This is another guest post from Joe Plemon from Plemon Financial Coaching. Joe is the Money Columnist for The Southern Illinoisan.
It is a great time to buy a house. Interest rates are the lowest they have been in decades. Housing prices are down and now, the American Recovery and Reinvestment Act of 2009 had dangled another carrot in front of us: a tax credit of up to $8,000. This credit, which expires December 1 of this year, is free money for first time home buyers or anyone who hasn’t owned a principle residence in the past three years.
If you are hyperventilating at the prospect of finally owning your own home, stop and breathe. You are experiencing the early signs of house fever. This ailment has a Steve Urkel effect, causing you to make decisions that you later look back on and ask, “Did I do that?”
Here is the deal. Take advantage of this great market if you are ready to buy a house. If you aren’t ready, use the carrots as motivation to get ready.
What do I mean by being ready?
First, get out of debt.
Car payments, credit card debt and student loans do not mix well with house payments, real estate taxes and homeowners insurance. Not to mention the fact on what new expenses buying a home entails. When you buy a house, you no longer have the option of calling the landlord to fix it. You are the landlord and it’s now on your dime.
Second, build an emergency fund.
Your emergency funds should be at least three to six months expenses. Don’t be naïve. Emergencies happen and that emergency fund could be what stands between you and a foreclosure.
Third, determine how much house you can afford.
Figure out how much you can afford by planning on a 15 year fixed rate loan that would not be more than 25% of your take home pay. For example, if you take home $4,000 a month, you could afford a loan of about $120,000. Whatever you do, do not let the banker figure this out for you. Trust your gut. You know how much you bring home each month.
At this point, start shopping and, while doing so, start making the payments to yourself. You will learn how it feels to make those payments and you can use the savings for a bigger down payment.
Now. Are you ready? Go out there and get yourself a great deal on a house!