June 2008 Home Is Where the Smart Is Strategies for First-time Homebuyers The reasons to buy a home are numerous. Landlords can be a drag. You can remodel the bathroom just how you like it. And homeowners eventually stop making a house payment. Buying a home is right for everybody, right? No, buying a home is only right for those who are ready.  No. 1  Understand that this purchase is very different from buying a new dishwasher. Unless you have $200,000 lying around, buying a home is not so much a purchase as it is borrowing a lot of money — money that you'll be paying back for decades. Many people think the trick to buying a home is coming up with a down payment and closing costs. But the real challenge is keeping the home after you buy it, making the mortgage payments month after month for years and years. Defining Moments The principle is the original loan amount. With a new mortgage, most of your payment will cover the interest on the loan and very little will go to the principle. Overtime, as you pay down the principle bit by bit, you'll pay less and less in interest and more and more in principle. For fun, pay a little more each month to your mortgage and reduce your principal. Making the equivalent of an extra monthly payment each year can reduce a 30-year mortgage to 22 years.  No. 2  Calculate the real cost of a perspective home. Many savvy buyers are quick to see that a $1,000 monthly payment can finance a pretty big house nowadays. But just because you can afford a $1,000 rent payment doesn't mean you can afford a $1,000 mortgage. Home ownership brings with it a host of other costs including property taxes, mortgage insurance (PMI), windstorm and flood insurance, water bills and maintenance/repairs.  No. 3  Save as big a down payment as possible. There's probably no better gauge as to whether a homeowner will be successful than the size of a down payment. Lenders will advertise no-money-down loans, but they usually require higher interest rates. That's because these loans are RISKY. Putting down less than 20% usually means you'll have to pay PMI, which can be $50-$150 more a month. Even if you have to take on PMI (coming up with 20% isn't easy) you'll want to attain 20% in equity as quickly as possible and get rid of the PMI. Starting with a large down payment helps you get there sooner. A large down payment also reduces your monthly payment. The bottom line is that the price you'll pay to finance a minimal down payment is too costly in the long run.  No. 4  When saving for a down payment, pay off your other debts first. For one thing, the interest on credit card debt is money that could be added to your savings. But taking on a mortgage with few or no other debts, again, increases your chances of making your monthly mortgage payment.  No. 5  In the months before you apply for loans, do whatever you can to improve your FICO score (credit score). Generally speaking, the better your credit, the better your interest rate, which is a huge factor in making home ownership affordable. It takes time to overhaul your credit, but there are small things you can do to tweak it. For instance, in the months prior to buying a home, do not apply for a new credit card. Too many credit inquiries, can lower your short-term score. For more on managing your credit score stay tuned to Debt Matters. Changes In Bankruptcy Laws Savings Section Safe Deposit Box? Monthly Money Challenge Home Is Where the Smart Is Short on Cents Past Issues

Debt Matters is a source of general information about personal finance and is not a substitute for professional financial advice. Circumstances vary from one individual to another and advice in these articles may not be right for everyone. The publisher will not be held liable for any damages incurred by following the advice found in Debt Matters. © Debt Matters; www.debtmattersnews.com; 2005, 2006, 2008