Purchasing a home is a major financial responsibility. Because your money will only
stretch so far, you need to buy a home that fits within your budget. Lots of people don't
even consider buying a home because they are afraid they will not be able to afford it.
But often home ownership is within your reach, particularly with some of the special
programs available to first-time home buyers. In fact, sometimes home ownership is just as
affordable as renting, and in some cases, even more affordable.
Home ownership can actually add to your savings as mortgage
payments help build your net worth. As opposed to rent payments, a portion of your
mortgage goes toward building equity (i.e. the difference between the market value of a
house and the amount still owed on the mortgage). As you pay off the mortgage, you owe
less on the home and "own" a larger share of it.
Another financial benefit of home ownership is that mortgage interest payments are
deductible. By owning a home, you can write off the interest on your mortgage on your tax
return. In many cases, this will take you above the minimum itemized deductible, allowing
you to write off many other items.
On the flip side, there are some situations where renting may be a better financial
situation than buying a home. If you will be in a particular community for under three
years, if the local economy is not doing well, if unemployment is rising, or if your
future income will not provide you with enough for mortgage payments and other financial
responsibilities to owning a home, then renting may provide the better option.
When people start thinking about buying a house, one of their first questions is
"How much can I pay for a house?" Look at yourself through the eyes of the
lender. Banks want to make sure you are able to afford the home you buy and they will
decide if you meet their mortgage requirements.
As a general guide, you can purchase a home worth two or three times your annual
income, depending on your savings and debts. Your total monthly payment for housing
expenses, which include mortgage principal, interest, taxes, and insurance (PITI), should
not exceed 30-40% of your total monthly income.
