QUESTION: Susan calls in from Abilene, Texas, with a question about retirement and mortgage percentages. She asks Dave what percentage of your total net worth your personal residence should be once you are retired.
ANSWER: I don’t have a set percentage. The larger your net worth, the smaller the percentage would be. In other words, if you’re worth $50 million, you wouldn’t want to have 50 percent in your home. But if you’re worth $150,000, you’re probably going to have more than 50 percent in your home.
So, the smaller your net worth is, the larger the percentage of your home will likely be. And that’s very reasonable. That’s one ratio you can look at. If you’re in the million-dollar range of net worth, and I’m just making this up on the spot — I don’t really have it figured out — but I don’t think I’d want to have more than half of it in my house. I think I’d want to have about a half-million in investments, and about a half-million in my house. Again, I haven’t done the math. That’s just a feeling I have.
But you can kind of see how I’m looking at that. You want to try and have as small a portion as possible, but you also have to have a home you can live in.
QUESTION: Craig calls in from Miami, FL, with a mortgage question. He and his wife have made an offer on a house they really like through a first-time buyers program. Now, they’re having second thoughts after looking at their budget and debts. They haven’t turned in the paperwork yet, and Craig asks Dave if they should go ahead and buy. Can you guess Dave’s answer?
ANSWER: I wouldn’t go through with it, Craig. I would tell you to become debt-free before you buy. I want the house to be a blessing to you, not a curse. When you have debt hanging around your neck and no money, you’re just asking for trouble. Everything that can go wrong will go wrong. That’s Murphy’s Law, and he’ll move into your spare bedroom along with his three cousins — Broke, Desperate and Stupid.
Homeownership when you’re broke is not a good idea. And basically, that’s what you’re telling me. You’re in debt, and you have to squeak into something with a first-time buyers plan. Translation? You have no money. Get the debts paid off, build up an emergency fund and save up a good down payment. Then, when you buy a home, it will be a blessing. It won’t be chasing you around the block every time something comes up.
I know that’s not a popular answer. I know it doesn’t feel right because you’ve got house fever and you’re all excited about this house. That’s how most young couples feel, and everyone acts like you’re the biggest moron on the planet if you don’t go get a house. But I’m the guy who says don’t go get a house in such a way that the house gets you.
That means debts paid off, build an emergency fund and save up a good down payment. See how solid that feels? It feels like wisdom. And you want to know why? Because it is.
QUESTION: Kate in Washington, D.C., is single and makes $45,000 a year. She has only two more debts left to pay off — a recent $100,000 HELOC with no first mortgage, and $24,000 in student loan debt. Now, Kate has the opportunity to roll up both of her debts into one. She asks for Dave’s approval on the idea, but he sees some potential issues that could make this a bad plan.
ANSWER: Wow, that’s a dangerous situation. The reason the home equity loan is dangerous is they generally have call provisions on them. Within a one- or three-year cycle they can call the entire loan on you. If they decide they don’t like it anymore, that could put you in a position where you have to scramble to get a loan to keep from being foreclosed on.
Swing down to that same bank and see if you can switch to a fixed-rate, fully amortizing loan — meaning regular payments, no balloons and no closing costs — and convert that thing out of a home equity loan position. That is not a good loan to have that big, especially with a $45,000 income.
So, would I add $24,000 to that? Absolutely not! Home equity loans are typically going to have higher interest rates than student loans. And if you become permanently disabled or die, your student loans can be forgiven. Regardless, I’m not going to tell you to put your student loan on your home, unless it’s to avoid a bankruptcy or foreclosure. I want you to plow through that thing, and get it all paid off completely in the next year and a half.