How much upfront is needed to buy a house?


How-much-upfront-needed-to-buy-house  Don't stretch to buy the most expensive house you can. This will probably be your biggest single investment but if it's too big an investment, it can distort your personal finances for years to come.
  
 In deciding how big an expenditure makes sense for you, you and your financial planner or tax accountant should discuss the following: your current income and expenses and expected future increases in your income; any big predictable future expenses (such as tuition bills); your future career plans (do you expect or hope to move within the next few years?); and your investment portfolio. What other assets do you own? Will you have enough disposable income to keep adding to them after buying a house?

  
 Consider a couple who together earn $65,000, but have $250,000 in combined savings and inherited assets. Theoretically, they can afford to put down $200,000 for a $300,000 house and pay $7,000 a year in property taxes. The taxes plus a 30-year $100,000 mortgage at 8.5 percent interest will cost $15,500 a year. That's only about a quarter of their income.


 But in real life, the cost of utilities, maintenance, yard work, and furnishings for a $300,000 house may bring the actual tab closer to $25,000 a year even if the property taxes don't go up, which, of course, they will. Instead of feeling carefree because of their big inheritance, this couple may wind up feeling strapped for cash.

 Also, they will have invested the lion's share of their assets in their house an illiquid, undiversified, and highly leveraged investment.

 (Here's how leverage works: You buy a $100,000 house with just $20,000 a 20 percent downpayment. