Owning your own home is part of the American dream, a dream that’s become easier to attain in recent years. Nearly 7 in 10 American households own their own home, up from 44 percent in 1940. Still, a home is the biggest investment most people will ever make. So, you have to be sure you are ready. If you’ve just caught real estate fever, you could end up buying more home than you can afford.
What can’t you live without? Before you even set foot in a real estate agent’s office, take stock of what’s important to you in your new home. Do you want four bedrooms or do you need them? Will you need good schools? An easy commute? Shopping and restaurants within walking distance?
What can you afford? The back of the napkin calculation goes like this: take 25-30 percent of your gross monthly income (minus any previous commitments, like credit card bills or student loans). That should be your monthly housing costs (including maintenance, taxes and insurance). You’ll probably end up with a mortgage three to four times your salary. Interest rates have been gradually rising and observers fear more hikes, so be cautious with any mortgage with adjustable rates, which rise and fall with market rates.
Are you financially prepared for this? Owning a home is a big commitment and it’s not for everyone. Is your job secure? Are you going to be able to make steady payments for decades to come? (Some with variable income may get an option Adjustable Rate Mortgage that will allow a choice of payments.) Establishing good credit will save you an enormous amount of interest payments. Have you saved enough for a downpayment (3-20 percent of the house price) and closing costs (1-2 percent)? You may be able to get a mortgage for less than 20 percent down, but your payments will be higher and you’ll probably have to pay mortgage insurance.
How long are you planning on staying? How you answer this question may determine the previous two questions. If you have no kids and plan on leaving the state in two years, then schools are not your priority. But, if this just might be the house you’re in for the next decade, you better check them out. How long you plan on staying will also determine what type of mortgage you should get. If you’re packing up in a few years, then you might consider an adjustable rate mortgage, one that will allow lower payments at first. The catch is if you do end up sticking around, your mortgage payments could go way up.
Is this some kind of get rich quick scheme? In 2005 nearly 3 out of 10 homes were bought for investment, according to surveys by the National Association of Realtors. Another 12 percent were vacation homes, many with some financial strategy in mind. Over the last several years home prices have climbed by double digits in many regions, so buying a second home seemed like a sure thing. Now that the market is cooling, however, it may be harder to make money on real estate investments if you’re only counting on the price going up instead of rental income.
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