BUYING A HOME: Economics vs. Emotions

USA Today (Society for the Advancement of Education), March, 1999 by Kenneth T. Austin

"Falling in love with a particular house is wonderful, but not a good enough reason for buying it."

The American dream of home ownership is alive and well. Owning a home, in fact, is the single item most often mentioned as necessary for the "good life," according to Roper polls. That is in spite of rising home prices, which, in the local market, only have seemed to fuel the quest for a place of one's own.

Sometimes, the strong desire to own a home precludes many practical decisions concerning the purchase. First-time home buyers, in particular, often are guided by their emotions when choosing a house, rather than approaching it in a carefully thought out way.

There are, however, many practical steps you can take if you want to protect your investment--most likely the single largest one you ever will make. Buying a home should be approached systematically, with both eyes wide open, using your brain instead of your heart. So, take off your rose-colored glasses and let's start at the beginning.

If you presently are renting, should you consider buying? This decision can be affected by market conditions, including mortgage rates, home prices, and supply and demand.

In over-all terms, for most people, the advantages of home ownership--pride, status, privacy, inflation hedge, tax considerations, freedom to do what you want--often outweigh those of renting. Renting, on the other hand, affords a greater sense of freedom to move, requires little upkeep or responsibility, and doesn't tie up one's money. (In today's market, if you just plan to live in a house for a few years, you can't take for granted that prices will keep rising or that you will be able to sell when you want to.)

It always is important to consider the financial and tax implications of owning vs. renting for your personal situation. Paying off a mortgage ultimately builds equity, which can be used as collateral for financing another home or other purchases down the road. Each individual case requires comparing the two costs (owning vs. renting) and considering all the various factors involved. If you need assistance, check with your accountant, who should be familiar with your financial status.

Falling in love with a particular house is wonderful, but not a good enough reason for buying it. Of course, you must like it a lot, but buying a house no longer is a purely emotional decision. Today, financial considerations play an expanded role in the purchase deliberations.

Calculating what price range you can afford helps you conduct your house hunt with realistic expectations. To determine this, you need to know how much mortgage you can carry or, looking at it another way, how much money the bank will allow you to borrow.

There are some simple ways of calculating this yourself: Subtract all your non-housing monthly debts and expenses (e.g., credit card and loan payments, tuition, transportation, food, clothing) from your monthly income to calculate how much income can be applied to housing expenses, including mortgage payments, real estate taxes, and insurance premiums. This amount should come to no more than 33% of your total monthly income.

Armed with-this information, you can go to a lender, who will confirm and refine these numbers for you based on current interest rates. Because mortgage lending is so competitive these days, most lenders will do this with no obligation on your part. Most real estate agencies, in addition, have "qualifying" programs to help you with this early on in your search.

Also important to know is how much money you can make available for a down payment that is paid upon the signing of a contract, usually several weeks or even months prior to closing. The larger the down payment, the more equity you will have in your home and the smaller your monthly payments will be.

Closing costs should be calculated as well, since these funds must be available at the time of closing. A good rule of thumb is to estimate three to five percent of the purchase price.

Once you know what you can afford, you should stick to homes in your price range. If you are realistic with your budget, you will be better off in the long run. Looking at a $300,000 home on a $220,000 budget most likely would be a waste of time and will prolong your house hunting.

After analyzing your financial status and how much house you can afford, the next step is to seek out the help of qualified professionals to assist you in the hunt throughout the various stages. This gives you the emotional security of knowing that there are experts out there who can assist you and are just a phone call away.

These experts include real estate brokers, lawyers, bankers or mortgage brokers, and a home inspection company. Talk to your friends and family, possibly even co-workers, and get recommendations of professionals with whom they have had good experiences. It always is better to go with a recommendation than a name out of a phone book. Make a list of the names and phone numbers of these professionals and keep it on hand at all times.