Question:
My wife and I have always rented a home. We would like to purchase a home in Tennessee. Our combined income is around $65,000 a year. We have 3 small kids so a starter home is not really an option. I want to follow your advice and save up a 20% down payment and finance for 15 years. My wife does not want to wait the 2 years it’ll take us to save up 20% but would rather put $0 down and finance for 30 years in the hopes of paying it off in 15 years. She fears that if we wait 2 years to save up 20%, homes will increase in price. What should we do?
Answer:
The first principle you both must remember is never make a decision based on fear or unfounded assumptions. Your wife wants to buy now, primarily out of fear that the market prices will increase in the near future. It may happen and it may not. Either way, no change in the market, good or bad, warrants making a bad decision with money. Sound financial principles are sound when the market is up and when the market is down. Let me explain the “why” of having 20% down. First, you must always have equity through a down payment on the first day of owning a home. Why? Because you need to be able to turn around and sell the home without paying more money to close should there be a drastic event. If you lost your job the day after closing and had 20% equity in the home, you could easily sell the house and cover all realtor fees and other expenses associated with the sell. You would also still have a decent amount left over to start saving for a replacement home. Secondly, let’s say you had to sell and the market had turned. 20% equity lets you advertise the property below market value, if necessary, in order to sell it and move on. This 20% is a wonderful insurance policy between your family and unforeseen life emergencies. Never do a $0 down payment. It will take you years to even own a small percent of the home. The vast majority of what you pay each month, even on a 30 year mortgage, will go to interest and PMI. Most importantly, having low to no equity will always put you one life emergency away from loosing the home. And think about this, very few people who take out a 30 year mortgage actually pay it off in 15 years. You have 3 children who will have countless expenses as they grow up and get involved in school activities and hobbies. There will always be something else to put that money towards besides the house. If you are really planning on paying it like a 15, then get a 15! Make yourself accountable by locking in the 15 year pay-off period. If the payments seem too steep, then you are buying too much house. Lastly, putting only 10% down is acceptable because it still allows you to sell the home and cover realtor fees. It does not, however, give you a strong equity position or freedom from PMI. Making the right decision on these tough issues will pay off in the long run. |