Before we get into the nuts and bolts of this lesson, a bit of advice for first-time homebuyers:
Sure, owning a home is one of the key elements of the American Dream, and not by accident. Home ownership means you no longer pay monthly rent for the roof over your head. Now you own it, and most of what's under it too. When you leave, you can sell it to recoup the purchase price and -- with any luck -- earn a profit too.
But don't kid yourself. Like most good things in life, home ownership comes with a slew of disadvantages, responsibilities, and downright headaches. So before going any further, consider whether your lifestyle and finances make homebuying a smart move.
It usually doesn't make sense to buy a home you'll own for less than three or four years. Reason: the high transaction cost of buying and selling property means you could lose money on the deal. If you do make money, you'll pay capital gains taxes if you're in the house less than two years.
So ask yourself if you can really stay put for that long. Will you need to move because you are transferred by your current employer or a new one? Are you thinking of going back to school? Will your income remain steady or grow, or is it likely to decrease?
On the financial side, one key question is whether it costs more, on average, to rent or own in your area. If you want to do it by hand, the rule of thumb is that if you pay 35 percent less in rent than you would for owning - including the monthly mortgage, property taxes, and any homeowner's fees - then it's smarter to continue renting.
Only if all those answers still point towards owning should you proceed to the next step -- setting your budget.
