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Home Ownership 
Owning a home is The American Dream. It’s also the largest financial transaction you’ll ever incur. Owning your home is one of the three key pillars in achieving financial security (the other two are Social Security/Pensions and Investment Income). 

But don’t assume that home ownership is essential. Tens of millions of financially successful people rent their homes – including the majority of those who live in urban areas. And owning a home doesn’t automatically lead to happiness: A study by Grace Wong Bucchianeri from the Wharton School of Business found that homeowners are no happier than renters, and they experience less leisure time and social interaction (because of the costs and chores associated with maintaining the property). 

Therefore, before you buy a home, be sure you’re ready to be a homeowner.  

Quick Quiz 
A mortgage is a loan based on: 

1. the current value of the house 

1. the future value of the house 

1. your income [correct answer]  

1. your car payment 

Want to test your knowledge further? 
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<LEARN MORE > 

give a unique design treatment to each of the following items. Place each item randomly so there’s no apparent order; users should feel they can jump to whatever topics they want. Clicking an item takes the user to the landing page for that item] 

Are You Ready to Buy? 

How Much to Pay for Your Home 

Determining the Correct Down Payment  

10 Reasons Why You Should Get as Big a Mortgage as Possible 

Selecting the Right Mortgage 

The Mortgage is Just the Beginning of What You’ll Spend Monthly 

The following pages contain the content for each of the above items. 

Are You Ready To Buy? 

Before hiring a real estate agent, ask yourself these questions – and count how many times you answer “yes”: 

1. Are you sure you want to buy a home? 

1. Do you anticipate any large expenses in the next two years, such as buying a car or having kids? 

1. Do you expect to stay in your current job for at least the next two years? 

1. Do you expect your job to stay in the same location for at least the next three years? 

1. Do you know how much you can realistically afford to pay for housing? 

1. Do you have a favorable credit record? 

1. Do you have enough money for the down payment and closing costs? 

1. Have you been pre-qualified for a mortgage so you know how much you can borrow? 

1. Will your existing debt reduce your ability to qualify for a mortgage? 

1. Is the amount you can borrow enough to enable you to buy a home you can truly enjoy? 

You should consider buying a home only if you answered “yes” to at least 8 of the above questions. 

Want to learn more? 
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How Much to Pay for Your Home 
Your mortgage debt must not exceed 28% of your gross income.  

Your total debt (including the mortgage) must not exceed 36% of your gross income. 

Some – including people in the real estate and mortgage industry, who make a living selling homes or the mortgages that facilitate the purchase – might say that you can exceed these 28/36 limits and still qualify for the mortgage. They’re right – but doing so will consume so much of your income that you’ll find yourself “house rich and cash poor” – unable to afford other essential expenses associated with the cost of living. The resulting stress could prove unbearable. Therefore, it’s best to stay within the 28/36 limits recommended here. 

Want to learn more? 
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Determining the Correct Down Payment  
Although there are loans available that let you pay as little as 3% of the price of the home (financing the other 97%), it’s best to pay 20% of the purchase price in cash. Whenever you put down less than 20%, you must pay for Private Mortgage Insurance, which typically costs 0.5% of your loan balance annually. PMI protects the lender in case you default – but you’re the one who pays for it.   

Why not pay cash, and avoid the mortgage entirely? Most can’t afford to do this, but if you can – perhaps by using the proceeds from the sale of your current home – then it’s a valid question.  

Want to learn more? 
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Here Are 10 Reasons Why You Should Get As Big a Mortgage as Possible. 

Reason #1: Your mortgage doesn’t affect your home’s value. 
Every home buyer expects the property to rise over time (if you thought it would fall in price, you wouldn’t buy it). The mortgage won’t have any impact on the future price. In other words, owning your home outright is like having money buried under a mattress; any equity you have is essentially earning no interest. You wouldn’t stuff ten grand under your mattress, so why stash $400,000 in the walls of the house? Having a long-term mortgage lets your equity grow while your home’s value grows.  

Reason #2: A mortgage won’t stop you from building equity in the home. 
Say you buy a house for $500,000, and you get a $450,000 30-year mortgage. As you make monthly payments, your mortgage balance declines – increasing your equity. And if you make extra monthly payments, your equity rises even faster. 

But that’s a canard. The truth is that making payments does not really increase your wealth. That’s because all you’re doing is moving money from one place to another – you’re taking money you could have invested and used it to reduce your mortgage balance. That’s not truly building equity. A genuine increase in equity occurs when the property’s value rises – which will occur (or not) regardless of your payments.  

Every dollar you spend on mortgage payments is a dollar you didn’t invest.  

Reason #3: A mortgage is cheap money. 
Mortgages are the cheapest money you will ever be able to borrow. Why pay 10% of an auto loan or 21% on a credit card when you can instead pay 5% on a mortgage?  

Reasons #4 and #5: Your mortgage interest is tax-deductible. And mortgage interest is tax-favorable. 
These two points are related, and together they offer you important benefits to carrying a mortgage. 

