Home Ownership - Buying A Home
Buying a house is a big step, but often a smart move. Home ownership enables you to build equity. Equity is the increased value of your investment in the house - that is, the difference between what you could sell it for, and the debts against it (e.g., the mortgage). Also, home ownership allows you to access two important tax deductions: mortgage interest and property tax.
How Much House Can You Afford?
"How much house can I afford?" is probably the first question you'll think about when you decide to buy a house - especially if you're a first-time buyer. Like most people who purchase a home, you'll probably need to borrow money to finance the purchase. Here, then, are the two most important considerations:
• How much
down payment can you come up with?
Down payments, in general, range from 5 to 25 percent of the purchase price of a house. The amount you'll need to put down can depend on several factors, including the selling price, age and condition of the house, your credit rating score, the requirements of specific lenders, and whether you are purchasing your first home.
If you're selling a house, the money you realize from the sale may provide the down payment for the purchase the new one. If your down payment won't come from the sale of another house, you will need to take the money from savings. Investments, such as stocks and bonds or stock options from an employer are a potential source of funds for a down payment. Bear in mind that the larger the down payment, the lower the monthly mortgage payment and closing costs will be. In some cases, it may be possible to borrow money from certain types of retirement accounts (e.g., IRAs) to help fund a down payment. It's a good idea to ask the advice of a tax professional or financial advisor before borrowing from retirement accounts or liquidating long-term investments.
Note that first-time homebuyers and veterans may be eligible for special financing terms. Contact your local U.S. Department of Housing and Urban Development (HUD) office, as well as local city, county, and state housing bureaus, for information about programs in your area.
How much can I borrow? The important question isn't really, "How much can I borrow?" Rather, it is, "How much can I afford to borrow?" Although many people who purchase a new home feel a financial pinch till they adjust to the new obligation, it's not a good idea to borrow so much that you feel a tight squeeze. Fortunately, lenders' primary lending criteria will be how you look financially. The amount you'll be allowed to borrow will, consequently, depend on the numbers - particularly your net worth and your current gross income.
In general, 28 percent is the maximum percentage of monthly gross income that a lender allows for housing expenses. Housing expenses are usually defined as: principal and interest on the loan, property taxes, homeowners insurance, any required homeowner's association fees, and any required private mortgage insurance. Note that the 28 percent maximum may vary depending upon several factors including gross income and net worth.
Lenders use a second number, 36 percent, as the maximum percentage of your monthly gross income allowed for total debt. Total debt includes housing expenses plus recurring debt: car loans, credit card payments, child support, and all other debts that will not be paid off in a relatively short time (e.g., 6 to 10 months).
Use Chart A to determine the maximum housing expenses likely to be allowed by a lender, based on your monthly gross income. Use Chart B to determine the maximum total debt a lender is Iikely to allow.
After you know your total monthly debt figure from Chart B, you can estimate how much you have available for monthly housing expenses by figuring out your recurring monthly debt, and subtracting it from maximum total debt number you calculated in Chart B.
What will borrowing cost me? Once you have a general idea of how much you can afford on a monthly basis, it's time to get a handle on the cost of borrowing. Generally, banks calculate monthly principal and interest payments per $1,000 borrowed.
Here's how the chart works. Let's say you purchase a $100,000 home, and you have $10,000 for a down payment and need a mortgage for the remaining $90,000. The bank agrees to lend you the $90,000 for 30 years at 8 percent interest. To calculate your monthly mortgage payments:
this calculation provides the monthly principal and interest cost -
it does not include property tax, homeowners insurance, etc. If you
want a more complete picture of the costs of owning a home, you need
to know or be able to estimate additional costs, including property
taxes, homeowners insurance, homeowner fees, and an estimate of
maintenance/repair expense. Many banks, mortgage companies, and
other lending institutions provide" cost calculators" on the
Internet. Also, a real estate agent can help you make these cost