Buying a Home
When you graduate from college, you are probably thinking that buying a home is in your distant future. If you are careful with your finances, you may be able to buy a home sooner than you think.
Outlined below are some basic facts about buying a home:
- Be leery of bank loans which require a limited down payment. You could get yourself into a mortgage debt that will be hard to survive. You will generally have higher interest payments and will probably have to buy mortgage insurance.
- Pay off your other debts before you consider buying a home. These other debts are likely to affect your credit and your ability to qualify for a home loan. Also the other debt you owe is likely to have higher interest than a home.
- Use a mortgage calculator to determine how much you will need to pay for a new house. You don’t want to have mortgage payments, real estate taxes, insurance and other annual home costs that exceed 28% of your gross income.
- Determine how much of a down payment you can afford to pay. Remember you may be able to borrow up to 50% of your 401 (k) to help out in the down payment.
- Be careful to consider closing costs. These can be 3% -5% of your home’s value.
- Choose an interest rate option. This includes the number of years and the type of interest rate. The two types of interest rate options are:
■ Fixed rate – the same interest rate over the life of the loan.
■ Adjustable rate – the interest rate varies with the overall interest rate market.
You will generally need to go for a loan that goes for 30 years.
- You need to understand how your loan works. Basically your payment will go almost entirely for interest at first. Consider a loan of $100,000 for 30 years at 5% interest:
| Year | Beginning Balance | Total Loan Payment | Interest Payments | Remaining Balance |
| 1 | $ 100,000 | $6,442 | $4,996 | $98,524 |
| 5 | $93,630 | $6,442 | $4,641 | $91,829 |
| 10 | $83,654 | $6,442 | $4,130 | $ 81,342 |
| 20 | $54,420 | $6,442 | $2,635 | $50,612 |
| 30 | $6,271 | $6,442 | $171 | $0 |
At first you are paying a lot for interest, but you are also getting a significant deduction for your taxes.
- Check out your employer’s policy on helping you with selling your home if you are moving. Many employers are very supportive of employees when they are moving.
- See if your parents can help you on your home purchase. Young graduates would be wise to forgo an expensive wedding in lieu of asking parents for help in making a down payment on a home.
- Don’t go crazy buying furniture or doing repairs. What you want to do is to develop a capital budget each year for home related expenses.
Finally think of your home as a long-term investment not as a social status symbol. It’s often true that the most successful persons live in modest homes that they find meet their needs..
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