Four Tips To Help You Buy A Home You Can Really Afford

It is challenging to remember when there has been a better time to buy a home. In most places in the United States, with Manhattan and a few other places as notable exceptions, home prices are still well below their peak values in 2007 after five years and mortgage rates are incredibly low—many mortgage professionals would have told you mortgage rates couldn’t get as low as they are in the fall of 2012.

So, given that you’d like to buy a home, the following ideas will apply for the most for your money without using most of your money!

1.  Ask your mortgage loan officer how much you cannot afford to borrow then commit to borrowing even less for your home purchase. It is tempting to purchase a home that will stretch your finances to the absolute limit for some very good reasons, but that approach comes with some huge risks as the last five years have shown.

2.  Figure out a home in a neighborhood where the average income is like yours or lower. If you stretch your way into a neighborhood where everyone earns more than you do, you’ll feel painful pressure to keep pace with the Joneses in ways that are very expensive. If your budget only allows for summer vacation to the nearest national park and your neighbors are all vacationing in Hawaii or Europe, you’ll feel inferior even if you’re not!

3.  Stay in your home for a long time. If you can remain in your home for fifteen years or more, the mortgage payment will truly seem to get smaller. Even modest levels of inflation over long periods of time will be inclined to push the value of your home up, along with your income, making the mortgage look small. After fifteen years, the remaining balance on your home may be comparable to a typical new car loan, meaning you could pay it off in just four or five years if you really tried to be done. The longer you stay, the cheaper it gets. Stay for thirty years and suddenly it will be free!

4.  Maximize the down payment. When you purchase your home, it is usually a good idea to put as much down as possible. It may require some sacrifice to get the down payment up to 20% of the purchase price, but that will not only reduce the monthly payment because you’ll borrow less, but also because you’ll avoid mortgage insurance (which adds no value to you or your home apart from allowing you to make a small down payment). If you have retirement savings in a 401k or IRA that can be used for the down payment, that may make sense if you are not yet 40 (so you have plenty of time to save for retirement) and you check with your tax advisor, you may be wise to use that to get your 20% down payment. Don’t take money from retirement savings to create a larger down payment than 20%—keep the money in your retirement account.