Why buy a house?
What can I afford?
What is the difference between market value and appraised value?
Is a low offer a good idea?
Who gets the furnishings when a home is sold?
What repairs should the seller make?
What are closing costs?
Who pays the closing costs?
What kind of home insurance should I get?
How do property taxes work?
Are property taxes deductible?



Q: Why buy a house?
A: Here are some frequently cited reasons for buying a house:
  • You need a tax break. The mortgage interest deduction can make home ownership very appealing.
  • You are not counting on price appreciation in the short term.
  • You can afford the monthly payments.
  • You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10 percent of the sales price.
  • You prefer to be an owner rather than a renter.
  • You can handle the maintenance expenses and headaches.
  • You are not greatly concerned by dips in home values.

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    Q: What can I afford?
    A:     Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts.

    It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan.

    The price you can afford to pay for a home will depend on six factors:

    1. gross income
    2. the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
    3. your outstanding debts
    4. your credit history
    5. the type of mortgage you select
    6. current interest rates
    Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI.

    This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.

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    Q: What is the difference between market value and appraised value?
    A:     Appraised value is a certified appraiser's opinion of the worth of a home at a given point in time. Lenders require appraisals as part of the loan application process; fees range from $200 to $300. Market value is what price the house will bring at a given point in time. A comparative market analysis is an informal estimate of market value, based on sales of comparable properties, performed by a real estate agent or broker.

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    Q: Is a low offer a good idea?
    A:     While your low offer in a normal market might be rejected immediately, in a buyer's market a motivated seller will either accept or make a counteroffer.

    Full-price offers or above are more likely to be accepted by the seller. But there are other considerations involved:

  • Is the offer contingent upon anything, such as the sale of the buyer's current house? If so, a low offer, even at full price, may not be as attractive as an offer without that condition.
  • Is the offer made on the house as is, or does the buyer want the seller to make some repairs or lower the price instead?
  • Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.

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    Q: Who gets the furnishings when a home is sold?
    A:     Fixtures, any kind of personal property that is permanently attached to a house (such as drapery rods, built-in bookcases, tacked-down carpeting or a furnace), automatically stay with the house unless specified otherwise in the sales contract. But you can consider anything that is not nailed down negotiable. This most often involves appliances that are not built in (washer, dryer, refrigerator, for example), although some sellers will be interested in negotiating for other items, such as a piano.

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    Q: What repairs should the seller make?
    A:     Most sellers like to make all minor repairs before going on the market in order to seek a higher sales price. In addition, nearly all purchase contracts include a buyer contingency "inspection clause," which allows a buyer to back out if numerous defects are found. Once the problems are noted, buyers can attempt to negotiate repairs or a lower price.

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    Q: What are closing costs?
    A:     Closing costs are the fees for services, taxes or special interest charges that surround the purchase of a home. They include upfront loan points, title insurance, escrow or closing day charges, document fees, prepaid interest and property taxes. Unless, these charges are rolled into the loan, they must be paid when the home is closed.

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    Q: Who pays the closing costs?
    A:     Closing costs are either paid by the home seller or home buyer. It often depends on local custom and what the buyer or seller negotiates.

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    Q: What kind of home insurance should I get?
    A:     A standard homeowners policy protects against fire, lightning, wind, storms, hail, explosions, riots, aircraft wrecks, vehicle crashes, smoke, vandalism, theft, breaking glass, falling objects, weight of snow or sleet, collapsing buildings, freezing of plumbing fixtures, electrical damage and water damage from plumbing, heating or air conditioning systems, according to the Insurance Information Institute, a Washington, D.C.-based nonprofit group for the insurance industry.

    Such policies are "all-risk" policies, which cover everything except earthquakes, floods, war and nuclear accidents.

    A basic policy can be expanded to include additional coverage, such as for floods and earthquakes and even workers' compensation for servants or contractors. Home-based business-coverage, an increasingly popular rider, does not cover liability associated with the business. Insurance experts recommend that homeowners obtain insurance equal to the full replacement value of the home. On a 2,000-square-foot home, for example, if the replacement cost is $80 per square foot, the house should be insured for at least $160,000.

    For personal items, homeowners can increase their coverage beyond the depreciated value of items such as televisions or furniture by purchasing a "replacement-cost endorsement" on personal property. Some experts recommend an inflation rider, which increases coverage as the home increases in value

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    Q: How do property taxes work?
    A:     Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate, on average 1.5 percent of the property's current market value. These annual local assessments by county or local authorities help pay for public services and are calculated using a variety of formulas.

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    Q: Are property taxes deductible?
    A:     Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.

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