By Matthew Pruitt
Realtors, mortgages, down payments, closing costs - these thoughts overwhelm the heads of homebuyers as they search for housing.
Sometimes the idea of owning their own home can be daunting to young couples who have never been involved in the home buying process before.
Whether you''re in the market now, or won''t be for years to come, buying a home is a good and important thing to help you accumulate tax-free wealth, said Scott Marsh, a personal financial consultant and professor at the Marriott School of Management, who has taught personal finance to students and faculty for the past 10 years.
'President Hinckley says purchase a modest home and then pay it off as quickly as possible,' Marsh said.
So, how modest should a home be?
Professor Marsh has a 3-step formula for calculating just how much you should be spending on your monthly house payments.
First, consider only the primary breadwinner''s monthly income, even if both husband and wife plan to work forever. Second, subtract from that monthly income your fixed obligations which include automobile payments, credit card monthly payments and also tithing for those who consider that a fixed obligation. Finally, multiply the resulting number by 35 to 40 percent. Your monthly payment should not be above that number, Marsh said.
The resulting number may not amount to the monthly payment of your dream home, but numerous LDS prophets have counseled to live modestly.
'Live in your own home even though it be but a modest cottage or a tent,' said Spencer W. Kimball in his book 'Faith Precedes the Miracle.'
Every modern-day prophet has recommended that we own our own home, Marsh said.
Whatever the price of the home, securing a mortgage will likely be of concern.
'Don''t get caught up in gimmick loans, like interest rates that are substantially below the going rate,' Marsh said.
Marsh also said to avoid paying money for lower interest rates, a process referred to as the buying down of interest rates with points, because the average home loan is only outstanding for five years. He also said to avoid interest-only mortgages, which allow one to lower their payment by paying only the interest of the loan, and adjustable-rate mortgages (ARM), which carry a lower interest rate at first but will change over time with the going interest rates.
Utah State University MBA graduate, Michael Tobler, used an ARM loan to finance his first house.
Tobler said he used the ARM loan to get into the home, but then when interest rates began to rise he and his wife made the switch to a higher but fixed interest rate. The fixed interest rate worked better to accommodate his budgeting practices, he said.
'It made us quite nervous to think that the payment could go up,' Tobler said.
ARM loan payments can also go down, but Tobler said if you ever do consider an ARM loan, read the fine print very carefully.
'There''s a lot of small print about when it can change, how often and how fast,' he said.
Once you have your mortgage, you should always pay a little extra on your mortgage payment than is expected, and try to take out a 15-year loan if possible, Marsh said.
Also, don''t get sucked into those less-than-perfect-credit mortgages, because you''ll be charged a higher interest rate and prepayment penalties in order to qualify, he said.
'Go clean up your credit first and establish a good credit track record before you take out the loan,' he said.
Federal Housing Administration loans can assist first-time homebuyers in owning a home with minimal investment. FHA loans allow one to pay as low as 3 percent for a down payment, and additional programs, such as the Nehemiah Down Payment Assistance Program, can sometimes reduce the down payment to zero.
In general, it''s good to pay a down payment, but it''s not always wise to put down as large a down payment as possible, Marsh said.
'You should always keep a significant reserve of liquid financial assets,' he said. 'Large chunks of liquid assets are very sacred and take a long time to accumulate; don''t jeopardize your liquid assets by putting too much money into a down payment.'
Often it''s true that students buying their first home don''t have a lot of money, and they cannot afford to spend much on a home.
If students are willing to live a little farther away from campus, they can purchase nicer homes at a lower cost in areas like Santaquin, Spanish Fork and Springville, said Cathy Lewis, a real estate agent for Century 21 Real Estate Corporation.
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Benefits to buying a home
(1) The value of homes in America increases on average about 6 percent per year. If you put down 5 percent as a down payment and the home goes up 5 percent, you made 100 percent return on your investment. Homes rarely decrease in value. (According to the Second Quarter 2006 Marketing Report by the Utah Association of Realtors, the average sale price of homes in Utah County appreciated by 21.97 percent since the second quarter 2005).
(2) The increase is often tax-free.
(3) Behaviorally, it''s an extremely efficient wealth accumulation tool. Seventy-five percent of Americans who reach age 65 own their own home.
(4) All the modern-day prophets have recommended couples own their own home.
Courtesy of Scott Marsh, personal financial consultant and professor at the Marriott School of Management.