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10 THINGS TO CONSIDER WHEN BUYING A HOME (pt1)

For many people, owning a home is a major accomplishment as it brings a sense of pride and freedom that cannot be matched by renting. When you own your own home, you are not bound by a landlord or his rules, and your monthly payments are actually building equity.
Although there is no doubt that buying a home may be the first step you take toward building long-term wealth, it is important to understand the pros and cons of home ownership before taking the plunge. Buying a house is a very difficult decision – there are large sums of money involved, the transaction costs and hassle of moving mean that you can’t just buy another house if you don’t like the one you end up with, and you don’t have enough information to make a completely informed decision. It is a big move.
The best you can do when buying a home is try to educate yourself in all aspects of the house hunt, keep a clear head and buy a house that fits your situation. There are many things to consider before buying a home, especially for first time home buyers. When first time home buyers finally get the keys to their house, they quickly learn the great responsibility involved with owning a home.
Take these things into consideration before you buy your home, and you will save yourself many headaches in home ownership:


1. Advantages of Owning a Home

Before you decide to buy, you must examine the advantages of owning a home. The most obvious benefit is that it will be yours and you will be free to do with it, whatever you wish. If you want to paint your kitchen pink, change the lay out, install a pool or turn your unfinished basement into a movie theater, you can.

Another major benefit of owning a home is that some of your monthly mortgage payment comes back to you in the form of equity. When you pay rent, you will never see any of that money again. On the other hand, part of your mortgage payment will partially be applied to the loan principal, which builds equity. Since your home is essentially an asset, you also have the potential to make money if you can get it sold for more than the original price. In some cases, this profit may even be tax-free. In addition, you may be able to tap into the equity of the home while still living in it in order to make improvements or consolidate debt.

Finally, there may also be additional tax benefits from owning a home. In many cases, the mortgage interest and property taxes you pay are deductible, which means you will be lowering your overall tax burden.



2. Disadvantages of Owning a Home

Even though there are many positive aspects to buying a home, we cannot overlook the potential setbacks as well. Unlike when you rent a home, all the major responsibilities to do with the upkeep of the house or all the legal matters will be your responsibility when you own a home, When you own your own home, there may be many unexpected repair and maintenance costs that you otherwise wouldn’t have if you were renting.
Another thing to consider is the potential to actually lose money on the house. While over time, real estate generally goes up in value, there are times when the real estate market stays relatively flat or actually declines. Depending on the costs associated with the sale and the actual amount you sell the house for, you could lose money.

Finally, buying a home is a long-term proposition. When you rent, you may only be bound to a monthly or yearly arrangement, so picking up and moving can be done on relatively short notice. Once you buy a home, it is not as easy to just pick up and move. You have a significant financial obligation, and the process of selling a home may take several months to complete. So, when you are buying a home, take the time to understand the benefits and drawbacks, and make sure you are doing it for the right reasons.


3. Determine How Much Home You Can Afford

If you have decided that buying a home is right for you, the first step you need to take is to determine what you can afford. One of the common guidelines to use is the debt-to-income ratio. Most lenders will suggest that your total debt-to-income ratio should not exceed 36%, and your mortgage debt alone should be less than 28% of your monthly income.
To calculate your personal debt-to-income ratio, first add up your total monthly gross income. Once you have that figure, multiply it by 36%, or 0.36. This number is the maximum amount of monthly debt payments you should have, including your mortgage.
Next, add up all of your current monthly non-mortgage debt payments and subtract it from the previous total you just calculated. This number will give you an approximate maximum mortgage payment you can afford. Ideally, this amount should be 28% or less of your monthly income.
Even with these guidelines, it is important to remember that your personal situation will ultimately dictate what you can truly afford, so you must always take all aspects of your situation into consideration. Sometimes house buyers “fall in love” with a house or neighborhood or even just the idea of owning a house and they place too high a priority on it. This can lead to regret when the novelty wears off and they find themselves without the money to do the things they like to do.


4. Finding the Right Mortgage

More than likely you will need to get a mortgage to buy a house. You will therefore have to ensure that your credit is in good stead and that your credit history is as clean as possible. A few months before you start house hunting, get copies of your credit report. Make sure the facts are correct, and fix any problems you discover. After you have determined how much home you can afford, it is time to shop for the right mortgage. Since you are likely to be financing a loan for hundreds of thousands of dollars, it is crucial that you make a smart decision. A bad mortgage can significantly affect your finances over time. Even if you find your dream home, there is no guarantee that you will be able to afford the required loan payments. This is why you should contact at least one lender prior to delving into the home buying process. A lender can pre-approve you for a loan and let you know exactly how much you have to spend.
There is a type of mortgage available for almost every situation. The bad news is that choosing the wrong one can cost you tens of thousands of dollars in interest over the term of the loan. The most common loans come in two styles: fixed and adjustable interest rate loans.
A fixed interest loan will perhaps be the better option in terms of providing stability for you. The interest rate will not change for the life of the loan, so your payments remain stable. One benefit with a fixed rate loan is that if interest rates go up, you continue to pay your same lower rate. On the other hand, if rates go down, you may be paying more than the current rate, although it may be possible to refinance for a lower rate.
With an adjustable rate loan, you sacrifice some of the stability in payments for the ability of the mortgage to adjust with prevailing interest rates. When interest rates are going down, this is can be to your benefit. But when rates are increasing, you can find yourself with a higher monthly payment. Before you even think about looking at properties to buy, you should really find out what mortgage options you have at your disposal. Do a quick budget estimate, look at some houses that you might be interested in and then revise the budget or revise the houses. If you really can’t afford a house then don’t buy one.


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