Buying a home is a major commitment. It’s a bit like… well, getting married: you’ve got to be ready and you have to find the right “one”. And, like a marriage, homeownership is a dynamic experience requiring a tremendous amount of care and attention.
If you’re ready to shift from renter to buyer, you’ve got some legwork to do. Here’s how to prepare:
Quite simply, the past can either haunt or help you. If your debt-to-income ratio is too high, financial institutions will likely be wary of extending you another loan. If you’ve had problems repaying past obligations, a lender will have trouble trusting you’ll pay your mortgage on time.
|Understand what you can afford||Most lenders require total housing costs not exceed 28% of gross monthly income, and total debt payments per month (including the mortgage) not surpass 36%. In real terms, this means if you owe no consumer debt and have a household income of $75,000, then $1,750 in housing costs is within your range.|
|Accumulate cash||If you don’t have at least some cash in your coffer, start a savings plan now. How much you’ll need depends on many factors, including the home price and how much you’ll put as a down payment. Closing costs, points, moving expenses, and a post-purchase reserve fund of two to three months’ worth of housing payments can add up to many thousands of dollars.|
Once you own your home, you may eventually want a bigger or better living space. Rather than purchase a new residence, first consider remodeling. You can add rooms and customize your home to meet your needs and desires without having to move. Yet while remodeling can be wise, it can also be stressful and expensive. Be careful when hiring someone to do the work for you. A contractor should:
- Be licensed
- Carry general liability insurance
- Carry workers’ compensation insurance
- Provide you with a written waiver at the end of the job
- Guarantee their work for at least one year from date of completion
- Provide you with references
- Be financially sound, so won’t declare bankruptcy in the middle of your project
- Can provide proof they’ve completed similar projects
- Ensure the price includes removal of all job debris and full clean up
So, how’re you going to pay for those fabulous improvements? There are three basic options: cash, refinancing and using home equity.
If the job is small or short term, paying with cash is often the best method. A nice advantage of using savings is you won’t have to repay a loan for the work done. When using cash, be sure to pay in agreed-upon increments.
|Refinancing||Swapping a higher interest mortgage for a lower interest one can free up money for the project. You can refinance your existing mortgage and take all or part of your current equity in cash. Keep in mind though, that it will only be cost effective if you plan on remaining in the home long enough to recoup the closing costs and other fees associated with refinancing.|
|Home equity||Using home equity can be a great way to make major improvements – and get a tax benefit of interest deduction at the same time. To tap into your home’s equity you can get a conventional second mortgage, a home equity loan, or a home equity line of credit. Second mortgages and home equity loans are best for large, long-term projects that require lump sum payments, while home equity lines are good for short-term projects or those requiring incremental payments.|
Finally, remember home isn’t only where the heart is – it’s also where the money is. You can get the most from your relationship with real estate by giving it the time and attention it requires, just like a marriage.