the can we afford the payments mentality

January 30th, 2008

The “Can We Afford The Payments” Mentality

My entire life thus far, when it comes to making major financial purchases, has been dictated by the idea of “Can we afford the payments?“. When I bought my first car, the final price I was willing to pay was not as important as what the monthly payment would be. Ditto on my second (and also current) car. Our student loan payment plans were chosen by the affordability of the payments. Even the purchase of my engagement ring involved a discussion of what the payments would be.

So it is no surprise that when my spouse and I decided to buy a house, we had the same idea in mind. We hadn’t meant to be house-hunting, but when our second child was born and we decided we needed to move out of our two bedroom, 800 sq ft apartment before I had a nervous breakdown (our bedroom served as office, nursery and bedroom all in one), we found that renting a three bedroom apartment would cost more than we could reasonably afford in our area, almost 50% more than our 2 bedroom apartment was. We don’t live in a booming rental market, and three bedroom apartments are very few and far between so they are priced at a premium. And finding a house to rent is almost impossible. After some searching, we decided to look at buying a house as a possibility. The problem was, we didn’t have very much (hardly any) money saved for a down payment, and we had always thought we needed a 20% down payment.

Well, if we were smart we would have stuck to the 20% down payment idea as a prudent financial decision. But instead we talked to a mortgage broker and several independent lenders to explore our options and to see what the minimum amount we could use as a down payment and still buy a house.

What we found really surprised us. It seemed no one expected a first time homebuyer to have *any* down payment. We have excellent credit and no money, and apparently here, a credit score is more important than money when it comes to purchasing a home. There were numerous lenders offering us 0% down low fixed rate mortgages. So we figured out what we felt we could afford as far as a payment (which ended up 20% less than we were “approved” for as far as the total loan amount) and started looking for a house. And subsequently, bought a 4 bedroom, 1800 sq ft house with 0% down for a payment that was not much more than our 2 bedroom apartment (taxes and insurance included).

All we really thought about was can we afford the payments. It is an invasive mentality that really does affect most everything we have done in the past.

And now, we live in a 4-bedroom house that I am pretty sure is worth less than we owe on it. Which honestly doesn’t bother me too much, because we are not planning on moving anytime in the near future, but still gives me a little nag of worry if I think too much about it. Yes, we can afford the payments, but that isn’t really the only thing one should consider when making a major purchase. A concept of the entire package is important, and understanding all the ramifications of what we’re getting into. I don’t have a risky or sub-prime mortgage, it is a basic boring 30-year fixed one, but even so, I’ve taken on a level of risk with 0% down financing I never considered in the process of doing it.

Is buying a house with 0% down a good financial decision? Probably not in many cases, and I can’t agree that it was the smartest thing we’ve ever done financially. Can it work out okay? Yes, but you have to be comfortable with the level of risk you are assuming. In the future, I plan to look past the “monthly payment” mentality and really evaluate if my financial decisions match up with my own risk tolerance before I make them. For my walking a financial tightrope will hopefully be a thing of the past.

This post is part of a writing project headed up by Rocket Finance exploring different aspects of the sub-prime crisis, lending practices, and foreclosures, and is my own musings on taking on a risky mortgage. Visit Rocket Finance on Friday for Home Finance: all you need to know about home ownership, a carnival of entries in this project.

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37 Responses to “The “Can We Afford The Payments” Mentality”

  1. I think that purchasing a home with 0% down is okay, but there are a few other factors to look at. You should look at housing appreciation rates in that area over a long period of time. Has the price of homes gone up a decent amount over time? You also want to look at the area that you are buying in. Is it an area that is undergoing a revitalization? If so, when did that start?

    The area that we purchased in is “up and coming” and we bought the ugliest house on the street. There’s no place to go but up.

  2. I think one of the scariest things about that mentality is when it’s combined with ARMs. Because people know they can afford the lower payment. And they expect to be earning more later and thus afford the higher payment. But they may not be thinking about it…

  3. We did a 100% financed house as well. I haven’t had any problems with doing it other than I have no equity in the house, so if something major happened, I could not refinance. Not that I really want to anyways. :)

    We did ours this way because we bought our house about 6 months earlier than we planned, my wife hadn’t quite finished her course so she hadnt started working yet, and it was the exact house we were looking for at an incredible price.

    How I have countered the fact that I didn’t have a down payment, is that I eventually increased my mortagge payment by 15% which is something we can do in Canada. It increased my payment by $60 every 2 weeks, which at first we wondered if we would miss it, but after it started coming out it was fine.

    I think doing this way may be better in certain cases because by adding this 15% plus the fact we are doing bi-weekly payments, my 25 year mortgage will be gone in 15 years.

  4. The beauty of a plan to freedom is that you may never need to finance another purchase. Payments will be a thing of the past. We paid cash for a new-to-us car 3 years ago and plan to pay cash for our next car (after the mortgage is paid off – 4 years to go!).

    Keep up the good work!

  5. We financed 90% of ours 4 years ago and it has appreciated quite nicely. But, like you, all we really looked at were the monthly payments. With such a large purchase, though, I think this is okay.

