Many people envision themselves living in a beautiful home with a yard surrounded by a white picket fence. In fact, owning a home is a big part of the American dream for most people. However, purchasing a home is one of the most serious decisions a family will ever make. There are many factors to consider. The decision to buy a home can have major and long-lasting emotional and financial impacts on your life.
Can You Afford It
The first thing to consider when buying a house is whether or not you can afford it and how much you can afford to pay. Lenders generally allow you to spend 28 percent of your gross income on a mortgage payment. However, before you go that high, you need to decide whether this will leave you with enough take-home pay to spend for other things you need and want, including clothing, transportation, entertainment and vacations.
Although the chief cost when buying a home is the purchase price, there are other costs to consider. The mortgage payment will include amounts for principal and interest, which is the cost you pay the lender to borrow money. In addition, mortgage payments usually also include the cost of property taxes and property insurance, which lenders require.
A house might be larger than what you are renting, which means higher utility bills for lights, heating and cooling. There is also the cost of water, sewer and trash collection, which many renters don’t pay. Additionally, there are also routine maintenance and repairs.
A lender generally requires a down payment. The amount of your down payment can affect the interest rate of the mortgage. In addition, your credit rating and the purchase price of the home can affect how much down payment a lender requires. There are also closing costs to consider, which include a credit report, an appraisal of the property, a title search, prepayment of property taxes and insurance into an escrow account and other miscellaneous fees that can total thousands of dollars.
Buying a home means a stable cost for the mortgage each month while rent goes up. People who itemize income tax deductions can take a deduction for the interest and property tax portions of their mortgage payment. Owning instead of renting builds equity, which you can recover when you sell. If you have equity, you can borrow money against it to finance repairs and improvements or spend on something else.
Your mortgage payment might be higher than rent initially. Additionally, although property values can rise over time, they can also fall. You could end up with less equity than expected, or even end up owing more than you paid. In addition, if your income declines you might find it difficult to quickly in order to move somewhere cheaper.
Buying a home has many advantages, but there are disadvantages too. It can be good because your payment is stable, and, unlike rent, you are building equity in an asset you own. However, buying a home also means you are responsible for all the repairs and maintenance. In general, it is better to buy if you know you can stay put. Consider getting pre-qualified for a loan and go over your total budget before buying.
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