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Buy or Rent: There's No Place Like Home

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 income.

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.



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