Buying a Home

THINKING OF BUYING a home? Before you start bidding on properties, ask yourself six questions:

How long will I stay put? If you think you’ll move within five years, perhaps because of your job or because the house you can currently afford won’t really be big enough, buying may not be smart. It would likely be better to wait until you can purchase a place you’ll be happy with for the long haul.

How much can I borrow? A mortgage lender may be willing to let you take on total monthly mortgage payments, including principal, interest, homeowner’s insurance and property taxes, equal to 28% or so of your pretax monthly income. We have more on mortgages in the chapter on borrowing.

How much can I put down? Ideally, you should save enough to put down 20% of the purchase price, so you avoid taking out private mortgage insurance, or PMI. Even if you can’t scrape together 20%, the more you put down, the less you may have to pay in PMI. Coming up short? You might be eligible to make a $10,000 penalty-free withdrawal from your individual retirement account and, if married, your spouse could do the same. The $10,000 is a lifetime limit, and the provision can be used only by those who haven’t owned a house within the past two years.

The down payment isn’t the only cost you will incur. Mortgage application fees, legal costs, a home inspection, title insurance and other closing costs could easily amount to $5,000 and perhaps far more, especially if you have to pay state or local transfer taxes.

Where should I buy? In tackling that question, give particular thought to two issues. First, are the schools good? If not, you might find yourself paying for private schools, which is an expensive proposition. Even if you don’t have children, good schools can bolster property prices—though it also means it costs more to buy into the neighborhood and property taxes are likely higher. Second, how long will your commute be? Research suggests that a long commute is one of the biggest causes of unhappiness.

What other costs will I face? Beyond the down payment and closing costs, give some thought to other expenses you might incur. What are the property taxes? Will you need to spend substantial sums on remodeling, either immediately or within the first few years?

Should I use a real estate agent? While sellers typically use a real estate agent, there’s less need if you are buying—and it could put you in a weaker bargaining position. Yes, by retaining a real estate agent, you may hear about properties before they hit the public listings.

But if you’re negotiating with a seller, you may also find there’s less wiggle room if you use a realtor. If a seller’s agent is looking at earning the entire commission, he or she might shave the commission to bridge the difference between what a buyer is offering and what a seller will accept. But if the seller’s agent will have to split the commission with a buyer’s broker, the agent may be less willing to cut the commission.

Next: Selling a Home

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Articles: Looking Not Seeing, Heading Home (I), (II), (III), (IV), (V), The $121,500 Guestroom, Home Economics and My Own Front Door