Five Important Principles When Buying a Home

Buying a home can be a great decision if you follow a few important principles.

First, put at least 20 percent down. With a 20 percent down payment you don’t have to pay for PMI (private mortgage insurance). Private mortgage insurance typically costs between 0.5% to 1% of the entire loan amount on an annual basis. On a $100,000 loan this means the homeowner could be paying as much as $1,000 a year, or $83.33 per month - assuming a 1% PMI fee.

Second, make sure your down payment doesn’t deplete your emergency fund. With houses, lots of things can break or wear out. You will also have maintenance expenses that you may not have had if you rented previously. You’ll need some additional money in reserve for unexpected expenses.

Third, keep your monthly payment for the combination of your mortgage, property taxes, and insurance below 25 percent of your monthly gross income.

Fourth, if you are married and you and your spouse both work, only purchase a house that you can afford on one income. If you plan to have kids and one of you would like to stay home, buying a home that requires just one income will be the most important factor in having the freedom to do that. Even if you both plan to stay in the workforce after having kids or you don’t plan to have kids, basing your mortgage payment on one income will help you weather the storm if one of you loses your job.

Fifth, plan ahead so that you will be able to pay off your home by the time you retire. If you can take out a 15 year mortgage or pay additional principle on a 30 year mortgage, you may even have your home paid off before retirement! Having your home paid off by the time you retire will go a long way toward helping you stretch your retirement savings.