Buying A Home And Peace Of Mind

If you've ever wanted something so bad it hurts, you understand how Frederick and Teresa White feel. The Grove City, Pa., couple dreams of owning a home, but tis still working to make that dream a reality.

To help them, Dave Ramsey, financial radio host, author and Early Show contributor, assesses their financial ability and answers general question about buying a home.

The Whites have always rented because they moved a lot as missionaries teaching English around the world and in the United States. However, they've finally decided that it makes financial sense to invest in a home, and they are looking forward to raising their children in Grove City.

Frederick White still teaches English, but now he works at a local college. Teresa is a stay-at-home mom who home schools her children. The couple's only debt is a car loan of $14,000. They worked hard to pay off previous credit card debts, and they plan to pay off the car loan within a year.

Looking at the way they have managed their money, Ramsey says they are good candidates to buy a house, but he thinks they should wait a bit. They don't have money saved for a down payment; their plan is to finance the entire purchase.

"Not having a down payment is a sign that you're too broke to buy," he says, suggesting that they pay off the car loan and get a small down payment first.

With home buying at an all-time high, Ramsey answers these frequently asked questions:

When buying a home, how big should a down payment be?
In a perfect world, Ramsey would advise anyone buying a home to put 20 percent down. He realizes the Whites probably won't, and that's OK. They should aim for at least 5 to 10 percent. Anyone who does not put down 20 percent should know that they would have to pay for PMI - Private Mortgage Insurance. This is insurance for the bank so that if it has to foreclose, it won't lose all the money it lent you. If, like the Whites, you don't put down 20 percent, you should pay your mortgage aggressively to reach the 20/80-mark; that is the point where you've paid 20 percent of the principal.

There are so many different types of mortgages available; which is the best and why?
Ramsey says 15-year fixed is the way to go. It doesn't matter who you are or what your situation is, you need to get a 15-year fixed-rate mortgage.

"Stay away from all adjustable rates of all kinds," Ramsey says

Getting an adjustable rate mortgage is "short-term thinking," he says calling these options, including the 30-year fixed-rate, "ludicrous."

The Whites took Ramsey's advice into consideration, but they think the monthly payments in the 15-year option are too high. So they are thinking about getting a 30-year fixed-rate, and then once Frederick White's salary grows, re-finance for a 15-year loan. Ramsey says people make similar promises like this all the time, but rarely follow through. If you can't do the 15-year, wait until you can, he says.

He gives the following example: Let's say you have a $140,000 mortgage.For a 15-year fixed-rate loan, you would pay $1,025 a month. Over 15 years, you would pay a total of $202,577. For a 30-year fixed-rate loan, you would pay $795 a month, and $286,164 over the life of the loan. By choosing the 15-year option, you pay $331 more each month, but you save $90,000 over the life of the loan.

There is another reason that he recommends this loan for the Whites as well:their age. Frederick is 45; Teresa is 41. If they have a 30-year loan, they will still be pouring money into their mortgage when they reach retirement age. Ramsey believes it's best to avoid situations like this.

But what about rising interest rates? Isn't it better to get in the game now, while rates are still low?

Ramsey's advice: Never let fear be a motivator when making a big financial decision like buying a home. We have no idea what's going to happen to rates. Lots of people have lots of opinions on this, but nobody can see into the future. And it's not worth risking your family's future by rushing into a home purchase.

As for the rumors about the real estate bubble, Ramsey says he believes there may be pockets of the country, like New York or California, where a bubble is a reality, but, in general, the bubble has been blown out of proportion.