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Buying First Home
Deciding to Buy Your First Home
Buying a home is more than a large purchase. It can be a significant
milestone as well. To many people, buying a home means they’re ready to
lay down roots and plan for the future. And in many cases, it is a sound
financial investment. But home ownership is not for everybody. Owning
property can be expensive and time-consuming. Some people would
rather use their money for other things, or simply don’t want to be tied
down to a home. Before making the decision to buy a home, it’s a good
idea to carefully examine your financial situation and your feelings about
The pros and cons of home ownership
How can you tell whether you’re ready to buy a home, and if you are, whether
this is the right time for you? To help you decide, look at the advantages and
disadvantages of home ownership and examine whether owning a home meshes
with your lifestyle and your goals.
Advantages of owning a home
• You save on taxes. Property tax and the interest you pay on your mortgage are
deductible from your income taxes.
• You build equity. Equity is the difference between your home’s appraised value
and the amount you owe on the mortgage. Your equity in a home is likely to
increase over time as you pay off the principal and if your home’s market value
increases. You can tap into your home equity in a financial emergency.
• Your monthly housing costs could remain more or less consistent over the years. With a
fixed-rate mortgage, your monthly payments will always be the same. Although
property taxes may increase, you won’t have to worry about a landlord raising the
• You will have more control over your environment. As a homeowner, you are free to
do what you want with your property as long as you don’t violate local zoning
laws or home association regulations. You can remodel, bring home a pet, and
landscape your yard without asking a landlord for permission.
Drawbacks of home ownership
• The initial cost is high. Buying a home often requires a large amount of money up
front, including the down payment, closing costs, and other fees.
Things to think about when
deciding whether to buy a
• The pros and cons of
• Looking at your lifestyle
• Determining whether you
can afford a home
2 z Deciding to Buy Your First Home
• You are responsible for maintaining your property. As a homeowner, you are the one
who pays for repairs and keeps your property maintained. There is no landlord to
repair a leaky roof or replace a defective furnace.
• You may feel tied down by your home. It’s easier to pick up and move when you’re a
renter. If you or your partner are transferred, or if you simply want to live
somewhere else, you’ll either have to sell your house or find a tenant to rent it.
• You assume financial risk. While property values historically rise over time, there is
always a risk that the value of your home will decrease. You can help protect
yourself from this by researching your purchase thoroughly before signing off on
• You’re responsible for making mortgage payments. Missing payments can ruin your
credit and quickly escalate into serious financial problems.
Looking at your lifestyle
Next, take a critical look at your lifestyle. This is an important step in figuring
out if this is really the right time to think about buying a home. Consider the
• Are you secure in your job? Do you foresee any career changes in the next few years
that may cost you or your partner income? Are you both relatively certain that
you will continue earning the same or higher salaries? If not, will you still be able
to afford a monthly mortgage payment?
• Do you expect to move within the next five years? If you plan on moving because of
military duty or job relocation, it may make sense to hold off on buying a new
home. Generally it takes three to five years to build enough equity in your home
to recoup the up-front costs of buying a new home, such as the down payment
and closing costs.
• Are you facing a big expense? Are you planning to go back to college? To attend
graduate school? If you are, it might make more sense to defer the costs and
responsibilities of owning a home until you’ve completed your degree.
• Will the money you spend on a home prevent you from doing things you love? Are you a
traveler who enjoys vacations to faraway places? Do you have expensive hobbies?
Is it worth it to you to buy a home and give up these activities for a few years
until you rebuild your cash reserves?
• Will owning a home make you feel secure or will it make you feel tied down? Your
answer to this question will reveal whether you feel emotionally ready for home
3 z Deciding to Buy Your First Home
Determining whether you can afford a home
For most people, a home is the largest purchase they will ever make. It’s easy to
become overextended financially and end up in debt or worse. Ideally, you will be
able to comfortably afford the costs associated with home ownership.
• How much can you afford to pay each month? In addition to a mortgage, your
monthly housing costs will include property taxes and homeowners insurance. If
your down payment is less than 20 percent of the home’s price, your lender will
require you to buy private mortgage insurance as well. Depending on the type of
mortgage you seek, a lender will allow you to spend 28 to 35 percent of your
gross monthly income on housing costs.
• How much long-term debt do you have? Lenders also factor in the money you owe
when looking at your mortgage application. Your long-term debt may include
college loan payments, car payments, and credit card debt. A lender may limit
long-term debt plus monthly housing costs to 36 to 45 percent of your gross
• Can you comfortably afford other costs of home ownership? In addition to your
monthly housing costs, be sure to factor in other expenses including
maintenance, repairs, and furnishings. Condominium owners should factor in
home association fees as well.
• How much can you afford for a down payment? Most lenders require a down
payment of 5 to 20 percent of the home price. For low-down-payment loans, you
will need 3 percent. (You must qualify for low-down-payment loans, and usually
end up paying a higher interest rate and additional up-front fees such as the cost
of private mortgage insurance.) Some lenders will approve a mortgage with no
down payment to home buyers with excellent credit histories.
• Can you afford the closing costs? Buyers ordinarily need to pay certain costs and fees
at the closing of a real estate purchase. Some are required by state and local laws
while others are required by the institution that provides your financing. In
general, closing costs can add an average of 3 to 5 percent of the price of the
home to your total costs.
When you weigh the pros and cons of owning a home and think through its
financial costs and its impact on your lifestyle, you will know whether home
ownership is right for you.