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Don't Buy A House If Debt Is Mounting

FIRST HOUSE

QUESTION:  I want to buy my first house but I want to keep my payments as low as possible, because a lot of my income goes towards making the minimum payments on my credit cards and auto loan.

                        The mortgage broker that I am dealing with suggests that I take out a 40-year loan instead of the typical 30 year loan, because stretching the payments an extra 10 years will lower my monthly housing expenses. This sounds like a good idea to me, but what do you think of the plan?

ANSWER: I think that is a bad idea, especially for someone who is in your financial situation. As I have written before, I’m not a big fan of 40 year mortgages, because the slightly lower payments that a borrower would have to make by stretching them out over an extra 10 years would easily be wiped out by the additional interest charges that would have to be paid over the same time frame.

                    For example, choosing a 40 year payback schedule instead of a 30 year plan for a $250,000 loan would lower the monthly payment by $25—but cost an extra $177,000 in finance charges for the “privilege” of paying the money back over the additional decade. It doesn’t take a rocket scientist to know that paying $177,00 just to lower the payment by a mere $25 is a lousy proposition.

                    Frankly, a person who is in your situation shouldn’t be thinking about buying a home at all. The fact that much of your income is already being used to make the minimum payments on your credit cards and car loan, suggests that you need less debt rather than more: With many credit card companies still charging 18 percent (or higher) annual rates, it would be better to postpone buying a home and instead use every extra dollar that you have to pay off those high-rate cards first.

                    My advice might be different if you already owned a house and were falling behind on your bills, and your only choice was to refinance with a 40 year mortgage or risk losing your home to foreclosure. You’re not in that situation now because you don’t own a home, but I am afraid that you’d soon find yourself in such a pickle if you purchase a house without first getting your current debt under control.

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