Preparing for Homeownership
April 1, 2009, 11:18 am
The right way to plan for owning a home
Recent turmoil in the housing markets has forced many people to look at homeownership differently.
We believe in the goal of homeownership, and we think one key to preserving homeownership in the long run is to prepare properly in the first place.
1. Save for a down payment.
It appears that from now on, the mortgage lending
industry is going to be less eager to lend to people with no money to
put down on a new home. The ideal borrower will have saved up 20% of
the home's value as a down payment on a mortgage. This may seem like a
lot for a first-time homebuyer, but if you can do it, you'll have a
much easier time getting approved for a loan and you won't have to pay
for PMI (private mortgage insurance), so your monthly house payment
will be lower.
Depending on the laws of your local area, there may be special programs for low- and moderate-income families that can help you in this area. Your state or city may offer assistance with the down payment or closing costs. To find out more about programs like this, check with a local HUD-approved housing counseling agency or ask your mortgage broker. Another possibility is a mortgage with a "silent second"; in this scenario, the loan carries a "silent" second mortgage which pays for some or all of the down payment. The borrower doesn't have to repay the loan if certain conditions are met (like staying in the property for 7 years). Not all silent second mortgages are fully on the level, so make sure yours is part of a reputable nonprofit or city program, and as always, consult a HUD-certified housing counselor before proceeding with any loan you don't fully understand.
2. Be ready to make the payments.
Homeownership carries costs that renting doesn't.
You'll be paying more for insurance and property taxes, plus PMI if you
don't have 20% to put down when buying a house. Try to determine what
your future house payment might be, based on the kind of loan you
expect to get.
You can use online calculators (like this one: http://credit.org/resources/Financial-Tools-Worksheets-Calculators/mortgage_loan_calculator) to figure out your monthly house payment, but be sure to add taxes and insurance to that monthly amount. A rough national average would include $250 per month in taxes, $70 per month in insurance, and if you have to pay PMI, add another $50 to the sum.
Say you are renting an apartment for $800 per month, and the calculations you've just done tell you a house payment will be around $1,100 when you add in the taxes and insurance. Start setting aside the difference. That'll be $300 every month that you can't touch. Put it in a savings account towards your future down payment. Over a year of renting, you'll learn whether you can really afford the house payment you're planning for, and you'll be saving money toward your important goal of homeownership.
Ultimately, your property taxes and the interest on your mortgage loan are tax deductible, which should offset much of the increased cost of homeownership, but you still have to come up with the larger house payment on a month-to-month basis while maintaining your household budget, so it's important that you be prepared to do so.
3. Don't make your move until you're ready.
It's great that homeownership is one of your long-term goals, but you have to be patient and make sure you're ready before you take the leap. Continue savings for a down payment and be absolutely sure you can realistically afford the added expenses that come with homeownership.
Before the recent mortgage crisis, people were caught up in a frenzy of speculation. Home values seemed to be rising with no end in sight, so people bought homes they couldn't afford, thinking the rising values would net them big profits. That's the wrong way to go about it. A home can be a great investment, but it shouldn't be treated as a short-term get-rich-quick scheme.
Another factor that led people to jump into homeownership was a decline in interest rates. When mortgage loans became especially affordable, people felt like they needed to move quickly to take advantage of the savings. But if you're not ready to own a home, getting a great interest rate on your loan won't save you from foreclosure down the line. You can't afford to be influenced by what's happening in the mortgage markets; you can only move into homeownership when you know you are ready.
4. Change your mindset.
It can be difficult for long-time renters to fully
embrace all the responsibilities of homeownership. Organizations like
Habitat for Humanity sponsor workshops that help teach people to
understand the new expenses that come with owning a home. Homeownership
can be hard work, and it may be full of unpleasant surprises; renters
can call the landlord when their water heater breaks down, but
homeowners have to pull out their own checkbook.
While homeownership has its trials and tribulations, the rewards are great; remember that someday, you'll be able to retire to a life with no mortgage payments and live in a home that's truly your own.
5. Be smart about shopping for a home.
A house shouldn't be an impulse purchase. It
requires a lot of careful consideration and planning. If you start
looking at homes too soon, you'll increase the risk of jumping at what
seems like a great opportunity. Don't even start the house-hunting
process until you've done all the other things on this list.
And when you do start house-hunting, be methodical. Do your research. Attend a free first-time homebuyer seminar at a HUD-approved housing counseling agency before you make up your mind.
The bottom line is, if you haven't saved up for your down payment and you're already thinking about school districts and paint colors, you're doing things backward. Take a breath, back up and start from the beginning by getting your personal finances in order. Once you know what you can afford, have established your savings, and have mentally prepared yourself for the responsibilities of homeownership should you be shopping for a home.
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