When <i>Not</i> To Buy A Home

A home for sale sign sits in flood waters along a street in Crystal River, Fla., Tuesday afternoon June 13, 2006. The effects of Tropical Storm Alberto forced flooding in low lying areas of Citrus County. (AP Photo/Chris O'Meara) AP Photo/Chris O'Meara

How many times have you heard that buying a home is the best investment you can make?

Now listen to this: "Pop"!

That's financial author and radio host Dave Ramsey popping the bubble of millions of Americans, on The Early Show Tuesday.

It turns out home ownership isn't always a good financial move. Homes are staying on the market longer and selling for less. Homes, says Ramsey, clearly are no longer the money-machines people believed them to be in recent years.

Beyond statistics, Ramsey has anecdotal evidence to make that point.

Every day, he's been getting calls from people who are "upside down" in their homes, meaning they owe more to the bank than their homes are now worth. It had been years since Ramsey received calls like that but, over the past four or five months, he's heard the same pleas for help every single day.

The majority of those in trouble are people who took "sub-prime" mortgages. For instance, if you took out an interest-only loan and financed the entire purchase, but now homes in your neighborhood are selling for $50,000 less than when you bought, you're in trouble. But Ramsey is also hearing from homeowners who relocated for a new job and have been unable to sell their old homes.

So, what does all of this mean?

Is it possible that a home is actually not as good of an investment as we've been led to believe?

That all depends, Ramsey says.

If you can comfortably afford a home and plan to keep it for a long time, then it's still smart to buy.

But there are several sets of circumstances in which buying doesn't make financial sense.

For starters, Ramsey has pretty strict standards on what it means to be able to afford a home -- standards many interested buyers don't meet:

  • Be debt-free: You should rent something really, really cheap until all your debts are paid off and you've managed to save cash for a down payment and an emergency fund. Then, you can look into buying.

  • Get a 15 year fixed-rate mortgage. If you can't afford these payments, you shouldn't buy, according to Ramsey.

  • Payments shouldn't be more than 25 percent of your income. Often, you hear it's OK to spend up to a-third of your income on housing, but Ramsey disagrees.

    There are other instances in which Ramsey recommends holding off on a home purchase:

  • If you can't continue to save for retirement, you shouldn't own a home. It's OK to stop putting money into a retirement account as you're saving for the down payment, but once the home is yours, you must begin again. It won't do you any good to have a place to live when you're 65 if you can't pay the electric bills!

  • Don't buy a home with a boyfriend or girlfriend. Ramsey believes that can wind up being "the worst mistake of your life." If you eventually break up with this person, you will have a huge financial mess on your hands. Also, if your boyfriend or girlfriend stops paying his or her portion of the mortgage, you'd still be responsible for it, and any missed payments or other penalties. In other words, your loved one could royally mess up your credit. Nobody ever thinks this is going to happen to them, but Ramsey sees it all the time.

  • This last one may come as an even bigger surprise: Ramsey recommends not buying during the first year of marriage. He says to "spend that first year renting and building equity in your relationship, before you undertake the additional responsibility of a house."
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