Interest paid on loans to acquire your residence (up to $1 million) is tax-deductible. The deduction is taken at your top tax bracket. Thus, if you’re in the 32% federal tax bracket, every dollar you pay in mortgage interest saves you 32 cents in federal income taxes. You also reduce state income taxes in many states, too. 

And here’s the best part: When you earn profits from investments, those profits are taxed at 20% or less — even if you are in the 32% tax bracket.  

Reason #6: Mortgage payments get easier over time. 
The monthly payment on a 30-year fixed-rate mortgage never changes – but your income will. Thus, the payment becomes cheaper relative to your rising income. 

Reason #7: Mortgages allow you to sell without selling. 
If you want to access the equity in your home but you don’t want to sell, you can simply refinance and increase your mortgage balance – giving you the money you want while keeping your home.  

Reasons #8 and #9: Mortgages allow you to invest more money 
Many people make big down payments when they buy a home so their monthly payment is lower. But financial advisors will tell you that the goal isn’t to lower your payment; your proper goal is to increase your wealth.  

Here’s where it gets counter intuitive. It might seem that a lower mortgage payment helps you create wealth because the lower monthly payment frees up cash that you can invest. Although that’s true, it’s only half the story. The other half of the story is that you have a lower monthly payment only because you made a larger down payment. 

Consider buying a $500,000 home. With a $50,000 down payment on a 30-year loan, your monthly payment will be $2,416. But if your down payment is $70,000 your payment is only $2,308. That’s’ $108 less.  

If you were to invest that $108 each month and earn 10% per year (the average annual return of the S&P 500 Stock Index since 1926), you’d accumulate $244,133 after 30 years (ignoring taxes). 

But to enjoy that outcome, you had to increase your down payment from $50,000 to $70,000. If you had instead invested the extra $20,000, you’d have accumulated $348,988 after 30 years – or $104,855 more. Clearly, the bigger mortgage gives you the opportunity to create greater wealth.  

Reason #10: Mortgages give you greater liquidity and flexibility. 
In Reasons 8 & 9, we saw how a lower down payment leads to greater wealth than a bigger down payment.  

And the smaller down payment means you get to retain more of your money – money that you might need if you lose your job, suffer a major illness or injury or incur some major expense.  

If you use all your available cash to make as big a down payment as you can, and if you make extra payments each month with all your available income, you might indeed reduce your monthly payment or pay off the loan quicker. But if you suddenly need cash, you won’t have any – and that’s the risk you need to worry about. If you’re “house rich and cash poor” you might have to sell your house during a financial crisis – a crisis you can avoid more easily by having lots of money in savings and investments. And the big mortgage increases your ability to build those savings and investments. 

Yes, owning a home mortgage-free is an appealing concept. But the smarter and safer approach just might be to carry a big, long mortgage and never pay it off.  

Want to learn more? 
Visit the Personal Finance Institute  
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Selecting the Right Mortgage 
You must make two decisions when obtaining a mortgage: Choosing the type of loan and its duration. 

1. Mortgage Type: fixed or variable? 

Fixed-Rate Mortgages have stable payments throughout the life of the loan. Adjustable-Rate Mortgages have a lower initial rate, but the rate can rise over time, making future payments significantly – and perhaps unaffordably –   higher.  

Generally, the only people who choose ARMs are people who cannot afford or qualify for Fixed Rate loans. Because the monthly payments for ARMs are lower, they are easier to afford and easier to get approval from mortgage lenders. But this can be a trap: the mortgage lender doesn’t care if you later default on the loan (because they’ll have sold it to investors or loan servicing companies). So, while a lender might be willing to give you an ARM today, it could leave you with a big problem in the future if interest rates rise.  

1. Mortgage Duration: 15-Year or 30-Year? 

With a 15-year mortgage, your payment is typically a few hundred dollars more than the payment on a 30-year mortgage. But you eliminate the loan in half the time, saving more than a hundred thousand dollars in interest.  

But the 30-year loan can be the better choice. First, the lower payment makes the home more affordable. Second, more of the payment is interest, which is tax-deductible for many taxpayers – making the payment even more affordable. Third, if you can place the money saved thanks to the lower payment into investments, you can generate substantially more wealth – enough to pay off the 30-year mortgage in 15 years – and still have tens of thousands of dollars left over! Even if you don’t invest the savings enjoyed by the lower payment, you’ll find the extra cash useful – to pay other expenses, eliminate other higher-cost debts or to increase your cash reserves.   

Want to learn more? 
Visit the Personal Finance Institute  
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The Mortgage is Just the Beginning of What You’ll Spend Monthly  
Too often, excited would-be buyers think only about the monthly mortgage payment. Equally important, though, are all the other costs of homeownership. These include:  

• Property taxes 

• Property insurance 

• Maintenance and repairs 

• Utilities 

• Furnishing and decorating 

• Technology infrastructure 

• HOA fees 

These expenses easily add thousands to tens of thousands of dollars annually. And when the plumber has to come, there’s no landlord to rely on. Instead, you’re going to stay home – possibly missing a day of work.  

Make sure you fully understand the costs – and hassles – of owning a home before you decide to buy one.  

Want to learn more? 
Visit the Personal Finance Institute  
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