Q: We are expecting twins this December and considering buying a house. We are renting right now, and we found a house we like for about $250,000.
We have about $11,000 saved in a Roth IRA that we will use for a down payment. Between expected birthday/anniversary gifts and cutting back on expenses, we think we can scrape together another $1,500 by December and have 5 percent down.
Based on a 5.5 percent interest rate and a 30-year mortgage, the principal and interest would be about $1,363, which is $300 a month higher than our rent; but we will be able to deduct the mortgage interest and save on taxes.
We went to a mortgage broker, and he said judging by our income we could qualify for a $237,500 mortgage, but because of some past late payments on credit cards (we are now debt-free) we would not qualify for the 5.5 percent interest rate. We could qualify for the better rate if one of our parents would co-sign.
I approached my mom and stepdad, and they didn't seem very excited about the idea of co-signing. I don't understand the big deal - they just have to provide a signature, and we have proved that we are much more responsible now than we once were by eliminating our credit card debt. Do you have any thoughts on how we could persuade them to help us out? Should we use the future grandchildren as a guilt trip?
You've come to the wrong person to help you persuade anyone to co-sign a loan, and shame on you for thinking about using the grandbabies as leverage!
It is not just a signature; they will be assuming responsibility for the loan. If you make even one late payment, your credit score as well as theirs will be negatively affected. If you realize that you can't afford the home and go into foreclosure, they will either have to take over the payments or face a foreclosure on their record.
The mortgage company may insist that your parents post personal property as collateral. If so, this property is at risk should you default. I don't like intrafamily loans, either, but that would be preferable to co-signing. At least if you default, you haven't affected their credit score, just your relationship.
I don't think you have learned enough from this recent housing crisis; this may not be the time for you two to buy a house.
The tax deduction you receive for your mortgage interest may offset the increased monthly principal and interest payment. But what about other costs, such as moving expenses, property taxes, private mortgage insurance, homeowners insurance, home and lawn maintenance, utilities, new furniture, window treatments and so forth?
With a down payment of only 5 percent, your private mortgage insurance will add about $155 a month to your payment on a $237,500 mortgage. If you buy this house, your monthly payment will be much greater than your current cost of renting. If you think it will take you until December to accumulate $1,500, including gifts, how do you plan to add another $455-plus to your budget with this new house? Without any gifts, it would take savings of only $250 a month to have $1,500 by December.
Qualifying for a loan amount doesn't mean that it is in your best financial interest to take on that much debt. If you take money from your Roth IRA and savings, you will have depleted your retirement plan and emergency fund. I suggest you make a budget, track your cash flow, and get your spending under control before you resume house-hunting. The following budgeting steps may be helpful to you:
1. Keep track of what you spend each month for as long as three months. Use a notebook, software program, check register - anything that works for you. Make sure you keep track of all expenses. Most people can tell you what they spent $50 or $100 on, but it's the consistent $10 or $15 dribble that builds into $100 of wasted money.
2. Analyze your spending patterns. Categorize your expenditures - groceries, eating out, entertainment, etc.
3. Separate the categories into 'fixed' and 'variable' expenses. Fixed expenses are things like rent, insurance, etc. Variable expenses are those over which you have control - things like groceries, eating out, clothing etc.
4. Add up all your monthly expenses in each category, and write down the totals. Arrive at a total for both fixed and variable expenses.
5. Add up all your after-tax income for the month, and subtract your fixed expenses. The result is what you have left to spend on variable expenses.
6. Review your variable expenses, and allocate the money you have left after paying all your fixed expenses.
7. Keep track of what you spend in each category, and readjust your budget or your spending habits if you need to.
8. Add an expense line for the twins. Children are a joy (most of the time), but they are not inexpensive.
Congratulations on paying off your credit card debt and the exciting news of twins!
