This week we tackled Baby Step 6: Pay Off Your Home Early. Or I should say that was what the lesson was supposed to be about. Instead we got the most boring lesson of the bunch, and one of the longest. I was looking forward to some creative and sound ideas for paying off a mortgage early but what I got was a laundry list of things to do when buying and selling a home. Almost nothing in this lesson had to do with paying off a loan early. The only thing mentioned was that you can make your mortgage payments bi-weekly (but never pay a fee to the bank for the service because you can do it yourself), which will add up to one extra payment per year, allowing you to pay off the balance sooner.
I understand that this list of do’s and don’ts could be valuable information for someone who has never bought or sold property before. But it was like Dave was trying to cram so much into this one lesson that he had to read it like a list. There was very little humor and very few of his amusing anecdotes here. This was strictly a listing of do’s and don’ts that can be found in any book or on any website about real estate basics. (If this recap reads like a list, I apologize. But there’s just not else much to do with this material.) I don’t think I was the only bored person there. I noticed quite a few people get up and leave during the video, something that I’ve seen very little of in previous lessons. So be warned: If you already know a little a bit about buying and selling a home, this might be the one lesson you want to skip.
Dave begins by discussing what to do when you want to sell a home. He advises you to think like a retailer and spruce it up. Make it as perfect as you can by fixing things, cleaning up, sprucing up the yard, and painting. You’ll get more money from a house that looks good than one that looks like it’s been abused. He also urges you to make certain your home is listed on the Internet, since 77% of buyers now do research on the Internet. You should also get a good realtor who has a lot of experience. A good realtor can bring in far more for your home than you can get on your own, thus offsetting their commission.
Dave then switches to buying a home. Owning a home is a good idea, he says, for three reasons. First, it’s a forced savings plan. Second, it’s an inflation hedge. And, third, it grows virtually tax-free since you pay zero tax on much or all of your gain as long as you hold the home for two years. When buying you should get title insurance and a land survey to protect you from disputes. Also get the home inspected to protect you from unpleasant surprises. Always buy with an eye toward the day you will sell. You should buy at the bottom of your desired neighborhood’s price range because you will have an easier time selling the less expensive house. Get a great location, with a view if possible since houses in good locations and with great views sell for more than those in less desirable locations. Never buy trailers, mobile homes, or timeshares since these are all depreciating assets.
Next it’s on to a list of mortgage do’s and don’ts. Dave argues that you shouldn’t take out a mortgage at all and instead pay cash. If that’s just not realistic, you can take out a 15-year, fixed mortgage with at least 10% down and pay it off early. But you should never buy a home until you are debt free and have a fully funded (3-6 months of expenses) emergency fund. Saving for a down payment becomes, in essence, Baby Step 3b. After you’ve saved your full emergency fund, but before you start saving for retirement, you should save for your down payment. Dave points out that there’s nothing wrong with renting while you save up and get your financial house in order.
When you’re ready for the mortgage, never take out an ARM, interest only, or reverse mortgage. They are all bad ideas. You don’t want a rate that will adjust or a mortgage where you never pay any principal. Get a conventional mortgage if at all possible. FHA and VA loans are available if you can’t get a conventional loan, but they are likely to be more expensive and carry more fees than a conventional loan.
However you go about financing your home, don’t let it become a financial nightmare. Your payment should be no more than 25% of your take home pay. Buy only when you’ve saved up a good down payment, have a fully funded emergency fund, and you have no other debt. Don’t buy just because everyone else is, or because your financial advisor is telling you that you need to own a home, or because there are tax incentives available.
I know many people don’t listen to Dave’s advice and I’m not certain I’d take it to the extreme of saying you have to have all your debt paid off before you buy. If that were the case, people with student loans might not own a home until they are 40 or older. If you’re making a good salary you can carry some debt and own a home, as long as the debt is not overwhelming or detrimental to the mortgage payment. I do agree that too many people rush into home ownership and don’t do their homework. They get into payments that are too big and too much given all their other obligations. Or they get sucked into a bad mortgage that comes back and bites them later. Maybe you don’t have to follow Dave’s advice exactly, but you do have to take the time to do research and educate yourself so you don’t get in over your head. A home is likely the biggest purchase you’ll ever make. It deserves careful thought and number crunching.
Homework roundup: Now that we’re nearing the end, there is very little work left to do. We only had to complete the last part of our Financial Snapshot which we’ve done every three weeks. The only change on mine over the last time is that I’ve gained about $4,000 more in savings. That means that during the thirteen weeks of this class my grand total added to savings was about $9,000. Granted, some of that was from tax refunds and some was from some unexpected freelance work, but it’s pretty good. I would have saved a good portion of that anyway since I use automated payroll deductions, but while in the class I was much more conscientious about funneling extra money to the savings to see how fast it would add up.
Our other homework assignment is to plan a graduation party for next week. We’ll see what my group comes up with…
This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. You can find the previous posts here: week one — week two — week three — week four — week five — week six — week seven — week eight — week nine — week ten — week eleven