Recs

3

Which Homes Should You Look At?

If you were to look for a new home to buy today, how would you decide what price range to consider? Here are some formulas you might consider:

  • If you've got ample savings socked away, you may be in the enviable position of being able to pay 20% or more down on a new home. This means you won't have to pay for private mortgage insurance (PMI). So if you have $50,000 at your disposal, you might want to look at homes that cost as much as $250,000. (Note that if you're currently paying PMI, and you've now accumulated more than 20% in your home equity, you can look into getting rid of that PMI.)
  • Banks often use formulas to determine how much of a loan they're willing to give you. One formula is that they'll let your monthly mortgage payment equal up to about 28% of your gross monthly income. So if you earn $50,000 per year, that's $4,167 per month. Twenty-eight percent of that is $1,167, which is roughly what you'd pay with a 30-year fixed mortgage at 6.5% on a loan of $184,000 for a $230,000 home.
  • Another bank formula looks at your total debt and other obligations, and doesn't want to see the monthly total (mortgages, credit cards, car loans, child support, etc.) exceed 33% or so of your income.

Keep in mind with all these approaches that it's smart to give yourself a solid margin of safety -- some wiggle room. If you determine that you can swing a $200,000 mortgage, but just barely, consider taking out a $175,000 one instead. Remember, life brings many unexpected twists and turns.

Think also about your current situation, and how you spend your money today. If your rent (or current mortgage payment) is $800, can you stand to replace that with a new monthly payment of $1,200? Remember that home ownership involves many other expenses, too, including taxes, insurance, home repairs, etc.

Fools speak out
This topic was addressed on our Buying or Selling a Home discussion board a while back, where one community member asked about whether you should look above your price range when shopping for a home.

As you'd expect, the responses were mixed. Several Fools stick to their price range like glue. Others argued that because most sellers are willing to negotiate downward somewhat, it makes sense to stretch your range a little. One Fool actually lowballed her upper limit, and found a more affordable home as a result.

Consider putting it off
If you find that you can't afford as much home as you want without taking on a lot of debt, perhaps on unreasonable terms, consider putting the purchase off while you accumulate more money. Renting isn't the end of the world, especially if it permits you to sock away significant moola. I myself rented for about 20 years before buying my first home. It wasn't necessarily the best decision, but it did give me enough time to save up 20% as a down payment on the home.

Meanwhile, if you're going to be renting for at least five or 10 more years, you can invest for the long haul in stocks and funds that have the potential to turbocharge your wealth. If you really want to invest in property, check out a real-estate-related fund. The CGM Realty fund, for example, has racked up an astonishing average annual return of nearly 40% over the past five years. Its top holdings recently included Companhia Vale do Rio Doce, BHP Billiton, Freeport-McMoRan Copper & Gold, and Vornado Realty. (To see a long list of our recommended mutual funds, take advantage of a free 30-day trial of our Motley Fool Champion Funds newsletter.)

Learn more
If you're interested in home-buying and selling issues, visit our Home Center, which features lots of money-saving tips on mortgages and other issues.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 538641, ~/Articles/ArticleHandler.aspx, 9/17/2014 7:48:24 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated Moments ago Sponsored by:
DOW 17,156.85 24.88 0.15%
S&P 500 2,001.57 2.59 0.13%
NASD 4,562.19 9.43 0.21%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/17/2014 4:04 PM
BHP $63.94 Down -1.53 -2.34%
BHP Billiton Limit… CAPS Rating: ***
FCX $34.51 Down -0.38 -1.09%
Freeport-McMoRan C… CAPS Rating: ****
RIO $52.81 Down -0.93 -1.73%
Rio Tinto plc (ADR… CAPS Rating: ****
VNO $103.50 Up +0.19 +0.18%
Vornado Realty Tru… CAPS Rating: *

Advertisement