Rich advice: Don't end up
Lenders and real estate agents
often will tell you to stretch yourself when you buy a house. "Buy
all the house you can afford!" they'll say. "Borrow to
It's bad advice, and you should ignore it, financial
"House poor" is the term for those who spend
too much on house payments and maintenance. It's a common affliction.
Sufferers starve their retirement accounts and miss out on pleasures
such as dining out and taking nice vacations. Being house poor can
even fracture a marriage.
Moderation in all things
In homeownership, as in all things, moderation is best,
says Tahira Hira, professor of personal finance and consumer economics
at Iowa State University.
"Nothing in excess is good, even if it's a good
thing," she says -- and she adds that homeownership is a good
So are relaxing vacations, delicious restaurant meals,
comfortable furniture and sufficient retirement savings. You have
to find a balance among all your wants and needs and devote enough
money to each.
"For every dollar that you put into a house,
that's a dollar that you can't use for other things," Hira
says. "Ask yourself: Is this where you want to spend that dollar?"
Some folks who seek debt counseling pay $600 to $700
a month on tricked-out pickup trucks, says Rudy Cavazos, spokesman
for Money Management International, which runs debt-counseling services
in Arizona, New Mexico, Illinois and Texas. "I think, 'Oh my
God, it's a pickup,'" he says. "But they say, 'It's my
pride and joy.'"
Don't let your pride and joy turn into a money-munching
monster, whether it's a pickup truck or a house. Cavazos's rule
of thumb is that the house payment -- principal, interest, taxes
and hazard and mortgage insurance -- should add up to 28 percent
to 30 percent of take-home pay.
That leaves 70 percent to 72 percent for pickup-truck
payments, leisure, savings and all those crazy expenses that renters
often don't consider: maintenance, repairs, homeowners association
dues, bigger utility bills and lots more.
Leaves and leaks
Financial planner John Sestina says to count on spending
double the cost of principal and interest. If you figure the principal
and interest on your mortgage will cost $500 a month, "figure
that maintenance, taxes, et cetera, will cost another $500 a month,"
"The cost of ownership is a major problem that
people do not forecast when they're looking into homes," Sestina
says. "They have to buy a lawn mower and insurance, and then
the roof leaks -- the thousands of things that basically cost double
Sestina, a fee-only financial planner and president
of John E. Sestina & Co. in Columbus, Ohio, offers this rule
of thumb: Don't buy a house that costs more than 2½ times
your salary. That's your current salary, not what you think it will
Hira agrees that you should borrow based on current
earnings, not expected earnings. That raise might not come through.
And if it does, "ask yourself what other expenses will come
with that position." You might want to upgrade the car, the
wardrobe, the retirement plan, the kids' school.
"I certainly don't think people should live under
their means," Hira says. "But my question is: What is
the upper limit that you can pull out of your pocket today to meet
housing and yet meet other demands until your next raise?"
Go ahead and wait
Financial advisers say the house-hunting process should
begin with a thorough look at one's financial condition -- everything
from credit score to retirement and college savings to life insurance.
Are you in control of your spending? Do you need to improve your
credit score? Can you handle adding debt on top of what you owe
on your credit cards, student loans and auto payments? Do you need
to write a will?
Don't buy a house until you are sure you're ready.
"A premature purchase of a house is probably
the No. 1 financial stress factor in a person's life," Sestina
says. He notes that money troubles are at the root of many divorces.
That point is seconded by Elizabeth Lewin, author
and co-author of several books about financial planning, most recently
Finance: The Essential Guide for Parents.
"Being house poor isn't any fun," Lewin
says. "To stretch yourself to the limit, where you're not doing
anything else builds up anger between spouses."
Lewin remembers feeling that way in the early 1970s,
before her divorce. "The house seemed to gobble up everything,
and there wasn't the money for vacations and eating out because
we were house poor."
Their financial condition, she says, contributed to
Real estate agents rely on commissions, and lenders
make more money on bigger loans, so both will encourage house shoppers
to spend as much as possible. "People have to stick to their
guns," Lewin says. "You can always move up."