Financial Tip of the Week from the Iowa Bankers Association:
June is National Homeownership Month, and it's the perfect time to celebrate the role that homeownership plays in the lives of families and communities. Owning a home is an important goal that many Americans dream of and are willing to work hard for.
This year, first-time homebuyers have a lot to consider when making the decision to rent or buy a home: interest rates are at all-time lows, there's still plenty of housing stock and prices are at or near their lowest in years. Yet deciding whether to buy a home or rent an apartment can be a complicated decision. How do you know what's right for you? Potential buyers should ask themselves several key questions before making this important decision.
1. What will monthly costs be, and can I afford the payments?
Keeping mortgage payments under 30 percent of your monthly income is a good rule of thumb. If you can't keep mortgage payments below that, you may be better off renting for awhile.
2. What other debt do I have?
Total rent or mortgage payments plus credit obligations should not exceed 35 to 40 percent of monthly income.
3. What is my credit score? Can I qualify for a good interest rate?
A high credit score indicates strong creditworthiness, and that qualifies you for better interest rates on a mortgage. The impact of a credit score on interest rates can be significant. For instance, a borrower with a score of 760 could pay nearly two percentage points less in interest on a mortgage than someone with a score of 620. Lower interest rates also mean lower monthly payments. If your credit score is low, you may want to delay buying a home until you can improve your score.
4. How much will taxes, monthly maintenance, or other fees cost?
Owning a home means you'll have to pay real estate taxes and other costs like insurance and maintenance. On the other hand, owning a home brings big tax savings at the end of the year. As a renter, the owner pays those costs for you.
5. How many years will I stay here?
Generally, the longer you plan to live in one location, the more it makes sense to buy. You'll build equity in your house and its value may increase over the years.
These are just a few of the many important questions to consider before deciding to purchase a home. You can also refer to the "Rent vs. Buy Calculator<http://www.aba.com/aba/static/calculators.htm?CALCULATORID=HF05&TEMPLATE_ID=www.aba.com_1>" developed by the American Bankers Association. The calculator compares the cost of renting versus the real cost of buying a home. If you have additional questions about the home buying process, contact your local banker for more information.
These financial tips are provided by the Iowa Bankers Association (IBA), representing banks and thrifts in the state. For more information, go to www.iowabankers.com.