If you have homeownership on your list of financial goals, perk up your ears, the odds are in your favor right now! In most parts of the country, home prices are still low. (Although we are starting to see a slow turnaround.) Interest rates on mortgages are low, averaging 5.20 percent right now for a 30-year fixed rate. And, if you're a first-time homebuyer, you'll see a nice tax credit come your way if you seal the deal before Dec. 1, thanks to the American Recovery and Reinvestment Act of 2009. It credits you with 10 percent of the purchase price, up to $8,000 ($4,000 if you're married, filing separate tax returns).
Even with all these positives, purchasing a home is not to be taken lightly. I've always thought that although many people can afford to buy a home -- they have the down payment in the bank, the credit score to get a mortgage -- those same people often don't stop to consider whether they can afford to own it. Here's how to evaluate the whole picture:
-- Run the numbers. The amount in mortgage debt you're pre-approved for is not how much you can afford to spend. Even in these more conservative times, lenders may be willing to lend you more than you can afford. "The banks have their own calculation, a certain percentage of your disposable income that they want you to allot toward a house, and I tend to think it might not be conservative enough for some people," says Ilona Bray, co-author of "Nolo's Essential Guide to Buying Your First Home." So do your own math -- take a look at your monthly budget, subtract any expenses that can be deleted (rent, for starters) and see what's left over each month. That's the amount you can afford to spend on your home each month, not only for the mortgage payments, but also maintenance, taxes, insurance and utilities. If you want to be really safe, practice living without that amount for a month or two, just to see how things go.
One note: Don't forget that mortgage interest is tax-deductible in most cases, says Dr. Gary Smith, co-author of "Houseonomics: Why Owning a Home is Still a Great Investment." "If you're borrowing at a 6-percent rate, it might only be 4 percent after taxes, depending on your tax bracket." Your accountant or online tax-prep software can help you run the numbers. ?