The best way to build wealth is to become a homeowner

April 16, 2006|By GREGORY KARP | GREGORY KARP,MORNING CALL

Few spending choices in life are as smart as buying a home.

That fact has been on full display in the United States as the housing market has boomed, rapidly increasing the wealth of homeowners. Unfortunately for renters, it has been a wealth wave they missed.

But it's not too late, said David Bach, author of the best-selling The Automatic Millionaire Homeowner: A Powerful Plan to Finish Rich in Real Estate.

"We're seeing homeownership become accessible to more people," he said in an interview.

Homeownership, however, may not be for everybody.

Reasons to continue renting are that you don't want the hassle and added expense. Or if you're convinced your area is experiencing a real estate bubble that soon will see depreciating prices.

If you're concerned about the difference in cost between buying and renting, plug in numbers to an online calculator by mortgage-backer Ginnie Mae at www.ginniemae.gov.

But maybe no homeowner statistic is as startling as looking at net worth, which is all you own minus all you owe. American homeowners have a median net worth of $184,400, while renters are worth $4,000, according to the most recent figures from the National Association of Realtors.

Here are Bach's answers to some common questions about buying and owning a home:

How much house can I afford?

In his book, Bach takes guidelines from the Federal Housing Administration, the government agency that helps people buy homes by guaranteeing loans.

The rule basically is that the principal, interest, taxes and insurance payments should not exceed 29 percent of your gross income. And your total debt, including the mortgage, car loans, credit cards and the like, should not exceed 41 percent.

But Bach said he's personally more conservative than the FHA, casting a mindful eye toward the cost of maintaining a house and basing the rule on take-home pay instead of gross pay.

Do I need a lot of money?

"The No. 1 thing holding people back is they think they need a big down payment," Bach said. "The fact is, 15 to 20 years ago you did."

No more. Lending restrictions have loosened to the point where many people today buy homes with no money down, he said.

Where do I get the money?

This is where Bach relies on a concept in his earlier books, dubbed the "latte factor." It means if you examine your daily expenses and start cutting, such as forgoing a daily latte at Starbucks, you can easily start to save.

What's the most important thing?

The old adage contends the three most important things in real estate are location, location, location. Not so, Bach says.

"I believe it's financing, financing, financing," he said. "If you talk to multimillionaires in real estate, they'll tell you it's always about the financing."

Financing refers to the terms of the mortgage. Terms include the interest rate and how the mortgage payment may change with adjustable rates and some of the more exotic mortgage arrangements. Bach suggests having a mortgage adviser.

Gregory Karp writes for the Morning Call in Allentown, Pa. E-mail him at yourmoney@tribune.com.

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