Ready for a home? Take a reality test

With headlines such as “Mortgage rates are falling again” and “Home sales begin to rebound,” you may be hearing the call to homeownership.

Yes, it is a good time to buy: Mortgage rates are near record lows and home prices have begun to stabilize after dropping as much as 40 percent in some areas during the last five years.

But is it a good time for you to buy? Achieving the dream of homeownership involves more than favorable interest rates and a promising market. You need to assess your personal financial readiness. That’s the real test.

These two simple checklists can help you make a decision. They will tell you if you are ready to buy and what your limits are when shopping and negotiating.

Assess your personal finances:

Do you have and use a written budget? A realistic budget – with actual numbers – will let you know if buying a home is a smart decision. Your budget should include monthly payment obligations, future expenses and nice-to-have items. Be comprehensive and be honest.

Do you have debt – car loans, credit cards or personal loans? If you do, now is the time to focus on paying off that debt instead of buying a home. A house will come with many expenses you don’t have when you rent. Debts may get in the way of handling home maintenance.

Do you have an emergency fund? An emergency fund equal to three to six months of living expenses – usually $10,000-$20,000 – will give you peace of mind and financial stability if your income is interrupted. This is not down-payment money.

Eliminating debt and having an emergency fund will not only make homeownership a possibility, they can make it a joy.

Assess home affordability:

A 20 percent down payment: Your down payment should be no less than 20 percent of the purchase price.

If you put down less, you likely will be paying private mortgage insurance, often called PMI. This typically costs between 0.5 and 1 percent of the purchase price annually.

On a $200,000 home, for example, PMI will add about $166 to each monthly payment. Not a small amount, and these payments last at least five years.

The monthly house payment: This number – called PITI – calculates principle, interest, property taxes and insurance. Ideally, the total should land somewhere between 25 percent and 30 percent of household take-home pay. By keeping payments in this safe zone, you will be prepared to deal with life’s challenges and enjoy homeownership.

The deferred maintenance and repairs: There is more to homeownership than making the monthly house payment. You must plan for maintenance and improvements.

Before buying, have a professional assess what maintenance will need to be done within the next five years so you can budget for it.

A good monthly estimate of maintenance costs is one tenth of 1 percent of the purchase price. The maintenance budget on a $200,000 home would be about $200 a month.

The affordability checklist should drive your price considerations, offer and negotiating.

Following these guidelines can allow you to own your home happily rather than having the home own you. Good luck. Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.