Tuesday, September 23, 2008

My favourite PF guru

Right before I graduated from college, I had to attend a mandatory student loan exit interview regarding all of the debt I'd accumulated from the federal government and my soon-to-be close personal friend Sallie Mae.  I received a noticed about this in the mail, and assumed that the phrase "exit interview" meant that I'd have the opportunity to sit down and speak with a loan counseler to discuss my repayment options.  Instead, I showed up to a room overflowing with students listening to someone in the front of the large room drone on about interest rates and grace periods.  I received a packet with all of my loan information, which both confused and terrified me, and we were all quickly ushered out after about 15 minutes so that the next group of students could have their "interviews".  The exit interview had consisted of my picking up the packet and giving my home address so that my debtors would be able to easily track me down six months later.  I never had the option of speaking to a loan counseler.  

I tried to talk to my parents about repaying my loans, but this was new territory; neither of them had graduated from college.  I'd never been in debt before, though it wasn't unfamiliar to me. My dad got into major credit card debt when I was a kid, and from the age of 9, I was constantly fielding calls from creditors. I really hated it, but I definitely learned from dad's mistakes and I'm responsible with money. I'd always been adept at saving, and I had a decent amount of money saved when I graduated from college, but I had no idea how I was going to handle student loans on top of paying rent, etc.

I turned to Amazon.com, where I came across Suze Orman's book, The Money Guide for the Young, Broke, and Fabulous. Though Suze's persona can grate at times, her advice is solid. After reading her book, I devised a plan for saving, opened and maxed out my Roth IRA for two years running, and generally got myself in gear.  Though her advice is pretty basic, her recent article on the Freakonomics blog brought up an important issue I've been giving some serious  consideration lately:
"Here’s what you need to think about as a first-time buyer: What you can afford in rent today is not the size of a mortgage you can afford. So for example, if you pay $1,500 in rent, do not think you can afford a $1,500 mortgage payment.

This is where so many first-timers get into trouble. What they don’t anticipate is that in addition to the basic mortgage, there is home insurance, property tax, and all the joys of home maintenance to pay for when you own a home.

So my basic rule of thumb is to add 30 percent to the basic mortgage amount to get a sense of your true housing costs. For example, if you use a basic mortgage calculator, it will tell you that a $250,000 30-year fixed-rate mortgage at 6.3 percent will run you about $1,550 a month.

But here’s where you should add in the 30 percent. That brings the cost to about $2,015. If you can handle that $2,015 payment, then a $250,000 mortgage is fine. But if you can only afford the $1,550 payment, the better move is to look for a less expensive home that will require a smaller mortgage."

I know a lot of people get on her case about being overly conservative with her financial advice, but this is exactly the type of advice I find most effective. As you can see in my sidebar, I'm trying to save up for a downpayment. I'm hoping to save much more than 25k, but I'm realistic. I know I don't make much, and I have lots of student loan debt to crawl through before my dream of home ownership can become realistic. My plan has been to try to put a sizeable amount down so that my mortgage payments are a couple hundred dollars less per month than my rent is, leaving the extra money to pay for the associated expenses of homeownership. I like that Suze explains this strategy in her straightforward way, making it seem logical. Like most of her advice, it should be.

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