Can You Buy a House?

Buying a home is a huge step in life and it can also be very complicated. If you are considering purchasing your first home, there are a few things you need to consider before making your final decision.

What can I actually afford? Be VERY careful about this one! You will see advertisements for low payments on high dollar homes, but is it for real? The payments are nearly never as inexpensive as you are led to believe they will be. So sit down with a pencil, paper, and calculator and add up the following:

• The basic mortgage payment including principal and interest ____________ (go to www. bankrate.com to have some estimates calculated for you)
• š The annual taxes of the home (divided by 12) _______________
• š The annual homeowners insurance premium (divided by 12) ______________
• š If you can not pay a 20% down payment, also add about $60 monthly for every $100,000 of the debt for Private Mortgage Insurance (PMI) _________________

The total will be close to your ACTUAL mortgage payment to the mortgage company every month.

Okay, now once you have those numbers, add on (or subtract if applicable) the following:

Does this home have a Homeowners Association Fee? _____________

š Is it going to cost me more for transportation? _________________

š Is the electric bill higher on average than my current bill? ___________ (You can find this out by calling the power company and asking about the average usage.)

š Will the water bill cost more? ____________

š Can I afford to keep up the maintenance/repairs of the home? ______________ (figure 1% annually of the home’s value)

If, after adding all of that up, you still think you can swing the monthly cost of home ownership, make sure you can cover the up-front costs:

š At least 5% down payment or $5,000 for every $100,000 of the selling price

š 2% for mortgage closing costs (can usually be financed by the mortgage company, but will decrease your equity).

š Whatever amount you need for purchasing appliances (most sellers do not leave refrigerators, washers, dryers, or stand-alone microwaves behind)

š Whatever amount you need to make immediate home repairs/improvements (every home has something that needs to be done to it).

š The amount needed to move

š The amount needed for a good-quality initial home inspection (DON’T skimp on this!!)

š The amount needed to pay for a home warranty, unless the seller agrees to pay it.

So, when all lights are green and you are ready to go, keep a few thoughts in mind that can save you money and your sanity.

Try to avoid mortgages that have a low payment at the beginning, but will increase later, because you may be in your home longer than you think, and these types of mortgages are primarily responsible for the incredible number of homes that are starting to go into foreclosure.

Realize that you can eliminate the burdens of PMI by getting a Mortgage and a Home Equity loan, but the added cost of interest and payments on the Equity loan generally makes the total monthly cost break even. Sometimes it can even be worse because you can occasionally get rid of PMI within just a few years if your home’s value rises enough, but a Home Equity loan only goes away if you pay it off or if you refinance your entire mortgage (and pay another 2-3% in mortgage closing costs.)

If you have had your home for a couple of years and suspect that the value has increased substantially. Find out what your home’s value potentially is, and if you’re sure you’re your debt is less than 80% of the value, you can contact your mortgage company and they will come and do an appraisal (at your expense). If your debt truly is only 80% of the value, you will no longer have to pay the Private Mortgage Insurance (PMI).

Take your time to find the right house. It is better to find a smaller house that you can afford than a bigger house that will keep you up at night worrying if you can continue juggling it all. Besides, it is fun to test your creativity to see how much functionality you can get out of a small space.

It is also better to buy the smallest house in a good neighborhood, than a bigger home in a bad neighborhood.

Don’t feel pressured to purchase a home if you are not ready yet. There are lots of people out there who think that a home is a wonderful investment. Unfortunately, if you are not ready to buy, it can be a financial disaster.