Buyers Guide - Fiancial Security

What do people mean when they say home ownership is the key to financial security?

The benefits of home ownership are both financial and psychological:

• Home ownership is a durable (real) investment. Historically, housing has appreciated in value for decades. Although no one can say a specific home in a specific location will increase in value, generally speaking the odds favor most homeowners. Also, monthly mortgage payments (the part that reduces the principal loan balance) becomes a solid form of savings.
• Numerous unique tax advantages are available to homeowners. Unlike other investment tax shelters, home ownership works for you even as you live in your investment. Fore example, the thousands of dollars you pay in mortgage interest (discussed below) are deductible. The tax deduction alone can sometimes make owning your own home cheaper than renting with "after-tax" take-home dollars.
• By accumulating equity in your home, you can later "move up" to another home, with a good down payment on hand.
• Home ownership offers you the opportunity to take control of your housing costs. Mortgage payments (even on adjustable-rate mortgages) are more predictable than rent.
• Owning your home allows great freedom of choice in choosing yoru community, architecture, interior décor, appliance selection, plus whatever method of financing best suits your situation.

What Price Home Can I Afford to Buy?

The easy answer to this all-important question of price is simply adding how much you can afford to borrow to how much you have available for you down payment investment. The total is your maximum affordable home price. (Remember to keep enough cash or credit left over for move-in expenses and an emergency reserve.) The harer answer is how much you are qualified to borrow.

For starters, you can put the most frequently used lenders' rule-of-thumb to work: the 28% and 36% formulas. This is the test many lenders use to qualify applicants for conventional mortgage loans (though some lenders and mortgage plans apply stricter codes, such as 25% and 33%, especially if your down payment is less than 20% of the sale price).

The 28% test permits you to spend no more than 28% of your gross monthly income on your total monthly housing costs, including principal, interest, taxes and insurance (P.I.T.I.) and condominium fees, if any. For example: 28% of a $3,600 gross monthly income would qualify a buyer for a $1,008 per month payment.

The 36% limit cover both your P.I.T.I and long-term debts (more than 10 months) such as alimony, regular household expenses (mortgage insurance and/or condominium or association fees), outstanding loans (car, appliances, school), support for children (resident or living separately). For example: 36% of $3,600 would qualify for a $1,296 payment t per month less monthly payments on any long-term debt.

In our examples, the affordable loan payments for an income of $3,6000 per month is a range between $1,008 for the home payment alone and $1,296 a month less any debt payments. (Strict lenders may use only the 28% standard, even with no debts, or ask you meet both standards. Other lenders may use less strict standards for borrowers with excellent credit ratings.)

In addition to your loan, the cast you have on hand (plus the cash you can acquire) is an important factor. You will need cash for a down payment (ranging from 0% - 20% or more for the sales price), settlement or closing costs, moving expenses, possible immediate repairs, remodeling, new appliances or furnishings. Also be sure to budget for utilities and maintenance. This takes some figuring.

an agent can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment amount and you get the approximate range of home prices you can afford.

Your next step is to shop carefully for the loan that will keep your mortgage payments in line with your budget. Different mortgage plans can dramatically affect your monthly payment - and thus the priced home you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards - again allowing you more home for you income.

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