Your Money_ The Missing Manual - J. D. Roth [102]
Remember, nobody cares more about you than you. Your real-estate agent, mortgage broker, and bank all have a vested interest in encouraging you to buy as much house as possible—their incomes depend on it. Listen to what they have to say, but make your decisions based on what's best for you.
Homebuyers are often told to "buy as much house as you can afford." But the problem with following this advice is that you're left without a buffer. What if you lose your job? Or what if you're forced to sell your home, but housing prices have dropped? (Many Americans are facing this problem in the aftermath of the housing bubble.) Instead of buying as much house as you can afford, it makes more sense to buy as much house as you need, keeping conventional DTI ratios as ceilings. (The box on Choosing a Home tells the story of a couple who bought more house than they ended up needing.)
Ultimately, it doesn't matter what the guidelines are. It all comes down to what you're comfortable paying. Just because conventional wisdom says you can afford a $1,650 housing payment on your $60,000 annual income doesn't mean you should do it.
Give yourself a margin for error. Instead of basing your home-buying budget on a 33% front-end DTI ratio, consider dropping that to 28% or, better yet, 25%. Another way to create a buffer is to base your estimates on your net (take-home) pay instead of your gross pay. You won't be able to afford as big of a mortgage, but you won't feel pinched by the payments, either.
Your Money And Your Life: Movin' on Down
When they got married, Sierra Black and her husband Martin bought a home near Boston, Massachusetts. "We found an old Victorian with gables and staircases and a finished attic." The 2,200 square-foot house was beautiful, and they loved it—but it was a nightmare to maintain that much space. "Buying that house meant buying a piece of the American Dream—but we both figured out pretty quickly that it wasn't our dream."
There was the $2,200 monthly mortgage payment and the $600 monthly cost of their combined commutes (which totaled 160 miles every day). Sierra tried to boost their cash flow by making the sorts of frugal choices described in Chapter 5, but she says, "It felt like I was bailing out a leaky boat with a teaspoon."
After 2 years of struggling to make ends meet, Sierra and Martin moved to a 1,500-square-foot colonial-style duplex closer to his office. "The new house feels small but not cramped," says Sierra. "We gave up a lot of square footage, but we didn't lose any functionality. It turns out we didn't need all that space."
They now pay about $1,600 each month for their mortgage. But that's not the only savings: "All of our utility bills are lower than they were," says Sierra, "and our commuting costs are nonexistent." Martin used to drive 40 miles to work every day; now it's a four-block walk. And Sierra does a lot of her errands on foot. "The great thing about this is that it's saved a ton of money and a ton of time."
As Sierra and Martin have learned, it's not material things that bring happiness, but finding ways to align your spending with your values (see Chapter 2): "Every single day that goes by since we moved, we tell each other this is the best decision we ever made. This improved our quality of life so much."
Choosing a Home
Buying a home is an emotional process. It's probably the biggest financial decision you'll ever make, and there's a lot of pressure to get it right: You don't want to overpay, make any legal mistakes, or discover you've bought a house you hate. But you'll be happier in the long run—not to mention more financially secure—if you do your best to take emotions out of the process.
That's not to say that you should buy a house using detached, Spock-like logic; even with preparation, the decision will be emotional. But before you start looking, you can take