Saving for your future = saving for your home

By Carrie Schwab Pomerantz

Published: September 21, 2008

Being a homeowner recently has been no picnic. Yet many people still want their own home — and it's hard to argue with that impulse. They want to put down roots and become part of a community.

Some people believe the market is good; it's certainly better than it was in 2005, but it's hard to predict where prices are headed.

Getting your foot in the door of your new home can be difficult. Most down payments are 20 percent of the purchase price, and 20 percent can be a substantial figure. Yes, you can buy with a smaller down payment, but you may be overextending yourself; your mortgage will probably be more expensive.

The obvious answer is saving.

There's no shortcut that will help you find 20 percent of the cost for your dream home. But you can save intelligently.

Before you take the leap, make sure you've got your financial future covered:

•Retirement savings: Start saving for retirement. I hope you're already building the kind of wealth you'll ultimately need. At the very least, if your employer provides a match, contribute enough to capture that amount.

•Pay off your credit card debt: Your next priority should be to eliminate high-interest consumer debt. Make sure you get rid of credit card debt before you take on the additional load of a mortgage.

•Build an emergency fund: You need some money in the bank to cover an emergency, three to six months of essential living expenses, in case you can't work or lose your job.

•Max out your 401(k) or other retirement vehicles: Since retirement is likely your most important financial goal, it should take precedence over buying a home. Before saving for a down payment, make sure you're setting aside the maximum in your tax-advantaged retirement account(s).

•Save for your children's future: Saving for college can be a major challenge. This means starting as soon as possible — even before you start putting money away for a home.

Assuming you're working on your other financial responsibilities, it's now time to save for your home.

Check your credit rating. Make sure there are no mistakes that might cost you dearly when you apply for a mortgage (or keep you from getting one entirely). Higher scores are better; lower scores generally translate into higher mortgage interest rates, driving up the cost of buying your home. You can improve your score: pay your bills on time, never miss payments and reduce your debt . You can learn more at myfico.com.

Second, figure out how much mortgage debt you can afford. A good guideline is the "28/36” rule: Mortgage payments, property tax and insurance should not exceed 28 percent of pretax income; total debt payments — auto loans, credit card debt and housing expenses — should not total more than 36 percent of your pretax income. It's vital to make sure you can afford mortgage payments. By the way, be wary of adjustable rate mortgages. In addition to the down payment, allow for other house-related expenses. After addressing your other major financial obligations, you can save for a house. Open a separate account (a money market or online banking account).

Finally, remind yourself that there's no rush in this kind of market. So keep saving until you can comfortably buy your dream house.

Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co., Inc., Member SIPC. You can e-mail Carrie at askcarrie@schwab.com.

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