    Even the most frugal among us would have a difficult time coming up with several hundred thousand dollars just to spend on a house. It would be nice though :)

  6. Focusing on payments is a mistake MANY people make. This not only true in homes, but prevalent in the auto industry as well. In either case, the seller/lender loves it when you focus on payments, as they play lots of games to put extra money in their pockets and keep yo u close on the payment you want.

    ALWAYS negociate on price, not payment. As for buying for 0%, with the falling house market, buying at 0 isn’t a good idea in general, and in particular now. Great article!

  7. I think that because you plan on staying in the house for a while, you are okay to purchase a home with nothing down. I don’t think that I would be able to afford a mortgage, a second mortgage for the 20%, and PMI…that’s why I have to save for a down payment…so I only have a mortgage! :)

  8. Give yourself some credit…you got a fixed rate loan instead of one of those ARMs. If you’re sure you are staying, you can probably get away with the 0% equity (or even being upside down for a couple of years), BUT…it’s not a good idea because it puts you in a very risky position IF something should happen in your life and you need to sell the house. If you’re upside down, you cannot sell the house without an infusion of cash from somewhere or trashing your credit through a short sale. Yuck! Mortgage companies shouldn’t be pushing 0% down, or at least they should be made to _really_ explain the risks involved.

    – K.

  9. I wouldn’t buy a house with no deposit. Over here you’d have a much higher interest rate, and I don’t really want to be in negative equity – when I was a kid, a few people my parents knew were caught out by that.

    On the other hand, I figured out my house budget by knowing what I could afford to pay each month. For the mortgage I focussed on getting the lowest 2 year costs (I’m almost certain to refinance after 2 years).

  10. I think there are a couple of things you said that indicate to me this was a reasonable choice:
    1. It is a fixed rate, 30 year loan
    2. It was comparable in price to your inadequate rental property so when you factor in the tax deduction, you were lowering your overall expenses.

    I have always tried, after my first house, to maintain no less than 90% loan to value ratio on my homes but I also haven’t seen a really terrible market. That being said, maybe this is something you look at as a possible goal after you pay off the student loans and get a good efund set up. Pay extra on the mortgage until you’re down to 85% or so. That way, you would have enough equity to sell the house without bringing money to the table. I don’t know that I would do that in lieu of retirement savings though. I would have to evaluate the risks at that point.

  11. It is not about the payments – the question is, will the house sell for more than it is worth?

  12. Hi,
    I bought my house at 23, using some inheritance as a downpayment (other than that I’ve been broke my entire life). I didn’t do the research, and now my ARM has come up. Being educated is so important!

    I’m joining the Peace Corps in a few months. However, with all the debt I’ve gotten myself into, I may not be able to go. I’m trying to turn my financial life around and that’s how I found your blog. Thanks for keeping my motivated.

    Now I’m refinancing, and I’m making sure I know exactly what I’m getting myself into.

  13. chris@creditcardreviews Says:

    February 8th, 2008 at 8:58 am

    For my wife and I the key was not to think can we afford the payments. Our thought was if one of us lost our job or we had some kind of financial disaster would we be ok.
    We bought a home we knew we could afford and put down a good downpayment then when we had good money coming in we payed big chunks on the mortgage.
    We should have our house paid off this year.

  14. You’re asking good questions and I think you’re wise to evaluate your risk. For what it’s worth I think you made a good decision. Here’s why:

    Fixed Mortgage – You have a fixed mortgage rate. That is so important. Adjustable Rate Mortgages (ARMs) can play havoc with a budget when the rates change. Even people who are aware of that and plan to transfer to another type of mortgage may still have problems as loan sources dry up. It’s much harder to get a loan now than it was during the real estate bubble.

    Home Value – I’m not an economist but from what I’ve seen home values tend to go up over time. There may be market fluctuations in the short term but over the long term home values tend to go up.

    Control – Have you ever had that sick feeling of looking at a letter from your landlord saying that the rent is going to go up 20%? I know I have. You’re no longer subject to the whims of the landlord. You call the shots.

    My Story – I bought a home in 1996. While I didn’t put 0% down, I put down a measly 3%. I lived in my home for about 10 years. My major property improvements were in landscaping and plumbing. The landscaping was something that I did for fun. The plumbing was something that I did because I wanted running water. :-) When I sold my house I received a nice nest egg to use on my next house. Buying my house was the BEST investment I’ve ever made.

    I hope your home is a great investment for you too! By what you’ve said I think it will be.

  15. my wife want to move into a 750k house just coz we qualified. After i explained that we really couldn’t afford it based on one income (you never know when 1 spouse gets laid off or “quits”) and that the banks were just trying to bamboozle you into a loan they KNOW you can’t afford, she backed down.

    but its hard to get out of the ‘we can afford the payments’ cycle. I bought a 20 month old used TSX for the wife with CASH, from a guy who had to leave the country. two of my friends leased a new TSX for their wives. in 3 years, when the lease is up, they’ll have spent 14k and I’ll have lost only 7k in depreciation.

    sure, they can afford it. but i can afford not to work for 3 years and they can’t!!!

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