Twenty Percent

I've been going back and forth with my credit union talking about loan modification, refinancing, extensions and so forth. The whole process has been enlightening and made me think about the financial decisions I've made over the last ten years. Buying a home and using it to manage your debt is the biggest financial decision a person generally makes in their lifetime.

The best advice I think I could give someone else is simply this: plan to have at least 20% down when you decide to buy a home. In saving up that 20%, give yourself no longer than 5 years to that end. During that 5 years, live within your means and avoid unnecessary financial liability. This assumes a 30 year mortgage being the product you'll be shopping for eventually.

If you can't save 20% of the value of the home you're looking at over 5 years, you probably couldn't afford it anyway. If the value of the home might come down to where what you can save in five years equals 20% of the value, it might not be a good investment. You can prepare for tomorrow, but good luck predicting it.

If you can afford to save up the 20%, you'll probably be able to afford the home and pay it off over the 30 years of the mortgage. Yeah, that math would indicate that if you could save 20% in five years, you should be able to pay it off in 25 years all things remaining constant. Don't forget that you'll have to pay property taxes, fees associated with the loan, homeowners insurance, and maybe even flood insurance. Homes have lots of hidden costs, hence the 20% over 5 year metric I employed.

Depending on the size of the loan, your closing costs could be $3000 or more.

Banks used to require 20% down for a home loan until their own greed (and our government) encouraged them to lend to people for 5% or less. This is extremely dangerous in my opinion because it robs people of the perspective and personal incentives needed for such a purchase. It's my opinion that the cost of a person's lifestyle can't be factored in until they've actually tried to save up that 20%.

A lot can happen in 5 years while you're saving up that 20%. The value of the type of home you want could go up, but so should your earning power. That 20% figure should be reevaluated every time you get a raise, switch jobs, or incur long term financial liability like student loans or kids.

That's all I got, good luck.