Rules of Thumb Regarding Home Finance

Buying a home is probably the largest purchase you are likely to make, and you want to ensure you do it right, if you do it at all. Although a few rules of thumb can help you with tough home-buying decisions, you should not view them as hard and fast rules. What you can do is learn some financial guidelines and use them to figure out whether they make sense for you.

Affordability

Figure what you and your honey make annually for 2 1/2 years, and that is how much home you can buy. That guideline assumes you don't have a lot of debt. If you do, you need to redo your figures. Debt-to-income ratio should be no more than 36 percent for home buyers. You could use one of the many affordability calculators online to figure out how much house you can afford. The calculators will take into account your gross annual income, down payment, monthly debt, mortgage rate, property taxes and homeowners insurance. You should also check your credit report through AnnualCreditReport.com.

Down Payment

If possible, you want to put down at least 20 percent of the home's price as a down payment. It usually takes at least that much to convince a lender you're serious and probably won't default on the loan. More money up front could also lower your interest rate. If you're a first-time home buyer, apply for a Federal Housing Administration loan. It requires a down payment of only 3.5 percent as of 2012.

How Long You Stay

Only finance a home if you plan to live in it for at least five years. The only time it makes sense to buy and sell in less time than that is during a housing boom. At the time of publication in 2012, the last such boom was in 2006. When the real estate market is down or flat, you lose money when you buy and sell too soon after the transaction and other related costs. These costs can run you 7 to 10 percent of the home’s price. If you expect to move soon, avoid financing and rent instead.

Fixed or Adjustable Rate

You'll likely find a fixed rate loan is a better deal than an adjustable rate loan. That especially applies if you do have hang on to the house more than five years. Even if you plan to stay at least three years, seek an adjustable rate loan, or a hybrid adjustable rate mortgage (ARM) with a fixed rate period. You could get a lower interest rate with a hybrid ARM, most of which are good for three, five or seven years.

About the Author

Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.