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What to Consider When Taking on a Mortgage

I won’t tell you everything to consider when taking on a mortgage, I don’t think it could all fit into one post. But here’s something big to consider when taking on a mortgage: What will your income be in the long haul?

Maybe you’re feeling fairly secure in your job or your ability to get another one. But there’s more to consider. What else could drastically alter your financial situation?

For example, I knew a young couple who decided to buy a house right after they got married. They could afford the mortgage and all seemed well. However, they were soon faced with a major hitch in their plans: they were expecting a baby.

They considered the possibility of the Mrs. staying home, but that would mean they could no longer afford the mortgage. Her salary had essentially paid for the mortgage, his for everything else.

The monthly payment had seemed reasonable at the time, but they hadn’t considered the possibility that she might want to stay home with their children or her need for time to recover after childbirth. It doesn’t seem to have occurred to them when they were making the whole decision.

Their lives were quite busy and as we weren’t close friends, we drifted apart a while ago so the rest is fuzzier.  I believe that she continued to work and her mother-in-law took care of the children. I recently heard that she had cancer and I hope that they have their finances in a situation where she can go through treatments without completely throwing off their finances.

Of course, having children isn’t the only thing that can throw off your otherwise-well-thought-out mortgage.

If one spouse had developed a disability (I wonder if my friend’s cancer counts) and could no longer work, that would have also thrown their financial life into disarray. Fortunately, unlike the decision to have kids, you can insure yourself against disability.

When taking on a mortgage, I think it would be wise for all working spouses get disability insurance which covers at least the monthly cost of the mortgage.

It’s probable that your employer offers some form of disability insurance. That may be all you need, or you may have to purchase additional insurance on the site. Your HR department should have the details.

The same goes for life insurance. Even if either partner’s salary can cover the mortgage and general living expenses, it’s probably a good decision to take out life insurance which will cover a significant portion of the cost of the house. How much life insurance do you need? Some experts suggest 50% for a DINK couple with similar incomes. I’d say that or more if you feel comfortable.

If one partner makes significantly more or earns all the money, they should look into life insurance which covers even more of the home’s cost.

But even if the second partner is not bringing in a salary, consider his or her effect on the family finances. Can you still afford the mortgage if you have to pay for child care, for instance?

My personal finance professor learned all this the painful way when his wife, a SAHM, died with no warning (“right after breakfast” he put it). He’d managed their money so that he could afford the ensuing expenses, but he realized how much money he had NOT spent over the years because his wife was taking care of the kids, cleaning the house, cooking, etc.

In retrospect, he said, he would have taken out a policy on her which would cover those costs. Then he could have used his salary the same way he had previously–certain % to the mortgage, % to gas, etc.

A mortgage isn’t just about the now, it’s a long-term commitment. Many couples, including those with SAHMs and single parents (widowed or never married), manage to afford their mortgages. It’s just important to take the possible blessings and burdens.

What else would you suggest people looking at mortgages take into account?


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{ 10 comments… read them below or add one }

RacerX July 3, 2008 at 11:22 am

I think you have to consider two other things as well:

1. With my job, am I going to possibly move in less than 5 years

2. Do I really need, or just want, this much house

If you are going to move within 5 years, you just don’t have time to ride out the ups and downs of markets and can lose real money real fast. Second, please often buy as much house as they can get a loan for, and sometimes a bit more! You don’t have to buy your dream house first time out. Start small and grow like an investment.

How do I know…I didn’t concider either of those two points, and we wish we had!

deepali July 3, 2008 at 12:04 pm

I’m with RacerX – how long are you going to be in the place or at least the area. That’s my current conundrum and one reason I wish we hadn’t bought the condo!

That being said, it’s a good rental property so at least I’m not losing money on it. I imagine I’ll have to suck it up and find someone to manage it while I’m gone, and look to sell as soon as the market rebounds.

