Admiral Enterprises LLC SAVING ENERGY, ONE HOME AT A TIME!
Greenville, SC. 864-268-2853
Greenville, SC. 864-268-2853
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Commentary # 1
Why is taking equity out of your home to pay off short-term debt, take vacations, decorate, or do any number of other worthy things is usually not a good idea. Americans removed $701 billion of their home equity just last year alone. That translates into a lot of people who will die making house payments. While we’re talking about finances surrounding home financing, another danger area comes to mind.
This potential trap is often set with well-intentioned advice. It goes like this, “It’s a good
financial move to stretch to buy your house.” This sort of advice can come from many different directions. You may hear it from a family member, friend or professional. Following such advice could land you in a financial ditch somewhere down the road.
Are you the suspicious type? Do you sometimes see someone’s lips moving, but hear different words than what they are saying?
Let’s Play a Game . . .
You are out house shopping. You’ve told the Realtor that you plan to spend a maximum of
$150,000 for your house. By the end of the day you’ve looked at 9 different houses and are on the way to the 10th.
”What is the asking price of this one?” you ask your Realtor. “”Well, it’s asking 172,500,” she casually replies. You respond that $172,500 is really out of your comfort zone. Your Realtor now pulls out the famous false statement, “Financial advisors often say that it’s a good idea to actually stretch to get into a house.”
Alright, it’s your turn. What was your Realtor really saying? How about this? “Hey, the more you spend the more I make, bud.” But is she in it alone? No way!
So you’ve been persuaded to write an offer on this house that is about 20 grand more than you are really comfortable with. You are sitting down with the mortgage broker now, and mention that even though the rates are great, the monthly payment is going to be a stretch.
The broker replies, “You know, 5 years from now when you are making more money, you’ll be glad that you stretched a little now.”
What did the broker really mean? “Just sign the paper. The more you borrow the more I make.”
The mortgage broker also knows that the lender will make more in fees and interest if you are willing to “stretch a little”. Lenders can take a little risk by having you overextend because most people will pay their mortgage even when they can pay their other bills.
A Dose of Medicine
Anyone who has been “house poor” knows that the thrill of having a little bigger or nicer home quickly fades when they have to sit on apple crates to watch their rabbit-ear powered TV, all the while hoping that the neighbors don’t happen to look in the curtain less windows.
Buying too much house means that you will have to sacrifice in other areas like vacations, entertainment, clothing, vehicle, saving for retirement, or a college fund for the kids.
“Always live below your means.” Just a little modification for this discussion takes us to, “Never borrow as much as a home lender is willing to lend.” Not long ago, lenders limited the PITI (cost of principle, interest, taxes and insurance) to 26% - 28% of your pre-tax income. Today, lenders may often go all the way to 33%.
There is a lot more to getting into that big new house than the mortgage payment. Bigger houses need more electricity, gas, water, landscaping, cleaning, and maintenance. You should plan on spending about 1% of the homes value each year on maintenance alone. All this adds up on paper, but often not in the head. Do not exceed 25% of your income for PITI. By moving down closer to 20% you will clearly be well within that magic zone that precious few ever see--"living below ones means.”
Why is taking equity out of your home to pay off short-term debt, take vacations, decorate, or do any number of other worthy things is usually not a good idea. Americans removed $701 billion of their home equity just last year alone. That translates into a lot of people who will die making house payments. While we’re talking about finances surrounding home financing, another danger area comes to mind.
This potential trap is often set with well-intentioned advice. It goes like this, “It’s a good
financial move to stretch to buy your house.” This sort of advice can come from many different directions. You may hear it from a family member, friend or professional. Following such advice could land you in a financial ditch somewhere down the road.
Are you the suspicious type? Do you sometimes see someone’s lips moving, but hear different words than what they are saying?
Let’s Play a Game . . .
You are out house shopping. You’ve told the Realtor that you plan to spend a maximum of
$150,000 for your house. By the end of the day you’ve looked at 9 different houses and are on the way to the 10th.
”What is the asking price of this one?” you ask your Realtor. “”Well, it’s asking 172,500,” she casually replies. You respond that $172,500 is really out of your comfort zone. Your Realtor now pulls out the famous false statement, “Financial advisors often say that it’s a good idea to actually stretch to get into a house.”
Alright, it’s your turn. What was your Realtor really saying? How about this? “Hey, the more you spend the more I make, bud.” But is she in it alone? No way!
So you’ve been persuaded to write an offer on this house that is about 20 grand more than you are really comfortable with. You are sitting down with the mortgage broker now, and mention that even though the rates are great, the monthly payment is going to be a stretch.
The broker replies, “You know, 5 years from now when you are making more money, you’ll be glad that you stretched a little now.”
What did the broker really mean? “Just sign the paper. The more you borrow the more I make.”
The mortgage broker also knows that the lender will make more in fees and interest if you are willing to “stretch a little”. Lenders can take a little risk by having you overextend because most people will pay their mortgage even when they can pay their other bills.
A Dose of Medicine
Anyone who has been “house poor” knows that the thrill of having a little bigger or nicer home quickly fades when they have to sit on apple crates to watch their rabbit-ear powered TV, all the while hoping that the neighbors don’t happen to look in the curtain less windows.
Buying too much house means that you will have to sacrifice in other areas like vacations, entertainment, clothing, vehicle, saving for retirement, or a college fund for the kids.
“Always live below your means.” Just a little modification for this discussion takes us to, “Never borrow as much as a home lender is willing to lend.” Not long ago, lenders limited the PITI (cost of principle, interest, taxes and insurance) to 26% - 28% of your pre-tax income. Today, lenders may often go all the way to 33%.
There is a lot more to getting into that big new house than the mortgage payment. Bigger houses need more electricity, gas, water, landscaping, cleaning, and maintenance. You should plan on spending about 1% of the homes value each year on maintenance alone. All this adds up on paper, but often not in the head. Do not exceed 25% of your income for PITI. By moving down closer to 20% you will clearly be well within that magic zone that precious few ever see--"living below ones means.”
