Buy or Rent: There's No Place
Adding Up The Costs
Should you decide to "take the plunge" and purchase a home,
it's essential to anticipate what the various expenses will
amount to. You should never place yourself in financial jeopardy,
so it's important to be realistic rather than let yourself
be swept away. Why be realistic? If, for any reason, you are
not able to meet your mortgage payments or taxes, you risk
forfeiting your home.
No matter which purchase option you choose, your monthly
housing costs will be the following: (1) your mortgage payment,
which is made up of both principal and interest; (2) the amount
of property taxes you must pay--which varies not only from
state to state, but from county to county; (3) your monthly
insurance total, which normally includes homeowners' insurance
and private mortgage insurance; and (4) monthly maintenance
costs, which are generally applicable to condos, co-ops and
homes in "gated" communities or communities with homeowners'
associations. As a single family homeowner, you should also
figure the maintenance and utility services that you must
contract on your own such as heat, hot water, electricity,
garbage pickup, and so forth.
The types of insurance include homeowner's insurance which
covers destruction to your home or its contents, and private
mortgage insurance which is a policy guaranteeing that the
insurance issuer will continue to make payments on the mortgage
should you be unable to do so. Whoever issues the mortgage
is, in effect, making you pay for insurance to cover the potentiality
that you will default on payments.
According to most mortgage brokers, the total of items 1
through 4 should not be greater than 28% of your gross monthly
Should you owe money to others--amounts you must pay on an
automobile loan or credit cards, for example--it's important
to add up your monthly debt plus housing costs. The general
rule of thumb is that this total shouldn't exceed 36% of your
gross monthly income.
Most lenders require a down payment between 10 and 20% of
the value of the property. You can also look forward to (or,
rather, dread) paying a number of significant closing costs,
which normally vary anywhere between 5 and 10% of the total
purchase price. These closing costs include actually buying
the title to the home, as well as a number of charges associated
with its financing. Any prospective homeowner soon learns
that he or she will have a number of people "on the payroll,"
so to speak--including various attorneys, appraisers, and engineers.
Chances are that the bank or lending institution you deal
with will also hit you up with the costs associated with checking
out your credit. In short, you must be prepared to shell out
a significant amount of money to cover each and every expense
that's tied into the actual purchase of the home.