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March 31, 2010


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I would say you also need to have an attitude that precludes you from taking on debt. You need to realize that debt shouldn't be part of your life, and you need to just plain refuse to take debt on.

I think attitude is very important in staying debt free and becoming wealthy.

I think that sums up how I stay out of debt.

I hereby volunteer for anyone who needs a stay-out-of-debt friend for support. I love talking money and how to save it. Feel free to email me any questions or worries...we'll be like stay-out-of-debt penpals. :-)

budgetingfunstuff *at* gmail *dot* com

Great points FMF...I've already put your "Seven Steps to Get Out of Debt" post into my Weekly Favorites list for Saturday. It really is a fantastic summarized plan. Hope your speech goes well.

I'd disagree on the specifics of your affordable home equation; it's perfectly acceptable to take a 30 year note at 20% down (or any other form of down payment that does not require PMI) as long as you do not exceed your monthly allocation for housing/rent and factor your home value accordingly. In other words, if you currently have a $500 month rent that you are able and willing to pay and are looking to buy a house, you can afford a $500/month payment on a mortgage and taxes, with any excess (income growth, etc) applied to an early payoff plan. I have done this, and I've taken a 30 year mortgage in 2003 and already paid 21 years off (9 years remaining - hoping to shave several more years off in the next few). This allowed me the flexibility of a lower payment during those few times where cashflow was weak, maximize the interest deduction while aggressively paying down principle. But I bought a house valued at what I could afford - not a house valued at what I was approved for.

I agree with Rod. While it is true that most people would benefit from getting a 15 year mortgage and benefiting from the lower interest rate, there are some people who have good reasons to take out 30 year mortgages and pay them off early. For example, people who have unstable income sources may benefit from this. My husband is a farmer. Some years, the farm makes a lot of money and other years it does not make much at all. With a 30 year mortgage (hypothetically, we do not actually plan on getting a mortgage), we would be able to pay the minimum payment during the years the farm does poorly and we could pay off large amounts of the mortgage during years the farm does well. Overall, we would most likely be able to pay the mortgage off in 15 years or less, but choosing the 30 year mortgage gives us much more flexibility for our job situation.

Rod -

That's an interesting point you have on the 15-year loan. I originally looked at that point in the post and agreed with it. I'm not into the idea of looking at a home as an investment; from a strictly financial point of view, its a cost center (albeit a necessary one).

However, while I would advocate limiting debt of all kind, the reality is that most of us do have to take out a mortgage to purchase a home. And when doing so, it would be ideal to do so while paying the lowest rate of interest possible. These days, the spread between a 15-year and 30-year is not too much. From what you are saying, if I understand right, is that the lower payments afforded you flexibility of a low payment. That point I can understand - as long as the original intent is to pay off the loan as soon as possible.

Fully agree with your idea of buying a home valued at what one can afford, rather than what one is approved for. The whole concept of buying what one is approved for is senseless, in my opinion. What a lender approves you for doesn't match up with what you should necessarily do. It makes more sense to spend less on housing and pay yourself instead, to the extent you can.

Another thing that's critical is to plan ahead for both real emergencies and things that often masquerade as emergencies (like car repairs, Christmas, eye exams, etc.)

I disagree to some extent with regard to the comment about PMI. In some places, this is rather unrealistic. A 20% down payment is just a reactionary take on personal finance because people are so scared right now.

If home prices drop another 50% then that might be reasonable but I'd say that if you have 5-10 percent down and some savings and a steady income, you can probably afford a home. Some people will take over 5 years to save 10% of a down payment if they have to rent at the same time.

There are other costs involved with renting as well. This is an argument now about when to buy, not whether to buy....

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