Look for cheap houses in the school district you want. There aren’t many left. Young parents have cornered the supply. If you do find an older house, it will be smaller and crummier than you want, and you’ll overpay. But you have many years to fix it up–and the next buyer will overpay, too. Some newer school districts, however, never had cheap housing. It was zoned out.
Stick to the basic rules about how much to spend on a home. No more than 36 percent of your gross, monthly, steady income should go toward regular debt repayment–credit cards, car payments and housing included. (For housing, count principal and interest, insurance and property taxes.) Here’s another good rule: spend no more than two and a half times your income on a home.
I can hear you laughing, especially in expensive cities and suburbs. “For new purchases, I’m used to seeing 35 percent to 45 percent of gross income just for the house,” says planner Brent Kessel of Abacus Wealth Management in Pacific Palisades, Calif. That puts you on the financial edge unless you have no debt and big cash reserves (ha!).
Build a safety net. What would you do if one of you got too sick to work? Or lost a job? Or had to leave work to care for a baby born prematurely? You couldn’t make the mortgage just by cutting back on Starbucks, movies and eating out. “Young couples should think of their fixed expenses in terms of five pots,” says Elizabeth Warren, coauthor of “The Two-Income Trap”: mortgage, car payments, health insurance, children’s education and savings. Drive an old car; switch to a cheaper HMO; don’t leave your present house or apartment too soon. Put the savings in the bank. When trading up, you need at least six months’ worth of mortgage payments on tap, she says. That gives you breathing room if trouble strikes.
If you don’t have the savings–and couldn’t manage on one income–you can’t afford the house. Naturally, most home buyers ignore that advice. So they have no room in their budget for bad luck. For them, home owning becomes a form of economic Russian roulette. You’re OK only if the bullet doesn’t fire. (Disclosure: I blurbed Warren’s book. I loved it.)
Prepare to pay higher taxes, insurance and maintenance on a higher-cost house, says planner Robert Reed of Columbus, Ohio (maintenance costs about 1.5 to 2 percent of your home’s value each year). Your kids will need costlier toys to keep up with their friends.
None of this means that both spouses shouldn’t work. You just have to plan more carefully. Try to keep your fixed costs low enough to be paid by a single income. Earmark the other income for clothes, new cars, vacations and treats. Treats can stop if you get fired, but you’ll know the mortgage can still be paid.
Don’t gamble with the mortgage rate. Planner Joel Framson of the Allied Consulting Group in Los Angeles sees home buyers choosing teaser rates at 3 or 4 percent for two years. After that, they’ll have to pay the going rate, which may have soared. Some people will be crushed by the higher payments. Framson tells clients not to take the teaser rate if they’ll be in their homes for more than five years. Lock in a fixed rate. If that means a smaller house, so be it.
Don’t have kids. A drastic choice, but you’ll have more options on where to live. Good public schools are now for the moneyed class.
