Hi there, I’m Moneybags Magoo. Ask me a question and I’ll pull deep into my pockets of wisdom for an answer.* This month’s theme: housing.
Dear Moneybags Magoo,
Word on the street (slash internet) is to spend 30% or less of income on housing. I'm trying to figure out how much to spend on rent (floor-to-ceiling windows! Granite countertops! Hardwood floors!). Should I try to skimp in this area or can I flirt with the big-chunk-of-income realm? -Sincerely, Apartment Dreaming
Dear Apartment Dreaming,
The short answer for your rental woes: only pay enough in rent to feel safe and comfortable. For most, the ultimate goal is to buy a house (because those monthly payments will come back to your pockets, while renting puts your money in someone else’s pockets). By staying on the lighter side of rent, you’ll save more money for your down payment. If homeownership is not on your radar, the money you save in rent can be invested.
Dear Moneybags Magoo,
I am trying to buy a house, but a down payment would require me to sell all my hair for wigs and also sell my soul. I would really like to buy within the year, but I won't have enough saved within that time for a down payment. I've debated asking my parents to borrow money. Do people actually do this, or should I just pay for the private mortgage insurance (a couple hundred dollars per month)?
Cordially, No Flippin’ Idea What to Do
Dear No Flippin’ Idea What to Do,
First, I would hesitate that you should buy within the year if you can’t afford it quite yet. Let’s apparate back in time to ‘08 and ‘09 with the housing crisis. People bought houses they couldn’t afford. You really want to get into a house with a mortgage you can pay for, because bad things actually happen if you don’t (and think about your mortgage if your significant other loses their job). Ideally, wait until you have that magic down payment.
If you are still considering borrowing money from your parents, many first-time buyers will get assistance in one form or another if their family is in a position to do so. If we’re talking about a loan, it all depends on your relationship with your folks, and you, dear reader, will know best what that looks like. Since both money and family dynamics are involved, even with a healthy relationship and timely payments, this situation has the potential to get really nasty (financial control is a real thing - think about the icy glare from your mother when you buy a morning coffee while still owing them $30K). Dare I say it: any savings you may gain from family borrowing might not be worth the risk of complicating your family ties. Again, you know best if borrowing money from your family is workable.
Dear Moneybags Magoo,
My significant other and I are house hunting. Our Barbie dream house costs a little more than we want to spend. Do you think we would regret buying a more expensive house than a cheaper one? What's a good rule of thumb?
Sincerely, Wishing for a White Picket Fence
Dear Wishing for a White Picket Fence,
This one is easy: buy within your means. You will never regret committing to a mortgage that leaves you sleeping peacefully each night, rather than tossing and turning while thinking about your next mortgage payment. You can buy a bigger house down the road (literally or figuratively), and there will be plenty of opportunities to buy nicer houses as long as you can afford it.
A few notes on house buying for kicks and giggles: whatever number the bank approves you for doesn’t always account for things like eating food and buying gas every day. You don’t have to use the entire loan amount you’re approved for (and you probably shouldn’t. Again, we lived through the recession. Still fresh). Another fun trick: ask the bank about 15-year, 20-year, or even 25-year loans if you have the financial bandwidth for a higher mortgage. You’ll save money by shortening the life cycle of the loan even by a few years.
Also, like many things, you’ll probably end up spending a little more on a house than you planned (between buying new things, fixing up old things, and the sale in general). Plan accordingly! Give yourself some buffer for the added expense. A good rule of thumb: buy a less expensive home in a good location. Time will usually sort that one out nicely in your favor.
*The deep pockets of wisdom are actually an email thread with about twenty ridiculously savvy folks who are generous enough to let me ask pesky personal finance questions. These are gems from their answers, because they know about life and are pretty good at it.