New York, NY (Vocus) November 24, 2010
With low interest rates and attractive home prices in many areas of the country, renters may be wondering if it’s the right time to become a homeowner. The first – and most important – step in this journey is education, and there are many financial and personal factors to consider when making this life-changing decision.
For many people, renting may still be the right option. It can offer more flexibility when it comes to trying out different neighborhoods or relocating to pursue a new job. It means fewer financial commitments since someone else is responsible for maintaining the property and for fixing or replacing things when they break.
Buying a home may make sense for individuals or families who are ready to settle in one location for a while and want the freedom to customize their home in a way that fits their personal style and taste. Owning a home means the monthly payment isn’t going into someone else’s pocket, but towards something that can eventually be paid off – a way to help contribute to long-term wealth through the gradual accumulation of equity. Buying a home may also provide income tax benefits, though it’s important to check with a tax professional since everyone’s circumstances are different.
For those considering homeownership, there are significant costs before, during and after the home buying process other than just the mortgage payment, such as down payment and closing costs, taxes, insurance and the cost to maintain the home.
Potential home buyers should prepare themselves by learning about the following:
- Get a full financial picture: Income, expenses, debt-to-income ratio and credit score are all factors when determining if a potential homeowner is ready for the financial obligation of homeownership.
- Money needed upfront: Home buyers typically need a down payment of anywhere from 3.5 to 20 percent of the purchase price, in cash, as well as funds to cover closing costs that can range from two to three percent of the loan amount. Some buyers may also negotiate in their purchase contracts for the home seller to pay for some closing costs. Closing costs include prepaid taxes, loan costs, and fees paid at the final signing of the loan. In addition, whether required by a lender or not, it is a good idea to have anywhere from two to six months of the monthly housing payment, including principal, interest, taxes, insurance, homeowners’ association dues and private mortgage insurance, if applicable, in the bank.
- Ongoing costs of homeownership: There is more to the cost of homeownership than the monthly mortgage payment. There are property taxes, insurance, homeowner’s association dues, as well as the need to have cash set aside and readily available in case of an emergency, repairs and for regular maintenance.
Before deciding that homeownership is the next step, a potential home buyer should take the time to get a clear view of what owning a home would mean financially. If a home buyer is not fully prepared with the necessary financial resources, it could mean that renting is still the best option to allow time for additional funds to be saved.
For more tips and tools on the home buying process visit Bank of America’s enhanced, interactive home loan guide. Or check out the program Buy or Rent? Which Is Right for You?; part of AOL Real Estate's What Works Now series produced in participation with Bank of America Home Loans.
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