We have spent a lot of time on this blog talking about your house and how much to spend etc. Why? For most people, it’s your biggest expense …
Interestingly, I have no rules for your first home, other than not breaking the 25% Income Rule (this video talks about 28% … my rule is post-tax, but this video doesn’t specify whether it’s pre- or post-tax), so it may be worth listening to what this guy has to say.
However, once you are in your first home, in my opinion, you have “entered the race” and that’s when my 20% Equity Rule and 5% ‘other junk’ Rule kick in to help you ‘win’ the race to your Number by not over-investing either in your home or in your ‘other stuff’ (incl. cars).
Let me know what you think?
It’s interesting, when my wife and I where shopping for our first home in 2005, before the housing bubble burst, banks where telling us we could borrow up to 33% of our GROSS monthly income. I about fell over when I was hearing this. Not only at that time did that much house seem incredible to me, coming from a poor background and upbringing, but the idea of a mortgage that size frightened me! Fortunately, we had the sense (and the debt) to back that percentage off to around 15% on our purchase decision. And now that house is a rental for us.
Good to see that many ‘experts’ have brought that number down significantly and almost to the 25% rule!
@Scott I don’t know about TODAY, but as recently as 4 years ago lenders were still allowing (heck, even ENCOURAGING) people to borrow up to 33% of gross income. Not only that, but after borrowing the full amount, many of these lenders would then contact the borrowers within a years time to see if they wanted to “cash out equity” and pay off other debts or do some remodeling, etc. So not only were people borrowing far more than the “rules” say they should on homes, but within a year or two they were refinancing and borrowing even more at their lenders encouragement.
Marketplace Money was one of the first podcasts I subscribed to when my wife gifted me with an iPhone, and Chris Farrell always seems to offer pretty sensible advice. He won’t make you rich, but he will keep out out of debt.
We just refinanced, going from 25% down to 18% of out net income. I can’t believe how much nicer it feels. More money for “real” investments.
My wife and I have had several discussions about whether we should pay the mortgage early. Coming from a poorer upbringing, we both constantly struggle with the concept of “good debt.”, as we work out how to leverage our cash.
Neil (who finally passed 101)
@ Neil – … and you get an Elephant Stamp; well done!