A Costly Debt Trap that Every Young Adult Should Avoid

Editor’s note: please join me in welcoming Carrie Smith, new staff writer. Carrie is a successful freelance writer across many sites, including her own, CarefulCents.com. She will be sharing her story with money and her successes in getting rid of debt.

Building a House You Cannot Afford

Are you building a debt trap?

I was 23 when bought my first house.

I thought I had it all; the big yard, a two car garage and all the pride that came with being a homeowner.

It was my American Dream come true!

But my American dream was based on a lie because it was funded with money I didn’t have. Little did I know this is also one of the biggest debt traps that a young adult could fall into.

Don’t Fall into This Trap

When I set out to buy my first home, I had no idea what I was getting myself into and I was nowhere near financially prepared. I thought that just because I had a good job with steady income, I’d be able to pay off a mortgage over the next 30 years, no problem.

Sound familiar?

This is something many young adults face and believe is a smart idea. But buying a house you can’t afford is a dangerous trap that can cost you dearly.

According to the National Association of Realtors, 52% of first time homebuyers in 2011 were young adults ages 24 – 35.

Even though the mortgage is considered “good debt” because it’s a loan secured by your house that builds equity over time, debt is still debt and with that comes certain risks.

Buying Too Much House is Costly

This is something we all learned the hard way with the recent housing market collapse and The Great Recession. For me personally, this lesson hit very close to home and took just over 3 years and about $7,000 to learn.

I quickly found out that buying too much house, will ensure you start your adult life asset rich and cash poor.

I didn’t have any money saved for a down payment. I didn’t know how much I could afford. All I knew is that I wanted to be an adult and declare my financial independence by buying a home!

I thought that because the bank pre-approved me for a mortgage that meant I could afford the monthly payment.

But if you don’t take the time to track your spending and stick to a realistic budget, how will you ever know how much you can afford to spend on a mortgage?

You’ll be much more likely to buy too much house and end up learning a very costly lesson. You don’t want to be in your twenties or thirties, stuck in a house with no money left over to go out and do things.

It’s better to purchase a smaller house, with a smaller monthly payment, so you’ll still have money left to enjoy life.

The Bank is Not Your Budget

The truth is, the bank is only looking to make money off the interest on your loan, and the real estate broker is wanting to make the commission off the sale.

You are the one responsible to pay the mortgage at the beginning of the month – no one else. So don’t let yourself get talked into a mortgage you can’t afford!

Take time to research your options and make the best decision for your own situation. Which may or may not include buying a house right now. It’s vital that you create a budget that realistic for your lifestyle, so you’re able to start adulthood out on the right foot.

How to Avoid This Debt Trap

To avoid getting trapped into buying too much house, you need to create a cohesive plan and budget for everything that encompasses taking on a mortgage.

You’ll want to save up at least 20% or more, towards a down payment on your new home. You’ll end up paying a lot less money in interest payments and avoid extra private mortgage insurance.

Find out more about PMI and how to reduce the cost of your first home.

Don’t forget to factor in closing costs, which typically range between 3% and 5% of the loan price. And then there’s real estate taxes and homeowner’s insurance. These are essential expenses that come with buying a home and need to be added in with the overall mortgage payment.

After learning the hard way, it’s also a good idea to make sure the monthly payment is no more than 25% of your take-home pay. This will leave plenty of room in your budget for emergencies, extra expenses and income fluctuations.

The American Dream Isn’t for Everyone

Between the property taxes, homeowner association (HOA) fees, repairs and lawn maintenance, the true cost of owning a home can be a nightmare – if you aren’t financially prepared. And not everyone is cut out to be a homeowner.

At this moment in my life, I’m happy being a renter and I don’t have any desire to own a home again, for now. But that’s a decision I came to after some trial and error, but it’s what’s best for me and my life in this moment.

For young adults especially, you need to enter into the decision to buy a home with care. You don’t really know where your life will take you. You might want to visit a new country to learn a new language, or move to a new state to pursue a different job opportunity or even.

The possibilities are endless. Which means the American dream of purchasing a home may not be the best decision for you, and that’s perfectly fine.

The biggest mistake I made was not taking time to realize what my home buying preferences were and what my lifestyle could afford.

This is a common debt trap that many young adults fall into, but now you know how to avoid it!



Last Edited: January 17, 2013 @ 2:00 am
About Carrie Smith

Carrie Smith is an ex small business accountant who now helps freelancers and entrepreneurs get out of debt and organize their lives, so they can fund their dream business. Find her on Twitter @carefulcents.

Comments

  1. @kelseystagner Thank you for the RT yesterday!

  2. EdeaKrammer says:

    Getting a home is a long term investment this is what should be in the minds of the new adults and they should take it on their parents’ experience. I say sometimes in this kind of matter it has only one way ticket…
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  3. applecsmith says:

    @DonationCan @MoneyPlanSOS @ptmoney It’s hard a lesson to learn but glad I did.

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