Buying a Home: Is Buying a Good Idea?

Due to rising home prices, many people are choosing to buy before homes become completely unaffordable. Unfortunately, high price tags make it difficult for some hardworking earners to afford a decent living. Buying a home is a huge commitment. Furthermore, homes are usually our first big investment. Yet, before taking the leap and completing a mortgage loan application, potential buyers should consider the risks of homeownership. In some markets, buying is cheaper than renting. Nonetheless, unexpected maintenance and utility bills may cost a few extra hundred dollars a months. The following tips will help potential buyers determine the right time to own a home.

Income vs. Mortgage Payment

Despite predictions of a slowing housing market, many cities across the nation continue to experience soaring or steady home prices. As a result, the average mortgage on a starter home ranges from $1200 - $1400. Five years ago, first time homebuyers could acquire a starter home with mortgage payments $600 - $800. Homebuyers must be able to afford their mortgage payments. Before applying for a home, consult online mortgage calculators. Even though mortgage calculators do not calculate monthly taxes and insurance payments, they can provide a rough estimate based on mortgage amount and interest rate. On average, taxes and insurances are an additional $200/month. Prior to submitting a bid or offer on a home, know how much you can afford.

Good vs. Bad Credit Rating

Buying a home with a poor credit history is doable. Yet, expect to pay a higher interest rate, which also equals a higher mortgage payment. In an overpriced housing market, an increased interest rate can make that dream home unaffordable. Improving credit rating before applying for a home loan is a smart choice. An applicant with good credit may receive an interest rate of 6.5%, whereas a bad credit applicant applying for the same loan amount may receive a rate of 7.5% or higher. This can increase monthly mortgage payments by $150 or more.

Is There a Cash Reserve?

Many homebuyers purchase homes with little cash savings. Because unexpected household expenses will arise, having a cash reserve is wise. Without disposable cash, homeowners are forced to use credit cards for common household repairs and maintenance. Moreover, if a homeowner becomes ill or unemployed, loss of income can cause extreme financial hardships.

Down Payment and Closing Costs

Numerous home loan programs offer assistance with down payment and closing costs. Therefore, the traditional 20% down payment and 3% closing fees are no longer required. Yet, homeowners with cash on hand for closing and down payment receive a better interest rate on their mortgage loan, which means they save money over the life of the loan.