It seems nothing can stop Americans from wanting to buy their own homes. It’s almost as if the credit crisis didn’t happen, even though not too long ago we were bombarded daily with stories about crashing prices, underwater mortgages and home foreclosures. It was an American nightmare, not the American Dream.
But if you think about the emotional and economic reasons people want to buy instead of rent, it’s not so hard to understand. As a financial advisor, I meet many potential first-time homebuyers who cite these reasons for wanting to buy: —”Why should I pay a landlord when I can put the money toward building equity in something myself?”
—”Paying rent is like throwing money away.” —”I don’t trust the stock market. I’d rather put money in real estate.” —”Renting feels like a temporary situation. I want to put down roots and nest.” —”I want to be able to remodel my home in any way I want, with no restrictions from landlords.” What I usually do at this point in the conversation is a back-of-the-envelope analysis of what it would look like for my client to buy a home. The key components of the analysis involve money saved and money earned. (Read more: Roth IRA a better way to pay for college?)
Home sales are at the lowest level in two years. CNBC’s Diana Olick explains what role the “unusually disruptive weather” played in the slumping numbers.
Comprehend your costs How much is saved for the down payment, closing costs and cash reserves? The best scenario involves putting 20 percent down. With 20 percent down, the borrower can receive gifts of up to 100 percent of the down payment with no private mortgage insurance (PMI). PMI can add several hundred dollars to the monthly payment. However, many first-time homebuyers are cash-constrained. Some may qualify for a Federal Housing Administration (FHA) loan, which requires only 3.5 percent down. Many end up putting 10 percent down, which requires PMI and only 5 percent of the down payment can be a gift. Closing costs are approximately 2 percent of the purchase price and include title insurance, escrow fees and appraisal fees. There may be a local transfer tax due on the purchase.