Our mortgage loan officer told us what we qualified for and I couldn’t help myself as I burst out laughing. Shelly whacked me on the leg under the big conference room table as I regained my composure. “There is no way we can afford that kind of payment”, I said. That was 30 years ago, and we were in the initial stages of buying our very first home in Summerville, South Carolina.
We made a few mistakes, but overspending was not one of them. We found a nice, new little clapboard home that backed up to the Ashley River. It was small, with a single car garage even, but it was perfect for Shelly and I and new baby Gretchen. I think the last car we bought cost more than that house! My how things change.
Our target had been to keep our mortgage payment, interest, taxes, and insurance (PITI) below 25% of my Lieutenant JG salary. Where we screwed up was we financed 100% of the house and closing costs on a VA mortgage. Knowing what I do now, we would have put some money down as a down payment. Three years later, we were upside down on our mortgage and trying to get back to Texas. Fortunately, since the Navy was closing the local base they bought our house from us at our loan balance. We lucked out.
Fast forward to today, and we find ourselves in strange times. Mortgage rates are at all-time lows, local housing prices are rising steadily, and there is a great deal of economic uncertainty. Is this a good time to buy a home? Yes, I think it is, but you have to be smart about it. Don’t overbuy and try to put as much money down as possible. Doing these two things will keep you safe if your circumstances and/or the market changes on you.
I think my 25% of income target that I used way back when is still a good idea. You can qualify for more, but keeping your mortgage payment low not only protects you, but it also allows you to save for retirement, kids’ college, and other goals. As far as a down payment, 20% of the house value is ideal because this amount gets you out of having to pay mortgage insurance. “What’s mortgage insurance?”, you may ask. Well, if you default on your loan, the mortgage insurance protects the lender. Having to pay to protect somebody else is no fun at all, so avoid it if you can.
All of this is easier said than done. Affordable houses are hard to find around here, so you’ll have to look pretty hard and at these prices, 20% down can be a really big number. What can I say? Good personal finance is always chocked full of hard choices, compromises, and determination so don’t be discouraged.
Rob Schulz is a local Certified Financial Planner and author of THOUGHTS ON THINGS FINANCIAL: YOUR GUIDE TO A CHAOTIC MONEY WORLD. Rob can be reached at rob.schulz@schulzwealth.com. You can buy his book by clicking here: https://schulzwealth.com/book/
