A home of your own

NEA Today, Mar 1999

Buying a home is the biggest financial decision most of us will ever make.

There's good news for young Americans thinking of buying a home in 1999. Thanks to the Internet, information on home buying is available right at your fingertips.

Internet sites offer calculators to help you compare the cost of buying versus renting or to figure out how much home you can afford.

If you are contemplating buying a home, your first step might be to compare the cost of buying versus renting. You can afford to pay more on a mortgage than you can pay for rent because the interest on the mortgage is tax deductible.

For example, for a taxpayer in the 31 percent tax bracket, a $1,500 monthly mortgage payment is comparable to $1,000 renter's fee. There's a handy calculator in the real estate section at www.moneycentral.com that makes the task of comparing renting versus buying much easier.

A general rule of thumb is that if you expect to stay in a new house for seven years, you'll be better off buying. That's because there are many up-front costs associated with buying a home. If you sell your home again in a year or two, you won't be able to recover those costs.

What can you afford to pay for your first home? Banks and other lenders have very strict lending rules. The amount you pay for principal and interest can't represent more than 28 percent of your gross take-home pay, or the amount on your paycheck before any taxes or other deductions are taken out. So let's say you earn $36,000 a year or $3,000 a month. Twenty-eight percent of $3,000 is $840.

There is a second part to this equation. The principal and interest plus insurance and real estate taxes-called PITI-and any other long-term debts you have, such as school loans and car payments, can't exceed 36 percent of your gross pay, or $1,080 in our example. Some lenders offer expanded ratios, however.

You must also decide what you can afford to pay as a down payment. You can find lenders who will loan you up to 95 percent or even 97 percent of the price of your home. But, if you borrow more than 80 percent, you'll have to buy private mortgage insurance, or PMI, which is added to the cost of your monthly mortgage payment.

The best way to figure out how much house you can afford is to use the calculators available on the Internet at www.hsh.com, the Web site of HSH Associates, a leading provider of data on the mortgage market.

HSH also offers a 56-page booklet, How to Shop for a Mortgage, containing charts and tables to help you decide what kind of mortgage suits you best. Also included: a survey of lending institutions in your area and their current mortgage rates. The booklet costs $23 and is available by calling 1-800UPDATES.