Gabriella Gometra

Can You Afford To Buy A House?



Posted: Tuesday, September 28, 2010

by Gabriella Gometra

Residential real estate in the U.S. is at some of its lowest prices in years. Many people have been down-sized by their companies and have not been able to replace income at their previous levels. For this reason there are many homeowners who are eager to sell their homes that they can no longer afford. Add to this situation many homes that are near foreclosure or that have been repossessed by banks and are ready to be sold quickly. This is truly a buyer's market.

Add to this scene some of the lowest mortgage interest rates to be seen in years. Very few working adults can remember when interest rates were below 5 percent. The 1970's had rates at around 7%, the 80's saw rates in the teens, and the 90's had rates at less than 9%. Even at the beginning of 2010 consumers were being warned in great seriousness to refinance immediately because rates were expected to pick up through the year. Instead many home buyers and refinancers are now able to get mortgages for just under 4%. With every percentage point representing the savings of thousands of dollars over the entire term of a loan, mortgage borrowers are at a great advantage today.

Conventional wisdom says this is a great time to buy a house and everyone who can possibly beg, borrow or steal to get into a house, should. Many people who have never before bought a house are in a fever to get into one. Know that whether or not it is right for you to buy depends entirely on your own situation. The reason many people are involuntarily losing their homes now may be some of the same reasons to stay out of the market if it applies to you. If your job is insecure, if your income has been greatly reduced or if your total of other types of debts are high…these are all very valid reasons to slow down, take a cold shower, and look objectively at your situation.

Many people feel that if they can just get the bank to give them the mortgage money, they must be able to afford to repay their mortgage. This is not true, and subprime lending, or lending to people who really cannot afford to repay is a part of the reason for the recent high foreclosures in the U.S. This is some of the same kind of mushy thinking that causes people to collect credit cards by the dozen and run up their balances to their credit limits, because the borrower assumes wrongly that the banks must know something about the borrower's ability to repay that the borrower does not.

So what is a healthy rule of thumb to evaluate whether you can afford a house? Dave Ramsey, who is one of America's top financial educators, gives the following rules. First, get completely out of debt, including student loans, car loans and credit cards. Second, have an emergency fund so that it will not be necessary to go into debt again. Third, save up for as large a down payment as you can. Fourth, when you are ready to buy, be certain to get a fifteen-year fixed rate mortgage loan. The monthly loan payments with taxes and insurance should not be higher than one-fourth of your take-home pay. Following these rules will get you into a house that you should be able to pay off and keep.

Author Credit: Gabriella Gometra, stay-at-home mother and writer, is webmaster of http://repossessionlaws.org which is a resource about vehicle and home repossession.
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