Facing your financial reality

By Jay Dedrick, Rocky Mountain News (Contact)

Published October 15, 2005 at midnight

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Think you can build your dream house without seriously considering the financial side? You're dreaming. Before breaking ground on your ultimate dwelling, get in touch with reality. Here are money musts to consider from Susan O'Grady, a certified financial planner and president of Equipoise Wealth Management in Denver.

* Know what you can afford: "Lenders will determine affordability using a much higher percentage of income than is generally reasonable," O'Grady says. In other words, banks typically are eager to loan you the maximum amount they think you can afford.

O'Grady advises that a homeowner spend no more than 25 percent to 30 percent of net income on housing expenses. For instance, if the household income is $6,000 per month, then the monthly mortgage payment - plus maintenance costs, repairs, landscaping, etc. - should total no more than $1,800.

But given the high prices in the Denver-area housing market, O'Grady says she sees couples committing 50 percent or more of their net income to housing. To explore your saving options and for a monthly payment calculator, go to the American Savings Education Council's Web site, www.choosetosave.org.

* Crucial contingency: Because you can expect construction costs to exceed the initial budget by 10 percent to 40 percent, include a contingency fund in your budget plan.

"Homeowners often take out a construction loan that doesn't have a contingency built in, then they run out of money and have to borrow more or scrape from other resources," O'Grady says.

* Keep track of the money: "If you're making periodic payments during construction, you as a homeowner have an obligation to know what is included in that payment," O'Grady says. Also demand specific information on what's being completed with each payment - and how long completion will take. "Keep track on a spreadsheet. That's normal project management."

* The magic 20 percent: When it comes time for a mortgage to replace the construction loan, aim to pay at least 20 percent of the home's cost up front. By doing so, you avoid the expense of mortgage insurance. Otherwise, you're paying up to $5,000 a year to protect the mortgage lender - not yourself. "Coming up with that 20 percent down is certainly a worthy goal," O'Grady says.

* Protect the nest egg: "I would not support taking long-term savings or retirement money to buy a house," O'Grady says. One option: Temporarily suspend contributions to a retirement fund - but only for a year or two - while getting used to the mortgage.

* Tightening the belt: Entertainment and travel are the most obvious targets for household budget cutbacks, O'Grady suggests. Most homeowners, however, tend to maintain their present lifestyle - and accrue greater debt.

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