QUESTION: Craig calls in from Miami, FL, with a mortgage question. He and his wife have made an offer on a house they really like through a first-time buyers program. Now, they’re having second thoughts after looking at their budget and debts. They haven’t turned in the paperwork yet, and Craig asks Dave if they should go ahead and buy. Can you guess Dave’s answer?
ANSWER: I wouldn’t go through with it, Craig. I would tell you to become debt-free before you buy. I want the house to be a blessing to you, not a curse. When you have debt hanging around your neck and no money, you’re just asking for trouble. Everything that can go wrong will go wrong. That’s Murphy’s Law, and he’ll move into your spare bedroom along with his three cousins — Broke, Desperate and Stupid.
Homeownership when you’re broke is not a good idea. And basically, that’s what you’re telling me. You’re in debt, and you have to squeak into something with a first-time buyers plan. Translation? You have no money. Get the debts paid off, build up an emergency fund and save up a good down payment. Then, when you buy a home, it will be a blessing. It won’t be chasing you around the block every time something comes up.
I know that’s not a popular answer. I know it doesn’t feel right because you’ve got house fever and you’re all excited about this house. That’s how most young couples feel, and everyone acts like you’re the biggest moron on the planet if you don’t go get a house. But I’m the guy who says don’t go get a house in such a way that the house gets you.
That means debts paid off, build an emergency fund and save up a good down payment. See how solid that feels? It feels like wisdom. And you want to know why? Because it is.
QUESTION: Kate in Washington, D.C., is single and makes $45,000 a year. She has only two more debts left to pay off — a recent $100,000 HELOC with no first mortgage, and $24,000 in student loan debt. Now, Kate has the opportunity to roll up both of her debts into one. She asks for Dave’s approval on the idea, but he sees some potential issues that could make this a bad plan.
ANSWER: Wow, that’s a dangerous situation. The reason the home equity loan is dangerous is they generally have call provisions on them. Within a one- or three-year cycle they can call the entire loan on you. If they decide they don’t like it anymore, that could put you in a position where you have to scramble to get a loan to keep from being foreclosed on.
Swing down to that same bank and see if you can switch to a fixed-rate, fully amortizing loan — meaning regular payments, no balloons and no closing costs — and convert that thing out of a home equity loan position. That is not a good loan to have that big, especially with a $45,000 income.
So, would I add $24,000 to that? Absolutely not! Home equity loans are typically going to have higher interest rates than student loans. And if you become permanently disabled or die, your student loans can be forgiven. Regardless, I’m not going to tell you to put your student loan on your home, unless it’s to avoid a bankruptcy or foreclosure. I want you to plow through that thing, and get it all paid off completely in the next year and a half.
QUESTION: Sarah in Mobile, AL, recently applied for life insurance with a child rider. The insurance company denied her request for the rider portion, because her son has hemophilia. It’s the first time Sarah has applied for life insurance, and she doesn’t know what to do. She asks Dave for help.
ANSWER: I’m afraid you’re going to have a hard time with this, because it’s very difficult for hemophiliacs to get life insurance — for obvious reasons. That’s not a spiritual statement, it’s a statistical statement.
As a child, the way you can cover him is by building an emergency fund over time as you get rid of debt. You might even beef up your emergency fund a little more than the regular three to six months of expenses. All a child rider is for is in the case that, God forbid, you were to lose a child. Then you would have enough to cover funeral expenses and things like that.
An average funeral today is around $7,000 to $10,000. You could spend more or less if you wanted to, but if you guys have reasonable safeguards this isn’t a scenario you should be facing. I mean, there are some things he just shouldn’t do from a commonsense standpoint. But there are certainly lots of folks who have long, wonderful lives with that particular condition. It just leaves them open to a statistical problem in life insurance tables.
It might be that as research on the disease progresses and as he gets older, there’s a possibility that he could qualify. Twenty-five years ago in the insurance business, if you even said a word like “cancer” anywhere near your name, you were done — no life insurance of any kind. Nowadays, they look at what type of cancer it was, the survival rates, how long ago it was and how long you’ve been in remission. You can actually have had cancer and get life insurance. I’m guessing it’s that way with hemophiliacs right now.
So, I think there’s hope for the future. In the meantime, I would cover it with a slightly beefed up emergency fund. Just add a few thousand to what you would normally set aside for emergencies, because you might face some medical issues as well.
QUESTION: Cheryl calls in from Buffalo, NY, with a question about budgeting. She gives herself and her husband $150 a month each for blow money to be used on whatever they want. She’s upset because he spends all his eating out, then he buys other things he wants that he has no money for. Cheryl asks Dave if she’s being too stingy, but Dave thinks there are other problems in the mix.
ANSWER: Well, I think you guys are handling your money poorly. I think you’re acting like his mother instead of his wife, and he’s acting like a little boy instead of a man. You don’t want to give your husband an allowance and then not be happy when he spends money “he didn’t have” because he went over what you dictated to him. That’s a bad budget process.
The budget process, if you’re the nerd in the family, should start with you writing it all out. Then he sits down with you, looks at it and okays it with you. He needs to understand that this is you asking him to man-up and carry the decisions with you, so that you can both be in agreement as to what’s best for the family. Then, stick to it.
Do you see the difference? That’s a big deal right there. In one sense you’re not going to like it, because right now you’ve got control of things. But in another sense, you’re probably tired of carrying all the weight of the decision making and being the only adult in the household.
I don’t even want him to work on it much. I want you to lay it all out, but I do expect him to sit down and go over it all with you. You’re not asking him to be an accountant with a pocket protector, but you should ask him to make the decisions about your family with you and then you two — together — agree to stick to them. That’s a whole lot more fun!