In a column in yesterday’s Olympian, an investment advisor gave some advice that I suspect is followed by very few people in the Seattle area: Avoid being ‘house poor’ due to high payments
While there are some rules of thumb by which lenders gauge the reasonableness of your housing costs, the valuation of your property and the size of your mortgage payment are only parts of the picture.
You’re considered house poor if your housing costs prevent you from:
- Saving the equivalent of 3 to 6 months income in an emergency cash reserve account.
- Setting money aside for your retirement.
- Accumulating a diversified investment portfolio.
- Budgeting for other life events, such as paying for your child’s education
- Buying the furniture you need for your new home, or eating anywhere other than in your new kitchen.
Do you know anyone with the equivalent of 3 to 6 months income tucked away? I don’t think I do. Maybe my parents, but that’s pretty much it. Also, most people’s idea of a "diversified investment portfolio" is a small contribution to the company 401(k) plan and their house. And as far as junior’s schooling, hey that’s what federal student loans are for, right? It’s one thing if you don’t make very much money and you really can’t afford these financial luxuries. It’s another thing entirely when you can’t afford them because you willingly threw yourself into a money pit of a house.
I especially had a good chuckle about this bit of advice:
Be very cautious about using creative financing arrangements, such as interest-only mortgages or optional ARMs, to buy more house than you can otherwise afford. If home valuation increases cool off and interest rates heat up, you could find yourself caught between the rock of making the mortgage payment each month and the hard place of not being able to sell the house for enough to cover repaying the loan that secures it. You don’t want to lose your home to foreclosure because you bit off more than you can chew later.
"Creative financing arrangements" are about the only way first-time buyers could ever hope to afford something around here. I’m not sure what "be very cautious" means, but I would venture to guess that signing your life away on an interest-only, no down payment, adjustable-rate mortgage doesn’t quite fit the bill.
(Patricia Bliss, The Olympian, 03.15.2006)