Emotions, family and personal reasons all come into play in
any home-buying decision.
No one knows what the future holds for you, your family, your job
or your finances. But we can help you understand what you're going
to encounter when you embark on the sometimes-difficult journey
toward the American Dream of owning a home.
"When you get that urge to buy a house, the first
thing to do is step back and ask whether it makes more sense to
keep renting for a while. If you still want to buy, you need to
figure out how much house you can afford.
Economic differences between renting and
If you're looking for the best return
on your money, historically you're better off investing in the stock
market than buying a house. Primary homes generally don't earn the
investment return of financial instruments such as mutual funds.
While the stock market's long-term average rate of return is in
the range of 8 percent to 10 percent, housing historically has appreciated
on average in the low- to mid-single digits. Don't buy solely for
On the other hand, Uncle Sam helps out by letting
taxpayers deduct part of the mortgage interest and real estate taxes
each year. Borrowers get the benefit only if they pay enough in
one year to exceed the standard deduction. But that usually happens,
especially during the first few years of a mortgage when most of
each payment goes toward interest rather than principal.
Sunny side of homeownership
Owners enjoy other benefits, too. They build equity over time as
home values rise and their mortgage balances shrink. They also don't
have to worry about their housing costs shooting through the roof
because lenders can't boost borrowers' rates and payments, unless
those borrowers have adjustable-rate mortgages.
Cloudy side of homeownership
When something breaks at an apartment, it's the landlord's problem.
When it's your name on the deed, the problem is yours. If you throw
every penny into a down payment, you're taking a big risk because
you may not have enough money left to fix leaky pipes or buy a new
Potential buyers might want to hold off for other
reasons. If there's a good chance that you will be laid off soon,
you might want to wait. The same goes for people who plan to leave
a job soon. The monthly payment isn't the only obstacle for this
kind of customer. Closing costs and other home-buying fees, as well
as the commission that most owners end up paying to real estate
agents when they sell their homes, add up. People who have to sell
after living in one place for only a short time can end up in the
hole on their investments.
Explore all the options
Some middle-ground approaches to homeownership
blend elements of buying and renting. Some of the more popular loan
types are seller financing, "lease with an option to buy"
and "contract for a deed" plans
With seller financing, the seller actually assists
the buyer in purchasing the home, by "lending"
the buyer either a portion of the amount to be financed
or the entire amount.
Let's say the buyer and seller agree on a price
of $150,000 for the house. In many cases a lending
institution would require a 20-percent down payment
-- $30,000 -- and give the buyer a mortgage for
$120,000. But if the buyer has only $15,000 cash,
the seller could "take back" a second
mortgage for the $15,000 the buyer is short. The
buyer makes payments on the first loan to the bank
and the second loan to the seller.
Another example of seller financing: If the sale
price of the home is $150,000 and the buyer has
only $15,000 for a down payment, the buyer gives
the $15,000 down payment directly to the seller
who agrees to carry the entire mortgage amount of
$135,000. The buyer would make all payments directly
to the seller.
Pro: Seller financing
reduces the cash needed to get into a home and could
dramatically reduce closing costs. Often the seller
will be more flexible in accepting an underqualified
Con: The seller determines the interest rate
for that portion of the mortgage being carried,
and it usually comes with a higher rate and a shorter
term. Perhaps most importantly, it very often comes
with a balloon payment. This means that monthly
payments would be computed as though the mortgage
was to continue for, say, 30 years, but at the end
of five or 10 years the entire remaining balance
has to be paid in one lump sum. That normally requires
refinancing at that point, when rates could either
be lower, higher or about the same, or selling the
house to meet that balloon payment.