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Homeownership 101Can you afford the house you want?
A home is one of life’s most significant resources. It’s the place where you live, but it’s also an investment that can bring you satisfaction and security for years to come. If home ownership makes sense for you, it can be an essential part of your financial and emotional life. But the time has to be right. The biggest mistake first-time home buyers can make is to assume that if they’ve been paying $800 a month in rent, they can afford an $800-a-month mortgage. These days, more than ever before, just because you qualify for a mortgage doesn’t mean that you can afford the monthly payments. It’s a sobering fact that 100 percent of the houses (and homeowners) now in foreclosure once qualified for a mortgage. Not all of these people lost their jobs or suffered other unforeseen calamities—some of them just discovered too late that they really couldn’t afford the home they’d bought. Why? Because they didn’t plan for how much it was really going to cost.
Your monthly costs will include not only your mortgage, but also property insurance, property taxes, any possible PMI payments, maintenance, and utilities. And not only will your utility payments be higher if the home you buy is larger than your current one, but in many cases you’ll also be responsible for charges that renters don’t ordinarily pay—such as water, sewer connection, and garbage removal. Remember, as a home owner, you’ll be financially responsible for maintaining and repairing things out of your own pocket. That includes the physical upkeep of the property around your home and the repair and replacement of appliances—such water heaters, air conditioners, furnaces, stoves, refrigerators, washers and dryers.
As an exercise to help you find out what you can afford, I recommend that you “play house” before you actually buy a first, or larger, home.
How to Play House
Open up a brand-new savings account. Remember, this is something you want to do well before you’re really serious about buying a home. Set a date once a month—for instance, the 15th. For the next six months, on that date, I want you to deposit into your new account the exact difference between what your current housing costs (rent, or the total payments you’re making on the home you currently own) and the amount you project you’ll have to pay on your new home. For example, let’s say that you’re renting, and it costs you $1,500 a month to rent. The house you want to buy will cost you $3,500 a month (including mortgage payment, PMI, property insurance, taxes, utilities, and maintenance). You must deposit the difference between the two ($3,500 - $1,500 = $2,000 a month) into the new savings account, no later than the date you set.
After doing this for six months, evaluate how making those higher payments—or “playing house”—has affected your lifestyle. If you’ve made all the payments comfortably and on time, you know that you can truly afford this particular home right now. If, on the other hand, you missed payments or were late in making any, you can’t afford the house you were thinking about buying right now. The good news is that you now know what you can realistically afford at this time—without having lost any money in finding out. As a bonus, you should also have a nice sum of money in your savings account that will help you achieve your future goals.