Greetings and welcome to this week’s edition of our Tuesday Top 5, our weekly tips post to help you manage your money in five easy steps.
The deadline for that juicy $8,000 new homebuyer’s credit is rapidly approaching, but how do you know if you’re ready to own a home? Ask yourself the following five questions to help make that decision:
- How much can I pay for a house? One rule of thumb is that monthly housing payments (mortgage, taxes, insurance, association or condo fees) should be less than 30% of monthly income. With this rule of thumb, a family earning $60,000 per year could pay $1,500 per month in housing costs. Depending on the amount of the down payment, interest rates, taxes and insurance, this translates to a house price that is 2 to 3.5 times the annual income or $120,000 to $210,000 for a family with $60,000 in annual income.
- What other debts do I have? You need to carefully consider your budget and the other loans you are already responsible for. If you have student loans or a car note, can you afford to fulfill all of your monthly obligations and still have enough left over to save?
- How secure is my employment? Be confident that your job will outlast the high unemployment rate before you tie up your savings in real estate.
- Will buying a house wipe out my savings? Owning a home carries many costs that renting does not. If your hot water heater dies in the middle of January, you’re the one on the hook for fixing or replacing it. You don’t want to be in a position of having to raid your retirement accounts for necessary home repairs, so make sure you have an emergency fund for such occasions.
- Should I use an escrow account? With an escrow account, you pay a certain amount each month so that there will be enough money to pay large bills (usually property tax and homeowner’s insurance) that come due once or twice each year. The administrator of the escrow account handles the paperwork for paying these bills. Using an escrow account is smart because homeowners’ insurance and property taxes are typically paid once or twice each year and can be very large sums to pay all at once— potentially several thousand dollars. Failure to pay these bills can lead to the loss of your home.
And as everyone knows by now, if you qualify only for a subprime mortgage, you cannot afford to buy — no matter how attractive that $8,000 credit looks.
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You mortgage lender may not even let you waive setting up an escrow account. If you are not putting down at least 20%, most will require it.
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[...] you’ve been judiciously saving up for your first home but didn’t make it in time for the $8,000 tax credit deadline on November 30, here’s an early Christmas present for you: The incentive has been extended [...]