To determine whether you’re ready to transition from a renter to a homeowner, you need to do a true, side-by-side comparison. Here’s an example: let’s say you are renting for $1,100 a month and you’re considering a $200,000 home. You put $20,000 down and qualify for a mortgage of $180,000. A 30-year, fixed-rate mortgage with a 6% interest rate equals a mortgage payment of about $1,079 a month.
However, your expenses don’t stop there. In addition to your mortgage payment, you also need to factor in property tax, homeowner’s insurance and the costs of keeping the house running, such as plumbing, A/C, heating, etc., which will all come out of your pocket if they require repairs. If you make a down payment of less than 20%, keep in mind that you’ll also be paying Private Mortgage Insurance (PMI).
As you can see, your monthly payment can quickly increase 40-45% above your base mortgage. In this example, you’ve gone from $1,079 a month to $1,519. To determine whether this is feasible, plan on depositing the difference between your current rent and the projected cost in your savings account on the first of every month for six months. So, if your rent is currently $1,100 and the projected mortgage payment and additional expenses total, $1,519, you would deposit $419 every month.
If you are late on payments or stressed out, you may not be financially prepared to become a homeowner. However, if it was easy for you to make the monthly payment, that’s a good sign that you can probably afford to buy a house. And now you’ll have the extra money you saved over 6 months to help pay the closing costs or increase your down payment.
HERLIFE, July 2011