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Quick Calculation Calms Worried Homebuyers

blurb: Plugging a few numbers into a calculator can cure the first-time homebuyer's sticker shock.

Afraid of the financial responsibility of owning a home? Do your eyes glaze over when your neighbor describes the great deal she got on a 5/1 ARM loan with a periodic cap? Relax--owning a home isn't all that complicated or risky once you get started. Ask the 71.6 million people in the United States who already own a home. If you can't beat 'em, join 'em. Here's a basic approach for estimating your purchasing costs. Remember that all the resources you need are here on the web site.

First, educate yourself about home prices in your area. Although real estate agents are very knowledgeable about prices in different neighborhoods, if you don't want to take that step yet, don't worry about contacting one. You can find lots of home listings in the newspaper real estate ads and the Internet.  

Now, estimate the purchasing costs. Your final loan costs can vary dramatically depending on the type of home loan you choose and the amount for your down payment. Here's a basic formula to establish a rough estimate of your loan costs. First, take the typical home that suits your needs, and divide that price by 7 percent. That's your average savings goal for coming up with a down payment and closing costs. If you're feeling sticker shock, don't give up. You could qualify for a loan program with a low to zero-down payment. Next, estimate your approximate monthly mortgage payment. To do that, subtract five percent from the purchase price for the down payment, and enter the total into a mortgage calculator, using the interest rate advertised on a 30-year, fixed rate mortgage. Remember that you're just generating a preliminary estimate based on a fixed-rate loan. Property taxes and insurance will inevitably bump up your monthly costs. But if you go with an adjustable rate mortgage, you'll have much lower monthly loan payments.

Next, tally the tax breaks. You're going to hear this word a lot from your real estate agent and loan officer: deductibility. Always include tax breaks in deciding what you can afford. Here's what the numbers mean to a hypothetical buyer of a $126,000 home. Let's say you put 5 percent down, that's $6,300, and take out a 30-year loan for the remaining $120,000 at 7.5 percent interest. Your total mortgage interest payments for the first year would be $8,957. Subtract that from your annual taxable income. And that's not the only break you'll get. Your property taxes, which vary according to where you live, can add up to a deduction of at least several hundred dollars annually. Finally, you may be able to write off the loan points charged by your lender as a one-time deduction. Depending on the loan, lenders charge from one to three points. One point is equal to one percent of the loan, in this case $1,200. Add it all up, and you get a sizable tax break.

Finally, now that you're no longer bamboozled by the cost of owning a home, start saving for a down payment! Put away something every pay period. $50 or $100 every two weeks can add up fast. And you'll be amazed at how much you can save, just by eliminating frivolous expenses. Restaurants, entertainment, big vacations, clothes, sporting equipment... you can do without these things for a while, right? A little self-denial now can mean a lot of satisfaction later on moving day.

Sources used to create this article include Robert Nusgart and the Baltimore Sun