Funny about Money July 3, 2008 at 12:25 pm

RacerX is right on about the length of time you think you can stay in a house. Add to his observation the fact that you ALWAYS end up putting a significant chunk of money into unplanned fixes or upgrades (it never fails!), so that in five years you will have more than just your down payment and your mortgage payments invested in the property. Unless the real estate market is very strong, five years may not be long enough for you to recover your investment when you move.

Absolutely both partners need enough life insurance to pay off the mortgage. You have a $300,000 mortgage: EACH PERSON should have a $300,000 life insurance policy. This will allow the survivor to pay off the mortgage and use the increased cash flow from his or her salary to pay the expenses of child care and home maintenance.

Another possibility you might want to think about is divorce. Even though it’s an awkward thing to discuss, it would be wise for the couple to sit down together and think through how they will handle the real estate should they decide to separate.

Miranda July 3, 2008 at 1:31 pm

I think that Racer X makes a great point in looking at whether or not you really need the home you are in. Part of the reason that the mortgage market crisis happened is because people were using creative financing methods that allowed them to get into bigger homes.

Additionally, there is no reason to spend all that you can “afford” on a mortgage each month. Leaving a little breathing room is important. Just because you can get — and even afford — a certain mortgage payment doesn’t mean that you should.

mrsmicah July 3, 2008 at 2:25 pm

Excellent points everyone! Besides property tax, I’ve heard that one should plan on spending maintenance money every year. For the latter, I’ve heard solid figures or percentages of the home’s price suggested.

I really appreciate that almost all or our apartment maintenance is included in the rent.

Ryan S.@uncommon-cents.net July 3, 2008 at 7:01 pm

I think that considering interest rates and the various types of mortgages available is critical. A large part of the subprime mess has to be considered the responsibility of the borrowers. One of my best buddies, among the three brightest women I know, got herself an ARM and had to scramble to refinance and is now struggling on a daily basis financially. You can’t prepare for every eventually, but don’t over extend yourself!

Dad July 3, 2008 at 8:56 pm

A lot of excellant advice today! One thing which was sort of implied but not mentioned is the cost of ‘turning over’ a house, selling and the buying. If this cost is less than the value of the house, inflation adjusted, has gone up, you loose money every time you change houses. So, first you want to be pretty sure you are going to stay in an area for a while before getting committed to a house. Second you need a rising market to cover the closing costs. We don’t have that today. In time that will probably happen again. I know people who sold just before the bubble burst and those who sold after it had burst. People’s general optimism never seems to learn that things won’t keeping going up. This happened at the start of the great Depression and it happened at the dot com bubble and it has just happened in housing. Optimism needs to be tempered with a realistic look at history.

Mrs. Nathan July 3, 2008 at 9:48 pm

Is your friend going to be ok? Is her cancer serious?? I’m so sad! We will pray for them.

L@spillinbuckets July 4, 2008 at 7:49 am

Wow, your prof’s wife just up and died “after breakfast”! That’s scary…….

And I really hope your friend makes it through her cancer….

I know a couple who are newly married and inherited a home. They wanted to move, so sold the inherited home and bought a more expensive one a few towns over. Now he is losing his job and she is in school so they can’t pay the mortgage. If they had stayed in the first home it would have been fine. I feel like a home is such a large purchase that you should only move into one when you are sure you will be there for “the long haul”. Your house should be someplace you really want to be for several years before committing, as Dad said.

Frugal Trenches July 6, 2008 at 12:51 pm

My considerations would be
1. Do I have enough in an emergency fund to cover the mortgage for 9 months with no income?
2. Do I plan to move in less than 5 yrs? Adding up real estate fees and all others, may not be financially viable
3. Could we rent somewhere cheaply and have a bigger downpayment thus reducing the mortgage. For example, if you could rent a 1 bed apt for $500 but your mortgage is going to be $1200, I’d probably rent for a while to build a bigger downpayment etc!

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