Dave Says: It’s a dream, not a plan

Dear Dave,

I’ve been trying to save cash to buy a home, but things always seem to come up that eat away at my savings. I have \$130,000 set aside, plus an emergency fund, and I make \$120,000 a year. I’m debt-free and renting right now, but eventually I’d like to buy a house in the \$300,000 range. I really hate the idea of owing the bank money, so would you advise continuing to save and pay cash, or is it okay to make a big down payment and take out a small mortgage?

Megan

Dear Megan,

I love your idea, but right now you have more of a dream than a plan. You’ll need \$170,000 to go from \$130,000 in savings to \$300,000, right? So, let’s start planning.

If you save \$60,000 a year, it would take you a little less than three years to get there. If you set aside \$40,000 a year, it would take a little more than four years. A little division — just divide \$170,000 by the amount you want to save each year — and you’ve got the beginnings of plan. A dream is a good place to start, but I want you to develop this into a plan that focuses on a goal. Break this down, and figure out how to achieve it.

I see three ways to achieve this home ownership goal. One, you do the long division math and save like crazy for however many years it takes to save up \$170,000. The second is to put \$130,000 down on a \$300,000 home, and take out a \$170,000, 15-year fixed rate mortgage. This is the only kind of debt I don’t beat up people for having. The good news is, with your income, you could probably pay it off in half that time.

A third possibility is to buy a \$130,000 house. Write a check for nice, modest home now, and in five years — saving wildly the whole time, since you’ll have no house payments — move up and pay cash for a \$300,000 home.

If I’m in your shoes, that’s what I’m doing!

—Dave

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