Home buying the old-fashioned way

The subprime meltdown has meant a return to the old-fashioned mortgage: 20% down for 30 years at a fixed rate. Impossible? We look at 3 cases where people are going that well-worn route -- without Wall Street jobs or trust funds.

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By Emma Johnson, MSN Money

Gone are the days of 0% to 5% down payments. We're returning to our mortgage roots: 20% down on a home at a fixed rate for 30 years.

Quiz: Are you ready for home ownership?

These old-fashioned mortgages worked for good reason. For one, payments were easy to understand and easy to budget for. Further, the struggle to come up with that hefty down payment meant the ultimate purchase was more stable for the owner and the community, financial experts say.

"If you have 20% equity in your home, you're more secure," says Steve Habetz, president of Threshold Mortgage in Connecticut. "You're able to weather financial storms, and you're not paying private mortgage insurance."

Can anyone afford the expensive homes?

Sounds sensible. But how do you come up with that kind of money in today's market?

Average home prices jumped 81% between 1996 and 2006, to $221,900, according to the National Association of Realtors. That means to buy the average house you need $44,380 to satisfy a 20% down payment.

Impossible unless you're independently wealthy? Maybe not. The following three households are committed to buying homes the old-fashioned way.

Who: Wendy Nystrom, 34, insurance underwriter

Where: Jersey City, N.J.

What she bought: A recently renovated two-bedroom co-op for $375,000 with $75,000 down.

Income: "About the same as my down payment."

How she did it: Starting in her early 20s while making $25,000 per year, Nystrom started sending small amounts of money to a financial adviser who invested her money in stocks. All the while, she contributed to a retirement account and lived well within her means. In her early years, she shared a house in Boston with five other women, paying $200 per month in rent.

When she moved to New York City in 2001, Nystrom had a brief lapse in monetary judgment with shopping and restaurants binging -- until her sister reined her in and placed her on a budget. The plan required an unreasonably large contribution to savings, however, and not enough spending cash. So Nystrom created her own modified budget, which included automatically contributing a percentage of her income to savings and playing mental games with herself to stay on track. "Whatever extra I have in my bank account, I think I have less." If she knows she can afford to blow $1,000, she convinces herself the sum is half that.

What was her trick?

"When I was in my 20s, I thought do the normal thing and get married and be taken care of," Nystrom says. "That hasn't happened, so last year I decided it was time to grow up and do what I have to do and stop paying rent." In her hunt for a mortgage, she heard plenty of brokers' pitches for subprime mortgages, but knew it made sense only to go the old-fashioned route.

Benefits of a traditional mortgage

She now savors coming home after work and entertaining friends on the weekend in a place she calls her own.

Continued from page 1

Who: Craig Guillot, 31, freelance journalist, and Holly Guillot, 26, business student and Starbucks employee

Where: New Orleans

Combined income: $100,000

Status: Have saved 20% down on a home priced at around $200,000 but are waiting for the real estate market to improve before buying.

How they're doing it: The couple live and work from a one-bedroom apartment for which they pay $525 monthly. "We spend more eating out than we do on rent," Craig says.

After Hurricane Katrina, Craig lost his job as a staff writer for a local newspaper. Being unemployed and broke spurred an interest in personal finance, and he started educating himself, including subscribing to Money and Kiplinger's Personal Finance magazines. The couple now save a third of their income, have a year's worth of living expenses saved, no credit card debt and own their cars outright.

"Katrina taught me that your whole life can change any second -- and I want to be able to take on any odd turn life can throw at you," Craig says. "I like to be liquid, that's my thing."

Craig saw friends jump on the subprime bandwagon -- and have little or no equity in their homes even after several years. "I don't like living in this tiny apartment -- I would rather be in a house," he says. "(Because of this experience) I've developed very good financial habits -- if we'd jumped into a home right away I wouldn't have developed those habits."

Who: Mike Barbagallo, 35, television photojournalist, and Jessica Barbagallo, 34, TV editor

Where: Conroe, Texas, outside Houston

What: Four-bedroom, 3,000-square-foot house for $200,000

Income while saving: $140,000 combined

How they did it: When they got engaged three years ago, the Barbagallos had no doubt they would seek out a traditional fixed mortgage with a 20% down payment. But since they lived and worked in New York City, the Barbagallos knew their money wouldn't go far in that area. "On Long Island, even a small starter home is $500,000," Jessica says. "Do you know what 20% of $500,000 is?"

So the couple decided to look west -- to Houston, where wages are lower, but so is the cost of everything else. Even with pay cuts, the lower taxes and cheaper cost of living meant the couple could afford the large home they craved with a traditional mortgage they knew was wise. At the time, the frugal couple already had the recommended six months' expenses in an emergency savings account, but they didn't want to cash that in.

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So they got serious. Each was allowed a mere $100 per week allowances and kept their combined monthly credit card bill under $1,000 -- a credit card that generated points and was always paid off. They didn't go out every week, brown-bagged it to work and often dined in. "I'd make a huge pot of spaghetti and meatballs, and we'd eat it for a week," Jessica says. For years in New York, they had lived in the not-very-fashionable neighborhood of Astoria in Queens, paying modest rent when they could afford more in Manhattan.

Then they moved in with Mike's parents. The move added three hours' commute to each of their days (on the commuter train, fare subsidized by their employers), but within two years they had their $40,000 down payment and jobs in Texas.

"There were horror stories about adjustable rates . . . and that's why everyone is going bankrupt now. I couldn't fathom putting any less than 20% down," Jessica says. "It's my favorite thing now to pull into the garage and close the door. I'm proud we did it."

Published Nov. 20, 2008