Finding Your Place

Image Gallery Whether it's an acreage hidden in the hills or a townhouse in the middle of a bustling city center, most of us are searching for a special place we can call home. COURTESY KATHRYN TIMPANY

Whether it's an acreage hidden in the hills or a townhouse in the middle of a bustling city center, most of us are searching for a special place we can call home. We devote immeasurable hours imagining what we want, but may not know exactly how to find it and buy it. When a perfect Craftsman bungalow or spring-fed five acres finally does appear, we need all the advice we can get about how to make the wisest possible purchase. After all, buying a house or land is certainly one of the biggest single expenditures most of us will ever make. And once you've bought it, there are no refunds or exchanges. It only makes sense to be cautious and know as much as possible before you buy.

First, forget the Joneses and home in on what you want — and what you can afford. Be realistic and you won't be disappointed. Examine your budget and figure out exactly how much money you can comfortably invest. Most people borrow money to buy a house, and most loan agencies will require you to pay at least 5 percent down in cash. They usually will loan you an amount that results in monthly payments between 27 percent and 33 percent of your net income, depending on your debt-to-income ratio, which they will help you determine. If you expect to apply for a loan, now is the time to amend a poor credit rating or establish your credit history. These factors determine how much interest you'll pay and what kind of down payment the bank will require. And don't forget to consider closing costs, inspections and miscellaneous expenses, which usually add at least a couple thousand dollars payable at closing.

If you're planning to buy undeveloped land, you should expect to pay at least 20 to 50 percent down in cash. Interest rates for a loan on the remaining 50 to 80 percent probably will be higher than for home loans.

When you're ready to buy, shop around to get the best bank loan terms you can. Credit unions may offer competitive rates and usually are easy to join. Mortgage companies have become aggressive, creative marketers for loans.

Check with your lending agency about obtaining pre-approval for a mortgage loan, so you're confident of what you can afford.

How Big the Mortgage?

A lot of people fantasize about paying cash for a home. True, you can't beat the security of knowing that you own your place, free and clear. However, keep in mind that the interest you pay on your home is fully tax-deductible. You may be better off, financially, investing your bankroll and mortgaging the house.

Most of us buy as much house as we can afford. For that reason, we often end up with a 30-year mortgage on 95 percent of the home's value. But an unexpected change in your ability to make loan payments could put you in dire straits if you've borrowed as much as you can afford. Even in active markets, homes may take months — or even years — to sell. When you can't make the mortgage payment, those months move agonizingly slow.

You may want to choose a less expensive home, and put down a higher percentage of the home's value up front. This lets you avoid mortgage insurance, a big hidden expense that is often required on mortgages above a certain percentage of the home's value. And it offers no benefits to the buyer — it only protects the bank! If your credit is good, your banker may be willing to supplement your mortgage with a home-equity loan (essentially a second mortgage), thereby avoiding the cost of mortgage insurance.

An added benefit to home-equity loans: If you're buying an expensive home worth more than, say, $300,000, you may be stuck paying higher "jumbo" interest rates. A home-equity loan could bring your mortgage balance below the limit, and secure a cheaper rate. And the interest you pay on home-equity loans is generally tax-deductible — just like your mortgage.

If you expect your income to drop within the next 15 years, you might prefer a higher monthly payment now and a paid-off home in 15 years. If you think you will retire in that period, your income may decrease to a level where the mortgage-tax deduction isn't that beneficial. Many banks offer 15-year mortgages at rates preferable to those on 30-year mortgages.

Remember, though, if you are going to have debt of any kind — car loans, revolving credit, whatever — you probably want to secure it with your home. You'll generally pay less interest, and the interest will be deductible.

Or if you decide not to be tied to a loan, read Rob Roy's book, Mortgage Free, which offers sound steps to financial freedom.