As I browse the business sections of MSN.com, so many articles are written to encourage prospective buyers to take the plunge and buy a house. Headlines read like a “going out of business” sale, “Mortgage rates at rock bottom, buy now” is the theme. But just because mortgage rates are the lowest they’ve been in years, and home prices are much more reasonable than three years ago, does that mean everyone should go out and buy a house?
I’m playing devil’s advocate here, even though my goal is to purchase a home of my own, because I think these articles that are appearing in the business section of major news sources mislead prospective buyers. My stance is this: No one should buy a home unless they are financially prepared to do so, no matter how low interest rates are or how inexpensive homes may seem. Financial Samurai recently posted his interview with Consumerism Commentary and stated that he believes in the 30/30/2 rule when it comes to purchasing property. That is you have 30 percent saved, for a 30 year mortgage (I think this is the second 30, I can’t remember this one – Sam?), and pay no more than twice your annual income for the house. I agree, but with a slightly different variation; a person can probably comfortably afford a home at 2.5 time their income.
This means, however, that if you want to purchase a $300,000 house, you need $90,000 saved. How many new home buyers do you know that put down that much in cash for a house? It’s difficult to save that much money when an average salary hovers around $40,000. And, if you only make $40,000 a year (add a spouse that may equate to $80,000 total income), your home should cost no more than $200,000. Where I live, there are few homes in this price range. So what does this mean? It means I’m not ready to own a home yet, even with articles luring me to purchase because mortgage rates have never been this low and are primed for spiking within the next year.
Marketing pressure is what lead to the recent housing bubble, hopefully this pressure isn’t leading more purchasers down this same path. With tighter lending practices in place, due to the financial melt down, this should remedy some of the problems of the housing market. However, no matter how enticing home prices and mortgage rates seem, I won’t be making that plunge until I’m sure I can afford a home comfortably.
What is your thought on buying a home? Is it always the best option? Are renters financially illiterate people? What about all the articles sounding like advertisements for prospective home buyers? Should people follow the advice and just buy a home before it’s too late?
9 Comments
Hi Little House,
It’s actually the 30/30/3 rule – all 3’s to make it simpler 🙂
Have 30% of the value of the house in cash for DP and buffer, spend no more than 30% of your monthly gross income on your monthly house payment, and spend no more than 3X your annual gross income on the initial price of the home.
Cheers, Sam
.-= Financial Samurai´s last blog ..The Government Is Sexist And Nobody Seems To Care =-.
@Financial Samurai – Thanks for clearing that up. That makes more sense than my misinterpreted 30/30/2! I like the part about the payment being no more than 30% of your income, that completely makes sense.
Glad there are people posting information like this on the web. When my wife and I first got our house 5 years ago, we bought it just because of the excitement and getting a loan from my dad. Unfortunately, the 30/30/3 rule was not followed. Thankfully, I’ve learned my lesson.
.-= Jeremy Johnson´s last blog ..An Introduction To Jeremy’s “Wizard Club” =-.
@Arlene – Thanks for mentioning the privacy issue, I think that is important. Living in an apartment, or even a townhouse can sometimes be noisy, especially if you share common walls with your neighbors!
@Jeremy – Thanks for adding your story, I think it’s easy to be sucked into the excitement of owning your own home. I’m glad to hear you learned your lesson. Hopefully it wasn’t too painful!
I’m trying to fix my comments, please bear with me!
let’s try this again.
Hi Little House,
The short answer is no! Some people are not set up for the responsibility, maintenance, emergency expenses etc.! Owning a home is a lot of work!!
That said, my husband and I have owned 5 homes together and when we relocated and sold them, made a profit each time (but one). I’m handy and love to do the maintenance and repairs. I also love decorating and get lots of pleasure from our home. We started out in California and deliberately left because we knew that in order to build long term wealth, the cost of housing would eat into our ability to save. It was a wonderful decision to live in lower cost of living areas! We are financially much better off for that decision.
Know yourself, and make sure that if and when you do buy, your costs allow you enough breathing room to live your life! We always bought a less expensive home than we could afford, and it works out great for us!
Keep up the good work. Great blog, Fun to read.
Barb
.-= Barbara´s last blog ..Are you Already Rich? (Part 1) =-.
@Barbara – Thanks for adding your story. I think it’s important not to be house poor. I totally understand why you moved out of California. I currently live in CA, and know that owning a house here is so much more expensive than anywhere else. Unfortunately, for now I think I’m staying in CA. I might have to get creative with purchasing land, then building a house. This might save me money in the long run if I stay here. Thanks again for your input!