A Financial Guide to Buying a Home

Rule #1

Look Before You Leap

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Keate Barker

Keate Barker

Old-Think: Prices are always going to keep rising, so you should buy something, anything, as soon as possible. Fail to act quickly and your dream house will only become more unattainable.

New-Think: Don't feel pressured. Instead, make a decision based on your current financial picture. If you're bogged down with too much debt or if today's paycheck is stretched so thin that you can't save for emergencies or retirement, you may not be ready to buy a home yet.

While it may not be possible to pay off every cent of debt before buying a house, do take big steps in that direction. "It's not unusual for me to see parents with $100,000 in student loans," says Linda Patchett, a financial adviser in Chapel Hill, NC. "They might want a house today, but it will be much easier for them if they pay off as much debt as possible before they buy."

What about that old saying "It's just as cheap to own as to rent"? "That is one of the biggest misconceptions around," says Greg Van Wyk, a certified financial planner in Austin, TX. "When you look at the tax benefits of ownership, most people still need to pay $1 in mortgage interest in order to get 28 cents back. And there are all kinds of expenses that people never think about in advance, like the garden hose you don't own, the extra furniture you need to buy, and the repairs you've got to make on your furnace." Higher heating and cooling costs are also huge factors.

To determine the right time to buy:

  • Make a list of the advantages you'll gain from buying a house vs. the hardships and downsides.
  • Evaluate your family's likely income over the next three to five years. Is there a strong risk of layoff in your field? How probable is it that one parent will eventually decide to stay home with the children?
  • Take a no-nonsense look at where you are financially. Ideally, you'll have saved three to six months' worth of living expenses for emergencies and started your retirement nest egg. You should also have little or no credit-card debt and have made real progress in reducing your student loans.

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