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Ask Farnoosh: How Do I Get Financially Ready to Buy a House?

Rich tweets: How do I begin saving for a house when I rent now with no [money] saved and a down payment would take everything I have?
Buying a home is no simple feat and you never want to stretch yourself too thin just to call yourself a homeowner. Beyond the down payment there are additional expenses associated with owning that renters needn’t worry about — property taxes, home maintenance and the occasional flooded basement, to name just a few. Renting gets a bad rap sometimes, but remember it does offer more flexibility and savings on hand (that you’d otherwise tie up in a down payment). But if you’re willing and able to shoulder all these costs — as well as the responsibilities that go along with homeownership — keep reading!
Before you start saving, it helps to understand how much house you can securely afford. As a first-time buyer a common rookie mistake is assuming you can afford a monthly mortgage payment equal to your current monthly rent. But after factoring all these other ownership-related expenses, you’ll realize that’s far too much. And while it’s not uncommon for banks to multiply your gross income by a factor of three or four to estimate your maximum loan amount, I think it’s smarter and safer to multiply by two or two-and-a-half. For example, if you gross $75,000 a year, a comfortable mortgage would be between $150,000 and $200,000. Assuming you can put down 20%, which many lenders prefer, your home’s price tag could then be closer to $185,000 to $250,000. On the low end, a 30-year fixed mortgage with a 4% interest rate would put your monthly payment at roughly $700 a month, or 15% of your net monthly income (assuming a 30% tax rate). That’s much lower than the “30%” budgeting rule we usually hear (and that I have admittedly provided), but young, first-time buyers may want to proceed more cautiously. This probably won’t be your last home and, as your life expands, you’ll appreciate having some additional wiggle room in your budget.
You may also be able to qualify for the FHA First-Time Homebuyer Program, which lets you put down as little as 3.5%. Best to work with a mortgage broker and understand the different loan options available. “Even if the 3.5% down is not an option, there are many brokers that can do deals with a 10% down payment,” says Jason Jones, co-founder of Cap Equity Realty.
So as a first step toward saving, do the math, as in the example above, and understand what borrowing options you have. From here you should have a better framework for saving.
As for how to save, consistently and automatically is best. Create a New House savings account and directly transfer an amount every month to that bucket, and consider it untouchable money, says Brad Malow, founder of BuyingNYC.com. He also suggests speaking with banks to see if they offer any special interest rates or programs for first time homeowners.
Setting deadlines for yourself can be a powerful motivator. “Create a reachable timeline for your down payment... Whatever your situation may be, work out a definitive plan that works for you,” says Malow.
[Read about new mortgage rules issued this year.]
Joan tweets: Is premium worth it in high-performance cars?
Dear Joan,
Not necessarily. The main difference with premium gas (besides the fact that it’s 30 cents per gallon pricier) is that the octane rating is higher, which means the engine is less prone to pre-ignition or engine pinging, according to Bret Bodas, director of data at RepairPal, a site that provides auto repair information.
“Pinging occurs more frequently in engines where the internal combustion pressures and temperatures are higher — for instance, turbocharged engines and other higher performance vehicles.” According to Edmunds.com, if your engine prefers high octane gas but you feed it regular, its performance will suffer slightly, running about half a second slower from zero-to-60 mph. Not a major sacrifice, unless you’re in a big hurry to get somewhere.
You can always follow what’s mentioned in your car’s manual, but even then, if it says premium, it’s usually just a recommendation. Thanks to auto technology, auto experts say, your car will likely adjust. “Almost every vehicle has an engine computer that will compensate for the fuel used and will prevent any issues, such as pinging, from occurring,” says Bodas. “If there is a noticeable pinging or decrease in power, use the next highest rated fuel.” Edmunds provides a list of cars that require premium gas and others where it’s just recommended.
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.