For a more in-depth analysis, try using an online calculator that assesses the merits of buying versus renting, such as the New York Times’ buy-rent calculator. It allows you to input many variables for buying and renting, and calculates whether you will be up or down after six years. Although this is a useful tool, keep in mind that the result will depend on your assumed outlook for home prices.
Even if a house appears to be a good deal, the more important question is whether it’s something you can comfortably afford. To gauge whether the mortgage you would be taking on is affordable, you can go to the Table of Risk at HousingRisk.org. The table estimates the risk of defaulting on the mortgage in a severe real estate correction.
You will need three pieces of information to use the table: the ratio of your proposed loan amount to the purchase price of the house (the loan-to-value ratio), your FICO credit score and the ratio of your total debt payments for the mortgage and other loans to your pretax income. If you don’t know your FICO score, you can get a free estimate at http://www.myfico.com/Fico-Credit-Score-Range-Estimator.
With house prices already up substantially from their lows, today’s home buyers need to pay close attention to risk. Prospective buyers can protect themselves by using newly available tools to analyze local market conditions, and by realistically assessing their own financial situations before making such an important decision.
ABOUT THE WRITERS
Edward J. Pinto and Stephen D. Oliner are co-directors of the International Center on Housing Risk at the American Enterprise Institute. Oliner is also a senior fellow at the UCLA Ziman Center for Real Estate. They wrote this for the Los Angeles Times.
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