Some families are so eager to buy a house that they plunge in without taking a realistic look at whether they really can afford to become owners. The result can be disastrous - or at the least, financially uncomfortable.
"If you're not prepared financially, you might find yourself living in a splendid house without a penny to spare for anything else," says Kathleen DeFrances of Source One Mortgage. "Or you might overextend to the point where you can't keep up with your mortgage payments and risk losing the house."Source One, a national mortgage banker, has put together a list of points to consider before you set out to buy. They require some work on your part, but the more you know, the more comfortable you will be with your home buying decision.
1."Add up the probable costs for a house in your price range. Include monthly mortgage payments, moving costs, settling-in costs, taxes, insurance and property repair and maintenance. Are these costs higher than you pay in rent? If so, can you afford more for housing than you are currently paying?"
You won't be able to figure out all these costs exactly, but you can come close. The mortgage payment is easy. Choose a mortgage amount, ask a local lender to quote you an interest rate and then either use an online mortgage amortization calculator or ask a real estate agent to run the numbers for you. Call a mover to get an estimate of moving costs. A real estate agent can give you a good estimate of property taxes and insurance.
Figuring out property repairs and maintenance is harder. If the house you buy is new or in good shape, you probably won't have to spend too much right away. But figure that some appliance or other will need replacing and that other things - furnace, roof, basement water leaks - will go wrong at some point and you will have to deal with them.
2. "Analyze your current expenses. Keep a record of everything you spend over a period of time - say, three months. Do you usually have some money left at the end of each pay period? If not, you may need to change some of your spending habits before you can seriously consider buying a house."
It's easier to cut down spending when you have a goal. Give up all frills and sock away $300 a month. At the end of a year you'll have $3,600 plus a little interest. That's enough for a 3 percent down payment on a $120,000 mortgage.
3. "Try out the cost of home ownership. Start now to put aside money from each paycheck in whatever amount you decide you could pay over your current housing costs. If you find you can do this, you may be ready for home ownership."
For example, on a $120,000 mortgage at 7 percent interest, the monthly mortgage would be $798. Add in $250 a month for insurance and property taxes and the total comes to $1,048 a month. If you're paying $700 a month in rent now, that's $348 a month more to own a house. Can you live with that increase long-term, or at least until you get a raise?
4. "Analyze the up-front costs involved in purchasing a home. Your up-front costs include the down payment and various closing costs."
You can make a down payment of as little as 3 percent with government backed mortgages (FHA and VA) and with some other loans. Figure closing costs to be at least 3 percent of the amount of your mortgage. On the positive side, all the interest you'll be paying on the mortgage will lower your tax bill unless you stick with the standard deduction.
5. "Check out the ongoing costs of owning a home."
If you find a bargain house that needs substantial repairs, you may be able to get a loan for both your mortgage and the repairs at the same time. These government backed loans, known as 203 loans, are available through lenders that handle FHA mortgages.