First time buyers - Live within your means

Living within your means and what it means to a home buyer

As I thought about the turmoil in the financial markets this morning it occurred to me that there might be a few people out there that could use a heads up as they consider making their first home purchase. As you have undoubtedly heard in the news repeatedly, deep down below the current financial crisis is a problem with debt. This problem is not associated only with mortgages, but also with complex financial instruments that grew out of the repackaging of loans - both personal and commercial. Today I want to focus solely on personal mortgages.

Buying a home is a big decision, one that many of us face only a few times in our lives. I am not talking about a vacation home, investment home or fixer-upper, I am talking about your primary residence. What has happened to many people in the country is that they got in over their heads. How did they get there, or why?

For some it was just poor market timing. They bought their homes at the apex of the dramatic price increases. For others it was a poor choice of mortgage, whether they were led into it by their bank or mortgage broker, they ended up with a mortgage with "catches" in it. What catches? Well it could be an interest rate that adjusts at some point in the term, a mortgage that only required paying the interest on it, or one that required no down payment. Any of these can provide a rude shock to the owner, particularly when price appreciation stops. Millions of people have suddenly found themselves "upside down", or owing more than the house is now worth.

What happens when you are upside down? Your payments don't go down, that's for sure. You feel locked into that house, and for many this creates a dilemma if faced with having to relocate. Your choices aren't good; you sell your house at a loss and still owe the bank money. (that's called a short sale)

Since this blog is meant for first time buyers, all of the above was to get your attention! My message to you is simply this - as you plan your first purchase make sure you have a plan. Your plan should include several critical parts.

First thing is a monthly budget with all the new expenses you will incur as a homeowner along with everything else you pay for on a monthly basis. Things you may never have had to think about before like buying a mower, taking care of the lawn, planting flowers and landscaping, replacing a water heater when it suddenly bursts, paying taxes..... you get the picture. You have to have a contingency house fund planned into your budget.

Next thing to think about, before you ever start shopping is what can I really afford now that I have my budget? The mortgage company said I was pre-approved for $2,000 a month! Just because your debt to income ratios say you can spend X amount doesn't mean you HAVE to. There are a whole lot of people in this world that went out and bought the most they could afford and are now stretched to the limit. We call it house rich and cash poor. You can see it all over, just walk down the street some night and look in the windows that have no curtains or blinds and no furniture in the formal rooms - they bought the house and the BMW and now they can't afford curtains.

The whole point is to identify what you can be comfortable with and still have money left over to put in your savings account EVERY month. The pioneers of our country knew this, they didn't eat all their corn in the winter months even if they were hungry. If they did, they would have nothing to plant in the spring and they sure couldn't run to the local box store for more! Hence the saying, don't eat your seed corn. Save some for the new set of tires, for the baby's furniture, to repair the roof. If you have to, eat saltine crackers with your chili instead of $6 designer crackers, just pay yourself first.

One last thought for you. As a new owner, like a recent grad, you will get lots of offers for credit cards. Having a credit card or two is a great sense of safety and can give you a TEMPORARY cushion against unexpected bills. But treat them as that, a temporary cushion. If you use them, pay them off with the next statement; never carry a balance if you can avoid it, even if you have to give up your Starbucks coffee for a month.

Live within your means and plan for your future, it really keeps the stress level down!