Some Words of Caution to First Time Homebuyers
There has been a tendency for first time homebuyers and even move up buyers to buy more home than they can actually afford. This tendency had a lot to do with why so many families are facing foreclosure or having to sell their home for less than what they owe. If you follow a few simple rules, you will go a long way to making sure you avoid the trauma of one day losing your home.
Stretch or Think Small?
Advice to renters designed to encourage them to buy real estate often goes something like this: Home ownership is a good investment because your payments remain the same even when your income increases and when you get ready to sell, the house will be worth more than you paid for it creating a profit for you. Well, the first part of this statement is only true if you buy using a fully amortized loan. It is not true that your payments will remain the same if you choose an ARM or Adjustable Rate Mortgage. The second part of the statement is sometimes true and sometimes not true. Today, many families are being forced to sell their homes for less than they owe on it. Not much profit in that. Other families have simple walked away from their homes and now have the stain of foreclosure on their credit record. Some, but not all of the current economic problems would not exist if a lot of the home buyers that are selling short or in foreclosure had purchased a smaller, less expensive property.
What Expenses to Consider
If you are contemplating buying a home you will need to have money for a down payment and for closing costs. Generally, the more down payment you are able to make, the better your interest rate will be. Often times new home buyers are pressured by an agent or by their own emotions to put a small down payment on a more expensive property than a larger down payment on a property that costs less. The argument often goes like this: If home appreciation is 10% a year, would you rather have a home worth $100K or $200K? Obviously, you would rather make $20K a year than $10K, but the risk of losing everything is much greater the more you pay for the house. So, let's say you have $20,000 to put down on a house. You can put 10% down on a $200,000 home or 20% down on a $100,000 home. Which is the safer investment? Which is going to be easier to afford? The difference in house payment is going to be about $600 a month for the less expensive home opposed to $1100 a month for the more expensive home.
What Does It Mean to Pre-Qualify
Banks calculate how much they think you can afford based on your current income and expenses. Just because you pre-qualify for a certain loan amount does not mean that you should buy up to that level. Actually, these days, even if you are pre-qualified for a loan, it does not mean the bank will actually finance the home you decide to buy. A much better indication of what a bank will do can be obtained by getting pre-approved for a loan.
The 35 Percent Rule
It is a good idea to keep your home expenses to 35 percent of your take home pay. Home expenses include your mortgage payment, taxes, association dues, home insurance and maintenance. If you follow this rule and these guidelines, you are likely to make a wise purchase and avoid the terrible emotional trauma buying beyond your means can cause.
About the Author:
Noel Markham, MA |
