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Do your homework
I Think it was Will Rogers who said "A fellow that owns his own
home is always just coming out of the hardware store…" Most
homeowners would agree but, often in the excitement of house-hunting,
we tend to overlook some of the sobering realities. Before you start, be
sure you're comfortable with the obvious and less obvious costs of
home-ownership.
The Price Range
First determine how much house you can afford. Take a ballpark figure
by multiplying your income before tax by 2.5. This formula is used by
lenders to establish the price range for various income levels. Using
this formula, and income of $50 thousand ($50 x 2.5) would put you
in the $125 thousand price range. Then estimate how much you can
afford for a monthly mortgage payment. A lender's rule of thumb here
is usually about one-third of gross monthly income. Keep in mind that
the one-third guideline includes not only the mortgage payment but
also property tax and any other secondary financing or condominium
management fees, if applicable.
Test this guideline by reviewing your current spending. Do you, for
instance, have a commitment to a car or personal loan ? How much
do you spend on rent, clothing, transportation, entertainment and travel?
Would the guideline mortgage payment still be comfortable considering these
expenses?
Looking Ahead
Consider the cost of living in the home. How much will it cost to heat
monthly? What about the monthly cost of insurance, electricity, water,
maintenance - painting, repairs etc.? If you are considering buying a
condominium, what effect will the monthly management fees have on
your ability to carry a mortgage?
It can be difficult to forecast the cost of living in a home as compared
to living in an apartment. Here is another rule of thumb that may help
you to estimate the difference between the two. Take the value of the
home you are considering and multiply it by 3 per cent. Then divide that
figure by 12. In our example of the $125,000 home, the monthly cost
using this formula would be roughly $312 in addition to mortgage and
taxes.
The Down Payment
The size of your down payment is a major part of your mortgage
consideration. Most lenders will require a minimum down payment of
at least 10 per cent of the purchase price of the home. For instance, our
example of a home in the $125,000 thousand range would require a
$12,500 down payment. You would then need a mortgage of $112,500.
Cash Costs
When you have made an offer, had it accepted and begin to finalize the
purchase, there are other costs to be paid in full. There are legal costs,
registration costs, possibly house inspection costs and probably a land
transfer tax. Your real estate agent will give you an estimate of these
costs. Be sure to discuss with your agent the question of what lenders
call "interest adjustment date", depending on the date of your closing
and the date of mortgage payment upon closing. Be prepared to pay for
any heating oil left when you take over and to re-imbrues the seller for
property taxes paid in advance. Don't forget about moving charges, your
mover will give you an estimate before you move. You will have to pay
the movers upon delivery of the furniture.
Be Prepared
The way Will Rogers saw it, home-ownership is all work and no play.
But, the pleasures of having a place of your own usually outweigh the
work involved. Be sure you get maximum enjoyment from the experience
by buying within your means.
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