When your budget won't let you give gifts to everyone in the world—which is always, by the way—who should you give...
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You've probably heard Dave say he doesn't borrow money—ever. That's why he recommends the 100% down plan for buying a home. Pay for the whole thing in cash. No mortgage. No payments.
As odd as it may sound, Dave and his wife, Sharon, have a convincing story about why the 100% down plan is the way to go. Nearly 20 years ago Dave and Sharon hit the financial bottom because of their debt. They did an unpopular thing to help turn things around. After years of marriage and owning hundreds of pieces of real estate, they became renters. The normal mindset is that you should buy and not rent, but remember normal is broke. All these years later, they can see that renting was probably the best sacrifice they made. He and Sharon were able to pay off their debts and save money for a house.
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A lot of people have learned the same lesson in the latest economic downturn and are giving the 100% down plan a little more respect. All-cash home purchases are on the rise with 27% of recent home purchases being all-cash transactions.
Although that's the smartest and safest route, if your heart is set on buying a home you can still do it wisely. But if you can't pay cash for a house in full, how do you figure how much house is too much?
Dave's guidelines are simple. Your mortgage payment should not be more than 25% of your take-home pay. You'll need to pay at least 10% down on a 15-year or less fixed-rate mortgage, but 20% is even better because you'll avoid paying private mortgage insurance (PMI). Notice that is a 15-year mortgage, not 30. Don't be tempted by the smaller monthly payments of a 30-year mortgage. The truth is 30-year mortgages are for people who enjoy being in debt so much they want to extend it for 15 more years and pay thousands of dollars more in interest for the privilege!
Now, you can probably qualify for a much larger loan than what 25% of your take-home pay would give you. But it's really not wise to spend more on a house because then you will be what Dave calls "house poor." Too much of your income will be going out in payments, and it will put a strain on the rest of your budget. You wouldn't be able to save and pay cash for furniture, cars and education.
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The point is your house payments shouldn't take over your budget. Don't let your mortgage payments cause you major stress every month for years and years to come. Your dream home needs to be just that, a dream. You don't want it turning into a financial nightmare.
If you're ready to buy or sell a home, work with a real estate professional you can trust. Our real estate Endorsed Local Providers will help you find a great home that fits your budget.
You can also check out Dave's online mortgage calculator.