Trade up. Stretch to buy a house. Be house poor.
Those have been the guiding principles of home-buying since World War II. It's what parents tell their adult children, what banks, mortgage brokers, and real estate agents espouse as the wise move when buying property.
The turmoil of the housing market the past two years is a clear sign that this age-old advice is bad advice. During the boom, the starter home was persona non grata. What happened to buying what you could afford and then trading up? Even first-time buyers wanted 2,500 square feet and granite countertops, and everyone was clamoring to give it to them. Everyone wanted the million-dollar house.
I have made the mistake. We stretched too far to buy our first house.
Sure, on paper, we could afford it. But what we soon found out was that the mortgage payment caused a lot of anxiety. We suddenly couldn't afford to travel, to take time off of work, or do any of the other things we wanted to do with our lives. We became working slaves to our mortgage.
I began having nightmares. My hubby was the primary breadwinner. He made more money than I did, and if something happened to him, my salary wouldn't cover the house payment. That was always in the back of my mind.
Some people would think our house, at $225,000, was a bargain. But throw in New Orleans' high homeowners insurance premiums and property taxes, and those alone added more than $600 a month to our payment, more than we were spending on rent. Our good faith estimate, which was supposed to estimate those costs, was anything but accurate.
If it weren't for Hurricane Katrina, we would still be in that house, not living the life we wanted. Katrina was awful, and we ended up losing our jobs and still paying the mortgage on that house. But after months of worry and hard work, we managed to sell it. I write a lot about this harrowing experience here.
We were lucky. We sold our house in New Orleans, and in the process we were absolved of our mortgage mistake. We were given a clean slate. We weren't going to squander this opportunity.
When we went to the bank, looking to see if we could even qualify for loan for another house, the banker was surprised we didn't want even more money than we were asking for. After all, we could afford it. At the time, we were still paying a mortgage on the house in New Orleans. A mortgage that we thought was too onerous, and the bank was willing to give us another mortgage, for another house, even while we were still indebted to another lender. And they wanted to give us more than we thought we could afford.
Yes, we were planning to sell, but there were no guarantees in post-Katrina New Orleans. Was anyone buying? Was out real estate worth nothing because of the threat of future storms? No one knew, but even so we could still get a new mortgage.
The mortgage banker did discourage us from using all of the money we made from the sale of our last house as a down payment, if we were able to sell it. "But you only need 10 percent, 20 percent at the most, down."
He also tried to discourage us from getting the 15-year loan we wanted. 30-year was fine, he said. You can always pay extra.
We were much smarter the second time we bought a house. We got a 15-year, fixed rate loan. We used all of the money we made from the sale of our first house as a down payment. It was the equivalent of putting 60 percent down.
We settled on a much less expensive house, $154,000, and one that was smaller by about 600 square feet. Instead of relying on a mortgage broker, we used the mortgage calculators on Bankrate.com to tell us how much house we could afford. Or rather, how much we wanted to pay every month for a house.
We wanted our monthly payment to be small, something we could afford on one income-- mine, the lowest income-- if we had to. We wanted a payment that would still give us money left over to travel, to invest, to have a family without struggling to pay the mortgage.
And most importantly, something we could reasonable expect to pay off. Soon. Fast, if we worked hard at it.
We wanted financial freedom, and having a place to live that's paid for is financial freedom. It means you don't have to worry about being out on the street if you lose your job. It means you can put more money in your savings account, 401k, and college 529 plan. You could leave your job for one that pays less but is more fulfilling. A paid-for home gives you options.
Don't fall into the trap of believing you will never be able to pay off your house. I once wrote about two low-paid private-school teachers who paid off their home in five years, inspired by the book Your Money or Your Life. And houses in New Orleans aren't cheap.
There are ways to pay off your house, some simple like sending in biweekly payments. Others, like getting a second job or roommates, are more extreme. Here are some stories to inspire you:
A young family has a paid off home at 31
This couple paid off their home in three years
Huge debts, paid off fast by Liz Pulliam Weston
After we sold our house in New Orleans and moved in to our new home, the insurance check for the hurricane damage arrived. It covered what we had paid out of pocket to fix our house. Those repairs depleted our savings, but because we had started looking for paid work as soon as the levies broke, we had been able to create a new, but smaller cushion. We decided to send that $18,000 to the bank, to help pay down our mortgage loan.
The next month, we made our first mortgage payment. It would turn out to be our last. After our experience with our last lender-- Citibank-- we decided that we would cash out some stock and just pay off the house. We had some stock losses that would cover any tax gains we'd have to pay by cashing out. And it would give us peace of mind. We wanted to be in control of our own destiny. We didn't want to have to worry about our loan getting sold to another company, and having them mess up everything from payment crediting to escrow accounts like Citibank did when they bought our loan from Hibernia. I didn't want to spend another 15 more hours of my life trying to straighten out that mess on the phone, talking to someone in a call center in India.
So we paid it off. We would never have been able to pay off our first house, because we simply bit off more than we could chew. But downsizing to a smaller, less expensive home finally gave us a real chance to live mortgage free. I do understand that without the first house, which gave us a nice return on investment, it would have taken longer to pay off this house.
We did have a back-up plan, and even if we hadn't sold our house in New Orleans or had sold it at a loss, we would have still been mortgage free within 5 to 10 years.Sometimes, it's just a matter or setting your mind to it and coming up with a plan.
Now, three years later, we are even more grateful to own our home outright.
