For most people, especially if you plan to stay in one place for a reasonable period of time, the idea of paying a mortgage is much more enticing than paying rent. However, it’s important to understand all of the costs involved in buying a home, and the level of risk that you feel comfortable with.
It’s important to factor in the down payment, homeowners insurance, real property taxes, closing costs, repairs, maintenance, as well as the payment, when determining what costs are associated with home ownership.
Financing your new home To determine whether or not you can afford to buy a home, you should first calculate the property value of homes that interest you. This is determined by comparing the prices of homes recently sold of similar size, and preferably, in the same neighborhood. Realtors can easily help you with this process.
Next, you should visit with one or more lenders (these can be banks, savings and loans, or mortgage brokers), and compare their required down payment, interest rate, and closing costs. Make sure you are comparing apples to apples, when visiting with lenders. If you are putting down less than 20 percent of the property value, you’ll need to factor in private mortgage insurance (PMI), which is a policy that allows mortgage lenders to recover part of their financial losses if a borrower fails to fully repay a loan. Typically, the lower the down payment, the higher the monthly PMI, which often costs between $50 and $150 per month.
MoneyLenders should be able to give you an estimate of your closing costs, including points (the dollar amount paid to a lender for obtaining the loan), taxes, recording fees, inspections, prepaid interest, title insurance, appraisal, hazard insurance and tax reserves, etc. These will generally add up to between three and nine percent of the loan value. Add these costs to your required down payment, and you’re on your way to determining how much money you’ll need up front to buy a house.
Don’t forget to consider actual/physical moving costs. Whether you hire a moving company or do it yourself, it will cost money.
Be sure to budget for taxes and insurance, unless of course they are being escrowed into an impound account, where your lender will collect these amounts from you monthly and pay them annually, on your behalf. You’ll still need to budget for repairs and maintenance, as well as utilities. If the home is older and hasn’t been remodeled, you may need to have some money in savings for the “what if’s” (i.e. roof, heat or air conditioning systems, plumbing, electric).
In your final analysis of whether you can afford to buy a home, condominium, or townhouse, you’ll want to weigh the costs with the financial benefits, the tax benefits, and the appreciation factor. The best benefit of all will be the satisfaction of knowing that the home you live in is your very own.
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