Photo: Sean Lee Davies
I'm totally a worrywart, but even I'm encouraged by recent financial trends. Real estate values have started to rebound. The stock market is surging. Frankly, in this environment, it would be easy to get caught up in the moment and act hastily. But if you keep your head, you can find lasting financial security and long-term happiness. Here's how...
The Good News: It's Easier to BorrowThe economy continues its slow growth, but the Federal Reserve has no plans to raise interest rates. As a result, borrowing has never been cheaper, and lenders are increasingly willing to offer deals. I'm particularly heartened by the Fed's recent survey of bank officers: About 6 percent said they were making it easier for people with solid income and credit histories to get a mortgage (which could mean anything from requiring smaller down payments to accepting higher debt-to-income ratios from prospective buyers). Nearly 10 percent of lenders revealed that they're raising spending limits on credit cards again. And more than 13 percent of banks are loosening the rules for car loans by offering customers longer maturities.
Getting to a Happy Place
The expansion of credit is wonderful—for some people. By that I mean it's crucial to be realistic about your current financial obligations and whether you're in a position to borrow.
Whatever you decide to do, don't fall for a lender's preapproved mortgage amount, which may be more money than you actually need. Take out only enough to support a lifestyle that's below, not within, your means.
While you're at it, ignore the increased limits credit card issuers have started to offer. If you pay off your balance every month, you don't need a larger credit line. Besides, I recommend that you use a debit card for most purchases, which will prevent you from spending more money than you have in your bank account.
Finally, don't let seemingly great loan terms seduce you into buying an expensive car—it's a depreciating asset. Borrow the least amount possible and pay it back quickly even if a lender gives you the opportunity to finance a purchase over five years instead of three.
The Good News: Home Values Are Rising, But Mortgage Rates Aren'tA national index of house prices in 20 U.S. cities rose 8.1 percent in the 12 months preceding February (the most recent data available). Stabilizing home values have spurred demand; more renters want to buy, and more owners have the confidence and equity to trade up. Meanwhile, interest on a 30-year, fixed-rate loan is about half the level it was five years ago.
Getting to a Happy Place
Ignore the headlines about why now is a great time to buy a house, and ask yourself whether the moment is right for you to purchase one. Do you have savings set aside? Can you afford a 20 percent down payment? (I don't care if lenders are willing to accept a smaller amount.) Are you planning to stay put for at least five years? Answer no to any of these questions and you shouldn't become a homeowner just yet.
But if you are ready to buy or trade up, remember that less is more. Purchase the least expensive home that meets your needs so you'll have cash available for other investment goals. For example, if you choose a 30-year, fixed-rate mortgage on a home that costs $300,000 instead of one that's $350,000, you'll save approximately $225 on your monthly payment. Invest that amount in a Roth IRA that earns a 6 percent annualized return, and you could have more than $226,000 saved for retirement by the time you've paid off your mortgage.
Bear in mind, too, that bidding wars have returned and lots of buyers are chasing after a small supply of homes for sale. But don't let competition push you out of your comfort zone. If your budget is $300,000 and your agent tells you houses typically sell for 10 percent above list price, you should be shopping for homes that cost around $270,000. Otherwise you'll be tempted to overstretch if multiple bids push the price up.
Next: The good news about the stock market