Figure Out What You Can Afford
First, identify where it is you'd like to buy a home (in reality, not fantasy), and find out the price of the average home in that area. Next, set a goal of when you'd like to buy and how much money you need to do it. You'll need enough for a 5 percent to 20 percent down payment, the closing fees ($5,000 to $15,000), the mortgage payments, and any unforeseen repairs. Make sure you have enough to not only move in, but also stay there.
In addition to socking away for the big down payment, you should have an emergency reserve of three to six months' of your annual income for things that pop up -- like the boiler that bursts and needs to be replaced or the roof that leaks and needs repair.
Budget to Save
To start a budget, track your spending for two to three months so you can get a clear picture of where your money goes -- and how much you're actually saving. There is no true rule of thumb as to how much you should save; it depends on your income and expenses. If you want to save for a house, try living off of one salary. Make sure this covers your current monthly expenses and what you expect a mortgage payment will be. Figuring the mortgage into your budget now will get you used to what your future finances will be.
[Nest Note] According to the Federal Housing Administration, your monthly housing costs [meaning mortgage, utilities, repairs, etc.,] should not exceed 29 percent of your gross monthly income. Using this rule, if your gross income was $36,000 annually, your monthly gross would be approximately $3,000; 29 percent of that ($870), you could put toward your housing costs. If you don't have debt, that percentage can climb to 41 percent of your gross monthly income.
Don't Count on a Big-time Tax Break
You've probably heard about the tax advantages to owning a house -- and they're true. But don't assume that you'll automatically get a tax break for buying. The federal government lets homeowners deduct mortgage interest from taxable income, but this tax break may not be worth much if you buy a low-priced home. All taxpayers get a standard deduction (currently $6,700 for married couples filing jointly), and unless your annual mortgage interest exceeds that, you don't get an additional tax break.
Beware of "The Bubble"
When you chew a big wad of Hubba Bubba, it's fun to blow a bubble and watch it get larger and larger...till it bursts. Some people are speculating this is what's going to happen with the housing market. If you haven't already noticed, home prices are skyrocketing. Some people predict that prices will be unable to go any higher and there will be a sudden and marked decrease in value. That would mean two things: If you own, there's a chance you won't be able to sell your home and make a profit. If you rent and hold off buying for a bit longer, you'll get a better deal. So are economists just blowing bubbles up our you-know-whats about the end of high prices?
Kinda sorta. The housing market is not like the stock market, which can experience massive price swings in a matter of minutes. In fact, shifts in real estate are more gradual. It's more of a case of supply versus demand. While demand might slow down a bit and bring prices back to a reasonable place, there will always be people looking to buy a home. Now, just how much of a bidding war they are willing to engage in is the question.
What does this mean for you? You need to be on top of the ups and downs of your dream community. In addition to knowing mortgage interest rates, find out the condition of the local economy. Is there rampant unemployment, or are jobs being created? What is the history of home price appreciation -- or depreciation -- in your area? Is the inventory of available homes more or less than it was at this time last year? If you think your community's demand is decreasing, you might find a good deal soon. But if you already own a home, make sure the price is not decreasing so much that you won't make a profit by selling.
Don't Gamble With Your Home
Let's say you own a home and have this great idea to sell for a windfall, rent for a couple of years, and buy back into the housing market when prices drop. This way you can get a bigger and better place. Sound risky? It is.
The problem: You can't time the market, and you risk not being able to buy back even the type of house you sold. Factor in the costs of closing, moving, and everything else -- like schlepping your family and stuff -- and it starts to seem like a real hassle.
But this is a strategy that might work for your parents. People who are ready to retire or to leave a high-cost area, can sell their more expensive home and buy in another community where home prices are considerably lower. Think about it in 30 years, and for now just enjoy being newlyweds.
Aim for Appreciation in Value
Here's a major cliche for you: location, location, and location. If a house is in a desirable location, odds are it will grow in value. But even if you can't afford the hottest market, you can still find somewhere good. Look for a more modest home in an up-and-coming area. It's going to take some work to find out where that is exactly (like trying to find a hot restaurant without using Zagat).
Luckily, real estate agents can help you -- as can doing some research of your own. Snoop around to see if homeowners are remodeling. This means they are invested in the community and want to increase property values. Then find out what the town has in store for making the location more desirable to homeowners and businesses (new shops? Visit a town meeting).
Get the most from your investment: Don't just buy a home because it's big or expensive. Instead, focus on public transportation, good schools, recreation areas, and overall location.
[Nestperts] Joy Jackson, a financial consultant at AXA Advisors New York Metro Branch; David Howell, executive vice president of McEnearney Associates, a Virginia-based real estate company just outside of Washington, D.C.; and Christopher Brown, co-president of Prudential New Jersey Properties.
by Grace Jidoun
7/2/08
See more:
buying a home,
Real Estate