An alert reader tipped me off to this really cool rent vs. buy calculator:
The biggest mistake people make when buying a house is over-buying. Before I was a financial planner, I made this mistake myself. I focused on how much of a mortgage a bank would lend me, not on the fact that I still wanted to be able to take vacations after I bought.
Many times you make the decision about how much to buy in a period of about a month and you lock yourself into the expenses for years to come. Most people buy a place that’s nicer and more expensive than what they rent.
The biggest issue that people have with houses is buying one they can’t afford.
Here are five tips to avoid overbuying a house:
1. Put 20% down. Right now in Chicago if you’re buying a condo, make that 25%.
2. Buy a house that is 2-2.5 times your annual income. Live in New York City or San Francisco? Raise it up to 3 times your annual income if you absolutely must. You’re not getting away with anything; you’ll have less to spend on other things.
3. Trade up when your house is 100-125% of your annual income.
4. Realize realtors and mortgage brokers make more money when you buy a more expensive place. They don’t necessarily have your best interest over the long-term in mind.
5. If you don’t want to buy a house, don’t buy a house. A lot of people know they might want to move, or don’t want to take the risks and responsibilities associated with buying one piece of real estate. Follow that instinct, and save the money instead. Owning a home can make sense at certain times in your life and not in others. That’s fine.