Minding Your Money
A Common Cents Guide to Buying a Home
You are on the verge of making what is likely one of the biggest purchases of your life — buying a new home. While exciting, making such a big financial commitment can also be scary. The best way to overcome those fears is to make sure you are an educated buyer who knows what they are doing every step of the way.
You’ve heard the famous phrase, “knowledge is power.” Well, in this case, it couldn’t be more appropriate. By understanding the key financial steps you will be taking on your home-buying journey, and what each one involves, you will have the power to make smarter decisions with your money.
Time to buy?
First, you need to make sure this is the right time to buy a house and be certain you have sufficient savings to cover the costs associated with owning a home.
Are you ready to settle down in one place for five or more years? Do you have a steady and reliable income? Do you have enough savings to cover the down payment on a house, which typically ranges from 5 to 20 percent of a home’s price? If you answer “no” to any of these questions, then renting may make more sense.
To help you figure out if it is better to buy or rent right now, use one of these online calculators designed to aid you in making just such a decision.
Buying a home you can afford
If now seems to be the right time to buy, the next decision is figuring out how much to spend on a home. Follow the 28/36 rule, an easy to understand formula stating that you should spend no more than 28 percent of your gross monthly income on housing costs, such as monthly mortgage payments, property taxes and insurance. The second part of the formula dictates that your total debt should not exceed 36 percent of your pre-tax income. Go to http://www.bankrate.com/calculators/mortgages/new-house-calculator.aspx for help in crunching these all-important numbers.
Before proceeding, you might want to consider getting pre-approved for a mortgage. Having a pre-approval letter from a lender in hand when you go house hunting will make you far more desirable to sellers because it will show you are ready to go and it will speed up the process.
Before approaching lenders, check your credit report for free at www.annualcreditreport.com, as well as your FICO score at www.myfico.com. Mistakes can make it into your credit report and it’s better to start fixing them now before you start looking rather than bringing the home-buying process to a screeching halt.
Also, be sure to collect and organize financial records that document your income and personal assets, including pay records, tax returns, and bank and investment statements. Lenders will also want to know about your current loans and debts.
Locating a lender
Shop around for a lender that is right for you. Find one that fits your unique situation and with whom you feel comfortable. If you are serving, or have served, in the military, you could be eligible for a loan from the U.S. Department of Veterans Affairs (VA). The U.S. Federal Housing Administration (FHA) also offers low interest loans requiring smaller than normal down payments to those with good credit. It’s always a good idea to ask banks and mortgage companies in your area about the terms of their home loans. And if you’re a member of a credit union, be sure to ask there, too.
Types of loans
Just as there are numerous lender options, there are many different types of mortgages to choose from. Two of the most common are fixed-rate and adjustable-rate loans. A fixed-rate loan locks in your interest rate for the life of the loan, typically 10 to 30 years. With an adjustable-rate loan, your interest rate begins fluctuating after having remained fixed for a set number of years.
Owning a home is a significant responsibility and keeping it structurally sound and in good working order requires regular maintenance. While the amount you set aside may vary depending on a home’s age and condition, a good rule of thumb is to allocate 1 percent of the purchase price each year to cover maintenance costs.
Home ownership also qualifies you for generous tax breaks. Two of the biggest ones are the ability to deduct the interest you pay on your mortgage as well as what you pay in property taxes each year.
While there are seemingly countless financial decisions to make when buying a house, having a basic understanding of the key steps involved, from figuring out what you can afford, to mastering the lending process, will make you a smarter homeowner and ensure that you are spending your hard-earned money in the wisest, best way possible.