No place like home ownership - tips in buying a house

Stacy Kravetz

These days, buying a house is a lot easier than you think

Picture this: Best-buddy barely employed Bill brags that he just bought the last great house in America. He dangles the low, low interest rate in your face, taunts you with the fact that he's building equity, and makes you view the shag carpet and cottage-cheese ceiling in your apartment with disdain.

You hop in the shower to clear your head and hear your neighbor's toilet flush; you're hit by a scalding blast. Spirit broken, you collapse in front of the TV, just as the guy next door flips on his dishwasher and the woman upstairs gets on her treadmill. The walls shake, the lights flicker, and you vow, once again, to ditch apartment life if it kills you.

Home ownership certainly has its benefits, namely that you own the joint and don't have that dismal recurring feeling of pouring money down the drain. On the other hand, a house also carries a load of new responsibilities. How do you decide whether to rent or buy?

We're here to help. Many people have convinced themselves that home ownership is an impossible dream. But while it isn't for everyone, buying a house can be easier than you think. As we dispel the following myths, you'll see why.

Four words: I can't afford it ...

If the numbers don't add up the first time, don't give up. You probably wouldn't buy the first car stereo you saw without shopping around first. The same 'goes for home loans: Not all lenders will offer the same rates, so you'd be crazy not to explore the differences between banks, credit unions and mortgage companies. The key number to look for is the APR (annual percentage rate), which is a combination of all the expenses you'll pay computed as an average annual rate. Many newspapers run tables comparing local lenders' APRs, and plenty of mortgage banks advertise in local papers.

You might want to ask about adjustable-rate mortgages, which allow you to pay a lower APR in your early home-owning years and a higher rate later, when you're presumably more able to afford it. But rates are pretty favorable these days anyway, so chances are you'll find a pretty reasonable fixed rate.

Yeah, but a good deal is so hard to find ...

Contact a local mortgage broker familiar with your area; he or she can probably provide valuable leads and advice. The Web, meanwhile, is home to several mortgage databases containing information about hundreds of lenders; try Mortgage Market Information Services, Inc. (www.interest.com) or the 1st AAA Commercial Mortgage Lender Databank (www.blackburne.com). Other websites, such as FinanCenter (www.financenter.com), are chock full of general home-finance info.

Other options: Call a national lender and see what they can offer; two big ones are Countrywide Home Loans (800-570-9888; www.countrywide.com) and Chase Manhattan Mortgage (800-678-1051; www.chase.com). Many large corporations offer plans to help employees purchase a home; ask around the office. And military veterans may also qualify for good deals; check with your local VA office.

I don't have enough for a down payment ...

Don't count yourself out. It's true that in general, the greater the down payment you're able to make, the lower your interest payments will be. But a down payment might be anywhere between 3 and 20 percent of a home's value, and state and local housing agencies will typically give first-time home buyers a break. Generally, in order to qualify, your income must be below the county or state median, and the home you're buying must cost less than the average price in the region.

Federal agencies like Freddie Mac (the Federal Home Loan Mortgage Corporation; www.freddiemac.gov) and Fannie Mae (the Federal National Mortgage Association; www.fannie mae.gov; 800-732-6643) have programs through which lenders can offer you loans, provided you have good credit. Each agency has an interactive website that will walk you through the process.

You can also borrow money from yourself: If you have a 401(k) retirement savings plan through work, you can withdraw money from it to make your down payment, then simply repay yourself later,

I have terrible credit. I'll never qualify for a loan ...

Guess again. The Federal Housing Administration (www.hud.gov/fha) has a loan program geared toward people with spotty credit, though the interest rates are generally higher than you'll find through Freddie Mac or Fannie Mae. The FHA will insure your mortgage, covering any payments you're unable to make; in return, your monthly payments will be slightly higher, and you must pay back any money you borrow, plus interest, at the end of the mortgage term.

A private lender may also lend you money at a higher interest rate - these days, many banks are willing to take on higher-risk clients whom they might not have accepted 20 years ago. If you can afford to make high payments for a while, you may be able to buy now and refinance once your credit improves.

Another thing to consider is private mortgage insurance. The insurer will cover your house payments if you're unable to; in return, you pay the insurer a small percentage of your loan - less than 1 percent in most cases. Often, you can include the insurance premium in your mortgage payment each month.

Gee, I had no idea this would be so easy. Where do I sign?

Not so fast. While home ownership is within reach for a lot of people, it may not be the best option for you. If you've got a great deal on a rent-controlled pad by the beach, or if your company might transfer you to Singapore in six months, it doesn't make much sense to buy - you'll get whacked by the double whammy of closing costs when you move in and a brokerage fee when you sell. Likewise, if you can afford to buy a modest home but think you might be getting married soon, you may want to hold off until you know how much space you'll both need, and how much combined income you'll have to buy a place.

But isn't paying a mortgage the same as paying rent each month?

Not quite; there are other expenses to consider. Before you move in, you'll have to pay closing costs for things like home inspectors, insurance appraisals and credit checks; these can total as much as 5 percent of your home's value. There's homeowner's insurance, an additional 1 to 3 percent, and property tax, which varies depending on where you live. And seemingly incidental expenses you never had to pay as a renter, like the water bill, can add up fast.

Furthermore, with the economy healthy and stock prices soaring, few real-estate investments pay as well as the market average. You need to think about whether you want your money locked up in a home, or if you'd prefer to have cash available for other types of investments.

Hmmm. I see the pros and cons, but how should I make my decision?

The best way is to know what you're getting into and ask yourself the key questions: Can you afford it? Do you want the responsibility of owning a place? Is this the right time to buy? If you can cover all these bases, you're on your way to home sweet home.

RELATED ARTICLE: What's it going to cost me?

As a rule of thumb, your total spending on the housing portion of your life is supposed to equal about 25 percent of your pre-tax income. Following are a few websites that easily calculate what your monthly mortgage payment will be if you enter the amount you plan to borrow, the interest rate and the length of your mortgage (usually 30 years):

* www.mortgagealmanac.com

* www.nia.com/homes/mcalculato1.cgi

* www.bloomberg.com/cgi-bin/ilpc.cgi

Add in the monthly cost of property tax, insurance, private mortgage insurance (which you pay to protect the lender if you default - needed if you make a lower down payment). If you buy a condo or another place that's part of larger complex, add homeowner's dues or co-op fees. Ouch.

Fortunately, there's a bright side: a tax break for the interest portion of your mortgage payment. Calculate how much of your mortgage payment is interest. (Hint: For the first few years, you pay mostly interest.) Then, multiply your income-tax rate by the annual interest amount to figure out how much tax you'll save annually. For example, if you pay $15,000 in mortgage interest, and your $45,000 annual income puts you in the 28-percent tax bracket, you'll be able to reduce your tax bill - or your mortgage payments - by $4,200 (.28 x 15,000).

Remember, the tax break is helpful only if the sum of all your deductions, including the interest portion of your mortgage, is greater than the standard deduction. During the 1998 tax year, the standard deduction for an individual will be $4,250, and $7,1000 for a couple.

S.K.

Stacy Kravetz is the author of Welcome to the Real World: You've Got an Education, Nova Get a Life! (W.W. Norton & Co., $13).

COPYRIGHT 1998 Weider Publications
COPYRIGHT 2000 Gale Group