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Should You Buy or Rent?

You keep hearing it's a buyer's market:

  • Home prices are lower than they have been in years -- and dropping further as owners find it tough to sell.
  • A record number of homes are sitting vacant -- just under half of the approximate 4 million homes for sale are vacant, according to the National Association of Realtors. 
  • Mortgage interest rates are still fairly low.

Homebuyers have the pick of the litter, it would seem.

However, even as home prices keep dropping, buyers still aren't knocking at the rate sellers would hope. 

"National home prices have dropped a bit over the past year, but still remain highly unaffordable in most markets," says Scott Anderson, VP-Senior Economist for Wells Fargo, said in April 2008.

Some buyers are playing a wait-and-see game, hoping prices and even mortgage rates will fall further. 

Some other buyers are finding they just can't qualify for a loan the way that they could five years ago.

Mortgage lenders are getting stricter about the quality of buyers.  No-interest, no-money-down and no-documentation loans are harder to obtain, as the troubles in the subprime mortgage market have led to tighter standards for all borrowers, particularly those with less-than-perfect credit scores and those seeking nontraditional loans.

Even if you hear lenders talk about no-cost loans, "Don't believe it," says Lynnette Khalfani-Cox, author of "Your First Home: The Smart Way to Get It and Keep It."
"A lender might not have an application fee, or charge you points, but those costs and others associated with [the loan] are essentially priced into a loan with a higher interest rate."

You might think that first-time homebuyers would be in a good position to buy a home because they don't have a home now to unload before making a purchase. However, a high percentage of first-time homebuyers have historically sought adjustable rate mortgages, or have had 10 pecent or less of a down payment – with both of these harder to come by in today's market, it limits the number of first-time homebuyers on the market.

Many existing homeowners who have had their adjustable rate mortgages adjust to a higher rate must put their dream homes on the market because they can no longer afford the payments.  With their own home up for sale, they weigh buying something less expensive, or renting.  The lower home prices are enticing, but if they skipped a payment or two on their current home, obtaining a loan at a good rate to make another purchase just got that much tougher.

Can You Really Afford It? 

Something previous homeowners understand more readily than first-time buyers is that it takes more than a down payment and a certain monthly mortgage payment to meet the expenses of homeownership.  Your true costs could easily be almost double what you think.

Say your mortgage payments are $1,000 a month, or $12,000 for the year. You've been paying $950 a month to rent, so you figure you should be able to afford to buy, especially when you're able to deduct mortgage interest and other items off your taxes.
But in reality, those savings are likely consumed by your property taxes, homeowner's insurance and possibly private mortgage insurance to worry about  And then there's maintenance, including having the furnace cleaned, plumbing repaired, waste removal fees, lawn care, etc. 

Your $1,000 a month just became $1,500 a month.

To determine if you can truly afford to buy, start saving for the monthly payments about 6 months before you make an offer (after you've saved up the down payment). 

First, figure your monthly expenses for a home in the estimated price range in which you'd want to make a purchase. Subtract your monthly rent from these expenses and deposit the remainder in a special bank account designated "new home." 

Then on the first of each subsequent month, deposit the difference. (Don't wait until the third or the fifth of the month, because remember, there are ramifications if you make your mortgage company wait.)  If you are able to make these payments every month for six months, without stress and without skipping a payment, then you know you're well on your way to being ready to buy real estate.

Sheree Curry is a business journalist who writes a regularly for the Wall Street Journal on real estate issues. Her work has appeared in Entrepreneur, Trump magazine and Black Enterprise.

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