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How much does a baby's "crib" cost?
According to the Department of Agriculture, an average of $53,310. That's what the government recently estimated on average that a family of four spent to house just one child during the first 17 years of its life. Housing costs are the single largest expense for a child.
Since mortgage payments account for much of the housing budget, these figures show why parents-to-be and seasoned child-rearers alike should carefully weigh income and expenses before changing their living situation. Experts say trouble can arise when somebody buys his baby's first house, trades up to a larger property or borrows against home equity to pay for 144 square feet worth of pink bunny wallpaper.
"When people are trying to increase the size of the family, increase the budget, buy new cars, add on to the house and whatever, it's a time when a lot of people get into a bankruptcy situation or a credit card overextended situation and don't catch up for a long time," says Lovella Richardson, a certified financial planner in Knoxville, Tenn.
"You really don't realize how much you're spending on children until they leave home and you have more money than you did before."
First baby, first mortgage
Buying a first home is difficult for just about anybody: In exchange for giving lenders the right to make $150,000 in interest off of them, borrowers get bombarded with redwood forests full of paper and acronyms like PITI, PMI and GFE over the course of 45 days. If all goes well, they get to spend the next five years listening to Mr. Smith mow his lawn every Saturday at sunrise. Congratulations.
In all seriousness, though, taking that first step toward building a family with your spouse means making sacrifices and compromises.
Consider that conventional mortgage guidelines say somebody can qualify for a mortgage if the monthly principal, interest, tax and insurance payment wouldn't swallow more than 28 percent of gross monthly income. Overall debt payments, including those for car loans and credit cards, can't take up more than 36 percent of that income. Some programs also require the customer to have an extra two months worth of payments in reserve to cushion against any unexpected financial problems.
Couples who also have to support a baby may want to hold themselves to an even higher standard.
By postponing either the family or the house hunt for a few months and paying down some obligations, for instance, people can knock their ratios down to a more financially manageable level. They can also save more during that time in order to build up a larger reserve. Finally, couples who expect to take turns spending time out of work to remain at home with the child should be sure they can make their mortgage payment on one salary during those months.
Lenders will qualify borrowers based on how much they make now rather than what they will make nine months down the road, so a mother-to-be needn't hide her pregnancy when she heads to the bank in order to qualify for a larger loan. But the couple shouldn't hide their common sense, either.
"It's going to be harder with a kid, everything else being equal," says Vickie Hampton, an associate professor of family economics at the University of Texas at Austin.
"I always say people should look at their values. If they're willing to sacrifice going out to eat for the next five years and never going to a movie, then so be it," she adds. "But I think for some people, the house becomes a prison. They buy something that's a little more expensive than they could afford. In the best circumstances, they just have to cut back on entertainment and clothing and things like that, but in the worst-case scenario, they could lose the house."
Expand or move on?
Families that make it through the first few years of homeownership have it a little easier than those who are just starting out. But when it comes time to add a few more bundles of joy to the mix, they'll likely need to find more room. Depending on how far along in the first mortgage they are, the condition of surrounding homes, the couple's income and level of financial discipline, some will be better off looking for a new place while others should look at borrowing against their equity to build that new nursery or playroom.
"That's a good time to do some comparisons," says Mary Harrison, a professor of consumer education at the University of Florida. "If your lot is large enough and your neighborhood will support it, it's less expensive to go ahead and add on to the house."
The choice depends, in part, on the price of nearby homes. A family that already has the most expensive house on the block probably won't be able to raise the price of their home enough to compensate for the cost of renovation. That's because potential buyers will be experiencing sticker shock and aren't likely to cough up even more money. These homeowners would be good candidates for a move.
Making the right move
Still, they should be careful to handle the transition from one place to the next correctly. If there's a delay between the sale of the old home and the purchase of the new one, a borrower can get caught making mortgage payments on two sets of real estate. So-called bridge loans close that gap, but carry additional costs and risks. Although it's difficult to do, arranging the two transactions as close to each other as possible will prevent that problem from arising.
Homeowners with properties more in line with their neighbors' or those who plan on staying in the same place for a long time may want to think about renovating or redecorating instead. That way, they can avoid real estate agent fees, another round of mortgage closing costs and other financial burdens.
"A lot of people could do with the space they have if they just threw out some junk they're not using," Richardson adds. "They can make a garage into a room or you can add on some space without making it real fancy, remodel a basement or fix up a basement."
Line of credit or loan?
In many cases, these homeowners will turn to home equity loans and lines of credit to finance their projects. Experts say that's fine, as long as the borrower assesses her level of discipline before deciding which loan to obtain.
"The convenience side says the open-ended loan. Get the line of credit. You don't have to know exactly what you're going to need and that way if you end up with less and you need more, it works out great," Hampton says.
"But the other side of that, all of us when we get into anything, these projects tend to escalate beyond what we originally intended," she adds. "If you're prone to having trouble spending on a budget or you see the things you really, really want, the loan would tend to control that a little bit."
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