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Buying That First Home
| Article
# : |
18441 |
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Section : |
LIFE
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| Issue
Date : |
9 / 1990 |
1,942 Words |
| Author
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Marsha Bertrand
Marsha Bertrand is a freelance writer who specializes in the
topics of investment, finance, and business. She has written A
Woman's Guide to Savvy Investing (AMACOM Books, New York). |
“It's a great inflation hedge.”
“The interest is deductible.”
“It's the best investment you'll every make.”
Your friends have all been making statements like these encouraging you to buy a house. Now that you've saved enough money for the down payment, you're ready to take the plunge. But are you really prepared?
How Much?
The most obvious question, of course, is how much to spend. First, look at how much you have available to use as a down payment (typically, 10 to 20 percent of the purchase price). That will help determine what price house you can afford.
There are several rules of thumb you can follow to determine a price range that will allow you to meet your regular monthly mortgage payments. The first is that the price of the home should not exceed two times your annual family income. For example, if both spouses earn $20,000, you should be able to afford an $80,000 home (unless, of course, you are servicing other large debts).
Another useful rule is that you should not pay more than 38 percent of your monthly after tax income for housing expenses, which would include the mortgage payment, utilities, repairs, maintenance, and so forth. For example, the two-income family that earns a total of $40,000 a year and pays taxes at a rate of 30 percent should spend no more than approximately $887 per month for total housing expenses ($40,000 minus 30 percent tax leaves $28,000; 38 percent of $28,000 is $20,640; $10,640 divided by 12 months equals $887 per month).
An alternate rule limits your monthly mortgage payment to one week's pretax salary. Using this formula, a gross income of $40,000 a year would justify a mortgage payment of not more than $769 per month ($40,000 divided by 52 weeks). Note that the difference between the $887 and the $769 is that the $769 includes only principal, interest, and taxes while the $887 includes additional items. No matter which rule you use, a few quick calculations will give a feel for the price range you can afford.
Zeroing In
Once you know your price range, the next decision to make is where to live. Do you want to live in the
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