Buying a home? Make sure you’re truly ready.
You’ve heard the clichés about homeownership: It makes financial sense compared with renting. It’s one of the best investments you can make. It’s the American dream!
Buying your first home can be a rite of passage into adulthood, a symbol of financial maturity and independence. But how do you know if it’s the right time to buy? Is your decision based on the numbers – income, debt, interest rates, current home values?
Sure, these numbers may add up, but your decision should be based on more than numbers. Consider your financial mind-set. Do you have control over your budget, spending and debt? Are you living with the financial discipline to make a home a joy rather than a burden?
Mortgage lenders will help you with the numbers, but don’t expect them to have your back. It’s not their job. When you meet with a lender, you’ll need to answer these questions:
How much do you want to spend on a house?
How much money do you have for a down payment?
How much money do you make?
Have you been at your current job more than two years?
How much debt do you have?
Lenders typically use the 28/36 rule. They want your mortgage payment – often called PITI for principal, interest, taxes and insurance – to be no greater than 28 percent of your gross monthly income.
The more money you have for a down payment, the more expensive home you can buy and remain under the 28 percent guideline. Be aware, buyers with less than a 20 percent down payment will need to pay private mortgage insurance.
The 36 percent of the 28/36 rule indicates the maximum amount of debt you can assume as a percent of your monthly income when including your mortgage. For example, a buyer with a gross income of $75,000 a year could spend $2,250 on debt each month, with not more than $1,750 (28 percent) of the $2,250 (36 percent) dedicated to a mortgage.
In Durango, the median home price in the first quarter of 2014 was $338,000. This means a buyer with a gross income of $75,000 and a 20 percent down payment ($67,600) could expect a monthly mortgage payment of $1,735 (based on a 4.25 percent mortgage rate).
This just barely fits within the 28 percent of the 28/36 rule. That was Cheri and me with our first condo. Going by the numbers only, we completely missed considering our financial mind-set, overlooking the keys to making home ownership a rewarding experience.
Before talking numbers with a lender, consider these key principles:
Live by a realistic, written budget for a year.
Use the envelope system for discretionary spending.
Cut up your credit cards.
Be debt-free before you buy.
Have an emergency fund equal to three to six months of living expenses.
If you follow these rules, you’ll find you are prepared to enjoy the blessings and handle the burdens of homeownership.
matt.kelly.durango@gmail.com. Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.PersonalFinanceCoaching.com.
