Dear Money & Crisis Reader,
The Money & Crisis offices are as still as a graveyard this morning.
The email team is out of town, visiting family for the holidays. Our overworked copy editors are catching up on some well-deserved sleep. And I’m taking this opportunity to spend some much needed time with my family.
We’ll be back with fresh (always free) content on Monday morning. But today, we’re going to take a dive into the vaults and take a look at one of my favorite issues from earlier this year.
It’s a little story that proves anyone, even the most financially savvy amongst us, can be tempted into making terrible financial decisions.
All the best,
Editor, Money & Crisis
P.S. 2019 could be the worst financial crisis since 2008. To sure up your finances fast, check out this powerful income-building strategy for pulling $3,000 out of the stock market every month. Click here to get a step-by-step guide that couldn’t make it any easier.
3 Simple Rules for Buying a Home Without Going Bust
Carl Richard’s job was helping people make smart financial choices.
He was a financial adviser… he had his own financial planning business… he even wrote personal finance advice for the New York Times…
Yet he fell into the exact same trap everyone else did during the housing boom.
He bought a house he couldn’t afford.
By his own estimation, he and his wife could just about afford a house in the region of $350,000. But their real estate agent, Mitch, had other plans.
Not long after Mitch picked them up in his gold Jaguar, they were looking at houses in the region of $400,000… $500,000… $600,000…
“It felt a little crazy to be shopping for houses that cost half a million dollars,” Carl wrote in a New York Times article a few years later. “But my income was growing rapidly.
“Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.”
Eventually, Carl and his wife “settled” for a 3,500-square-foot home with a price tag of $575,000… and they had no problem getting a loan.
“We borrowed 100% of the purchase price. In fact, I was told I could borrow even more if I wanted. I had perfect credit and a solid income that was growing.
“But even so, when the lender approved us at 100%, it was more than I had expected. I remember thinking something like ‘Wow. I guess if they’re willing to lend it to us it must be OK.'”
I’m sure you can see where this is going.
The bubble burst… Carl’s income, which was dependent on how much money he was managing, dropped by 20%… and they lost their home…
It’s the same old story we’ve heard a thousand times before, only the players are different.
But I didn’t dig up this story to shame Carl.
He’s a smart guy. Heck, he even wrote a book on the lessons he learned so that others didn’t have to make the same mistakes he did.
But Carl’s tale is a firm reminder that our modern society is full of financial pitfalls… and anyone can fall into them.
Banks do not have your best interest at heart. Approving your loan is not a measure of your financial health or security. It’s a calculated risk that they have a better chance of making money on this loan than losing it.
You are the only person who can decide if you can afford a home or not.
Everybody’s financial situation is different. And whether or not you decide to buy a home is up to you.
But if you stick to these three simple rules to buy a house, you won’t bite off more than you can chew.
Rule #1: Keep your total housing payments below 30% of your after-tax income.
Now, the traditional line of thinking is that your mortgage repayments should be 35—40% of your before-tax income.
But this is the type of overconfident nonsense that got us into the housing crisis in the first place.
Had folks been more realistic with their mortgages, millions of families across America wouldn’t have lost their homes when the recession hit.
Your total housing payment (including property taxes and insurance) should be no more than 25—30% of your after-tax income.
There’s no point running calculations off your before-tax income. You can’t pay your bills with money that’s earmarked for Uncle Sam’s pocket.
Rule #2: Don’t be tempted by an adjustable-rate loan.
Opt instead for a secure, fixed-rate loan.
This will lock your interest rate at the same figure throughout the term of your loan. It won’t go down… but it won’t go up either.
It’s much easier to plan your finances when your repayments stay the same… and it won’t leave you vulnerable to massive interest hikes during a crisis.
Rule #3: Pay off all other debts before you even think about buying a house.
This is a no-brainer.
It makes no sense to take on the biggest chunk of debt in your life if you’re already struggling to pay off the debts you already have.
Juggling too much debt is the fastest way to financial ruin. Clear your deck of any outstanding loans before you even start looking at homes.
Stick to these three rules and you’ll be better off than most American homeowners are. And remember, buying a house isn’t for everyone. Sometimes it makes more financial sense to rent than to buy.
What about you? Are you a renter or a buyer? If you could go back in time would you have done any different? Shoot me an email if you have any questions or suggestions for future topics you’d like me to cover.
All the best,
Editor, Money & Crisis
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