Do Your Homebuying Math
Submitted by Larry Frank Sr. on Thu, 12/12/2013 - 12:00pm
The biggest purchase you likely ever make comes with many potential
pitfalls. Here’s how to dodge some.
Home sales do remain sluggish. The number of contracts Americans
signed to buy previously owned homes unexpectedly fell in October for
the fifth consecutive month. The gauge of pending home sales decreased
0.6% after a 4.6% drop in September, according to the National
Association of Realtors.
Gains in hiring and consumer confidence will likely boost the housing
recovery as the economy expands. If you’re one of the many prospective
homebuyers, know these homebuying mistakes from Kate Ashford, writing
Buying when planning to move again soon.
Buying more than the budget can support.
Forgetting about other ownership costs, not to mention costs of
moving and settling in.
Buying with a low down payment; if you can’t afford saving
monthly for the down payment seriously consider staying where you are.
Buying a home without inspecting it.
Going on a spending spree so everything else is new, too, which
adds to both your stress and additional debt.
These mistakes make for real financial disaster later. Simple steps help
estimate the difference between home ownership and your
current housing costs. The difference is what you save for the down
payment – these days, it’s typically close to 20% of the new home’s price
(the national average is 16%).
First, add up your current monthly housing expenses. Include your
principal, interest, taxes and insurance (PITI) or rent, your utilities such
as gas, water, sewer and electric and any other monthly expenses
specific to your current housing situation (for example, your membership
in a homeowners’ association).
Determine monthly expenses for the new place, including down
payment, mortgage interest and real estate taxes and weigh them
against your current and likely future income. Also calculate energy
costs for the new place. Estimate both categories wisely and realistically.
Subtract your total monthly expenses from your calculated expenses for
the new home. If this produces a positive number, you must save this
amount monthly for your down payment.
If you can’t afford to save the monthly amount for your down payment on
top of your housing costs today, you can’t afford to buy and live in the
new housing. All is not lost – just calculate when you expect to amass
the down payment.
If subtracting your monthly expenses from the new home’s calculated
expenses produces a negative number, the new place is less expensive
but you still need to save for the down payment.
Also calculate your debt to income ratio (DTI). How much you spend
related to how much you earn tells you – and mortgage lenders – your
capacity for more major debt.
The two types of ratios are front-end, which primarily incorporates
housing costs, and back-end. Use both to decide how much new home
you can afford.
Your biggest mistake to avoid: moving and then discovering that your
budget falls short to support life in the new home and that staying put
was your better option.
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Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial Planning.
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Home Buying and Selling