Q: My husband and I have been married for a month and we’re having a hard time setting financial priorities. We are trying to get out of debt – we have about $50,000 in debt right now – and we’d also like to start saving for retirement. We have tossed around the idea of buying a house instead of renting our apartment. My thinking is, the mortgage would be cheaper than rent and we would build equity. He is worried about all the other things like taxes and maintenance that might make it more expensive to own a home. It all feels so overwhelming! Where do we start?
This question is from The Money Couple’s last e-newsletter. They didn’t answer the question, so I thought I’d tackle it here.
One of the first places to start is to learn about getting a mortgage, from books like 106 Mortgage Secrets All Borrowers Must Learn – But Lenders Don’t Tell. Mortgages can be scary and confusing, and it helps to start learning about them as soon as possible. Maybe you won’t buy a house for another five years, but at least you won’t be starting from scratch in terms of your knowledge base!
Buying a House Versus Paying Off Your Financial Debt
A: Whether you pay off your $50,000 debt or start putting money towards a real estate investment (ie, your first home) depends on several factors, such as whether or not you qualify for a mortgage, how much interest you’re paying on your debt, and how much you and your husband earn every month.
Here’s what financial expert Suze Orman says about taking on mortgage payments versus paying off your $50,000 debt:
“One of the most important factors banks consider is your debt-to-income ratio. As a general rule, they don’t want housing payments to be more than 28 percent of your gross monthly pay, and a mortgage shouldn’t bring total debt to more than 36 percent. Estimate what your mortgage payment might be for a home in your area, then add that to what you pay each month for student loans and any other debt. If that figure is higher than 36 percent of your monthly salary, you know that decreasing your debts is the necessary first step before you focus on buying a home.” – from Suze Answers Your Top Real Estate Questions.
Another thing to consider is how much home ownership costs (your husband was right to be concerned about property taxes and maintenance! Our property taxes are over $6,000 per year, but our maintenance costs are incredibly low because the previous owner took excellent care of the house).
Here’s what the president of Bills.com says about buying a house:
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“The principle and interest on a mortgage payment are only the beginning of home-related costs. Escrow payments – the funds withdrawn to cover home insurance and taxes – and private mortgage insurance can add a few hundred dollars per month (or more) to a mortgage payment. In addition, first time home owners (all home owners, actually) must pay for repairs and maintenance, of course. A general rule of thumb is to budget 1 percent of the home’s purchase price per year for upkeep.” – from 10 Tips for First Time Home Owners.
If I were you, I’d consult with a financial planner – and make sure he or she discusses things like emergency funds, paying down your $50,000 debt, and getting a mortgage you can afford. And, read books like Dave Ramsey’s The Total Money Makeover: A Proven Plan for Financial Fitness. Learn as much as you can about financial planning, from a variety of financial experts.
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