Mortgage or Save?

Kevin in Midland, Texas, just became debt-free. He currently rents, but wants to buy a home, and asks Dave the best way to approach buying a house. Dave has a couple of options for Kevin, and thinks he knows what Kevin will do.

QUESTION: Kevin in Midland, Texas, just became debt-free. He is currently a renter. He calls in to ask Dave if he should get a mortgage and go back into debt or save up and pay cash for a house. Kevin is 28, makes around $75,000 a year, and is single. He’d like to keep the price of a new home around $200,000, and he thinks he can save $15,000 a year. Dave believes he can do better and get into a new home in 10 years.

ANSWER: Since you’re going to be debt-free, let’s round that figure up to $20,000 a year. If you’re saving $20,000 annually, that sounds like 10 years to a nice, new home — and you’re still debt-free.

That’s one way to do it. But I don’t borrow money, Kevin. And I don’t tell people to do things I won’t do. The one exception to that is that I don’t yell at people for taking out a 15-year, fixed-rate mortgage, where the payments are no more than 25 percent of your monthly take home pay. You could save for one or two years and put down a really strong down payment on a home in the price range you’re talking about.

Then you could pay that house off in 15 years maximum, but you might pay it off even sooner. That’s probably what you’re going to do.