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Step 7: Buy a House

PURCHASING A HOME is a huge mistake if we’ll move within the next few years. But it can be a great idea if we envisage staying put for at least five years and preferably far longer. And, no, this isn’t because houses are a great source of price appreciation—which they usually aren’t. Instead, there are two solid reasons to buy a house.

First, we lock in our housing costs. While renters face never-ending increases in their monthly payments, homeowners with fixed-rate mortgages will enjoy the same monthly principal-and-interest payment for years to come. Those with adjustable-rate mortgages suffer more uncertainty, because their monthly payments could rise. But there’s a limit to those increases—and, of course, their payments could fall if short-term interest rates decline.

But the big payoff comes 15 or 30 years later, when the mortgage is finally paid off. At that point, homeowners still have to pay maintenance, property taxes and homeowner’s insurance. But the big monthly payment is gone. Indeed, for many folks, sending off that final mortgage check is the signal that retirement is finally affordable.

That brings us to the second big benefit of homeownership: It forces us to save. With every monthly payment, we chip away at the mortgage balance, slowly at first and then ever faster. We might even want to accelerate this process—by making extra principal payments.

How much house can you afford? Banks typically want borrowers to limit their monthly mortgage payments, including property taxes and homeowner’s insurance, to 28% of pretax monthly income. What does that mean in terms of house size? Try the “How Much House Can I Afford?” calculator at HSH.com.

Next: Step 8: Plan Your Estate

Previous: Step 6: Protect Your Pay

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