Garrison Keillor once joked that when people are young they often dream about being painters or poets, but the single biggest destroyer of all such romantic career notions is a 30-year mortgage. Get one of those, he said, and you’ll chain yourself to an eight-by-eight cubicle for the next 30 years as you labor to make the payments.
It isn’t that buying a home is an inherently bad decision; it can be a great decision as long as you follow a few important principles.
First, put at least 20 percent down. With a 20 percent down payment you don’t have to pay for private mortgage insurance.
Second, make sure your down payment doesn’t wipe out your emergency fund. With houses, lots of things can break. You’ll need some money in reserve.
Third, keep your monthly payment for the combination of your mortgage, property taxes, and insurance to no more than 25 percent of your monthly gross income. In high cost areas like California and parts of the east coast you may have to go to 30 percent, but spending much more than that will make it very hard to live the generous lives we were designed to live, save and invest adequately, and live with financial freedom.
This third principle is a foundational part of the detailed recommended spending plans I developed for one-, two-, three-, and four-person households with incomes ranging from $30,000 to $150,000. Those plans are in the appendix of the “Money, Purpose, Joy Personal Workbook,” which Amazon is currently offering at a great price.
Fourth, if you are married and you and your spouse both work, only purchase a house that you can afford (see principle 3) on one income. If you plan to have kids and one of you would like to stay home, buying a home that requires just one income will be the most important factor in having the freedom to do that. Even if you both plan to stay in the workforce after having kids or you don’t plan to have kids, basing your mortgage payment on one income will help you weather the storm if one of you loses your job.
Fifth, plan ahead so that you will be able to pay off your home by the time you retire. According to the Society of Actuaries, in 2009 just 48 percent of retirees had paid off their mortgages – down from 76 percent in 2007. Having your home paid off by the time you retire will go a long way toward helping you stretch your retirement savings.
If you own a home, what lessons have you learned that might help others who are thinking about buying a home?