Homeownership is a great achievement and a terrific investment. But before you take the plunge from being a renter to an owner, there are lots of things to consider when adding up the true cost of home ownership. Author Suze Orman delineates a few of the most common financial factors that aspiring homeowners tend to misconstrue. Check out her top three tips before you sign on the dotted line:
1. The Invisible Grille Low-down on Down Payments - Plenty of lenders offer “zero down” mortgages. For the vast majority of us, this is a very bad idea. Why? Because the biggest challenge with owning a home is not the down payment; the biggest challenge is being able to afford the monthly mortgage payments. Getting the mortgage is one thing. But if you make no down payment, or a small down payment, your monthly costs are going to be much higher. As a general rule, don’t buy unless you can afford to make at least a 10 percent down payment.
2. Rent is not a yacht charter payment - Let's assume you currently are renting for $1,100 a month, and you now have your sights set on owning a home with a $200,000 price tag. You put $20,000 down and qualify for a mortgage of $180,000. On a 30-year fixed rate mortgage you're looking at an interest rate of 6% these days. That works out to a mortgage of about $1,079 a month. You may be inclined to think that because you have been able to afford $1,100 in rent, you can certainly afford a $1,079 mortgage. Not so. The base mortgage is just the beginning of your housing costs. You also have to consider property tax, homeowners insurance, and if you make a down payment of less than 20%, you are also going to be stuck paying Private Mortgage Insurance (PMI). Then there are all the unplanned webdesign costs; for instance, if the plumbing goes on the fritz, you have to absorb the cost of fixing it; costs which when you were renting, would be covered by your landlord. On average you need to add another 40-45 percent to get a more realistic total monthly cost. So if your mortgage payment is $1,079, the true total cost is about $1,519 per month.
3. The Tax Break is NOT an engine additive to Buy - Homeownership is the absolute best investment out there bar none, and while the mortgage interest deduction is a factor to consider, it should not be your only reason to buy. While it is true that interest payments on a mortgage below $1 million are tax-deductible, that alone is not a good enough reason to buy something that you may not be able to afford
