With interest rates and prices at their lowest in years it is very tempting to purchase a home. Here are some key questions to ask yourself which will serve as a reality check before making a commitment to purchase:
1. How much can you afford to put down? This will obviously affect your monthly payment. Some buyers consider using all their savings to keep their monthly payment down, but are then left without a reserve for emergencies.
2. What other debt do you have? Consider keeping all your debt payments (auto loans, credit cards, etc.) lower that 35% to 40% of your monthly income. Otherwise you probably need to either rent or lower your price range for your home search.
3. What is your credit score? Will you qualify for a good interest rate? With mortgage rates at historic lows, obviously you want to secure the best possible rate. The best rates will go to those borrowers with the best credit scores. Those with average or poor credit will be offered a mortgage at a higher rate or denied the loan. The difference can be as much as a 2% increase in the rate for those with low credit scores. This equates to thousands more in interest payments per year.
4. How many years will you stay there? Generally, the longer you plan to stay at a home , the more sense it makes to buy as opposed to rent. This is because you will get the benefit of building equity with each mortgage payment you make as opposed to renting where none of the monthly rent results in any equity.