How to Buy a House
- Wednesday, September 05, 2012
Editor's note: This article appeared originally at Debt-Proof Living on August 31st 2012.
When the housing bubble burst in the U.S., home prices across the country dropped significantly. As painful as this has been for many, this situation has made it possible for many people, who before would not have been qualified, to enter the housing market.
But is it really better to buy a home than to rent? Conventional wisdom has always pointed out that when you rent, you are just throwing money away every month. But that’s a one-sided argument. On the other side is the fact that the equity you may build from buying is mostly offset by the money you will “throw away” on property taxes, homeowners insurance, maintenance and mortgage interest.
In decades past, homeowners could pretty much count on their equity (the difference between the outstanding mortgage amount and market value of the property) to grow substantially each year. This usually made buying so much more attractive than renting, from a financial standpoint. However, since 2008, that benefit continues to be questionable.
There does remain one significant benefit for buying over renting: You get to freeze your monthly payment for 15 to 30 years and then stop paying it altogether. This offers the promise of a rent-free retirement. If there is one thing you will not want to have once you stop working is a monthly mortgage payment, or rent.
Buying for the first time can be overwhelming. In an effort to calm fears and build confidence, here are the basics for buying a house.
How much do houses cost? The national median existing single-family home price in the U.S. was $181,500, as of July 31, 2012. That means half are more and half less than that median figure.
How much can you afford? Generally, multiply your gross annual household income by three and you’ll know your comfortable price range. For example, if your total household income is $75,000 annually, you should be looking at houses in the $225,000 range. A loan broker might tell you something quite different, but remember this: The biggest mistake you can possibly make when buying a home is to get in over your head.
Mortgage. A loan on real estate is “secured” and called a mortgage. By “secured” this means that if you fail to pay as promised, the lender can take the property as payment, through a process known as “foreclosure.”
Most home mortgages are for 30 years, meaning that if you make all 360 principal and interest payments, the loan will be paid down to $0, and you will own the property “free and clear.” The monthly payments on a 15-year mortgage are going to be more, but you will own the house in 15 years, and avoid having to pay a lot of interest.
How much will my payments be? Of course there are variables here depending on interest rates, but generally your payment will be 0.75 to 1.15 percent of the purchase price. On a $150,000 home that’s $1,687 to $2,587 per month, which includes taxes and insurance.
The bigger your down payment, the lower the monthly payments. The lower the interest rate, the lower the monthly payments. The longer the loan term, the lower your monthly payments. Keep in mind that it’s better to get a shorter loan so you pay it off quicker and save on interest, if you can afford the higher payments.
Money you need up front. You will need money for the down payment, closing costs and miscellaneous costs.
Down payment. You will need 3 to 20 percent of the purchase price in cash for a down payment. The actual amount will depend on your credit score and the terms and conditions required by the lender.
Recently on Debt
Have something to say about this article? Leave your comment via Facebook below!
Listen to Your Favorite Pastors
Add Crosswalk.com content to your siteBrowse available content