Posted on: Thursday, November 4, 2004
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AKAMAI MONEY
Debt makes it prudent to defer dream for a while
By Deborah Adamson
Advertiser Staff Writer
Q. We are renters of a three-bedroom, two-bath house in Enchanted Lake. Both my wife and I independently went through bad real estate deals before our marriage — condos bought at the absolute worst time, early '90s, and negative equity like you would not believe. I got rid of mine five years ago; we just got rid of hers early this year when the market came back, breaking even basically.
Over the years, we've run up quite a large credit card debt that we are starting to whittle down. But it is still $25,000, another $5,000 in signature loans and $10,000 in a car loan. No savings. We both work full-time jobs, grossing $115,000 a year combined. We would like to own a house. We just don't want to have to wait until all our debt is gone.
— Don Kobayashi, Kailua A. While owning a home is the quintessential American Dream, you might want to ask yourself why it's important to become a property owner again so soon.
"Reassess why you want to buy now," said Danny Alvarez, an investment representative for Edward Jones in 'Aiea. "Home prices are very high. You don't want to repeat the same mistake" of buying in a hot market.
Unless you find a bargain, you might end up with negative equity again, he added.
"Sometimes, you just have to be reasonable," he said. "You have this debt but you also want this $500,000 home. Something's got to give."
As such, your first priority should be to pay down debt, especially those on high-interest rate credit cards, Alvarez said. When you make monthly payments, make sure you're not only covering the interest, but paying down principal too.
Take a look at your lifestyle, he added. Are you overspending on things that aren't necessities? Unless you have children in private schools, there should be room for saving.
You could start putting some money aside for a down payment as long as you're also paying interest and principal on your debt, he said. How much you save depends on how well you budget.
If you're still determined — or need — to buy a home now, you still must save for a small down payment and closing costs. Most loans require at least 3 percent down, said Lehua Rosa Malott, a counselor at Hawaii Homeownership Center in Honolulu. You also need to save 3 percent to 6 percent of the mortgage loan for closing costs and upfront fees.
Your $40,000 debt will be an issue with lenders. Because of what you owe, you'll qualify for a smaller mortgage loan than if you were debt-free.
With a gross income of $115,000, you're roughly getting $9,600 a month before taxes. Without any debt and assuming good credit, the lender will let you handle a mortgage payment of as high as $3,900 a month.
If you're paying $2,000 a month on your debt, the lender will let you handle about a $1,900 a month mortgage, assuming a good credit history, Malott said. On a 30-year fixed-rate loan with a 5.5 percent interest rate, that means you can borrow around $265,000.
Without a sizable down payment, you'll likely be able to afford just a condo right now. The median home price for single-family homes in Honolulu is $485,000.
Got a consumer or personal finance question? Contact Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
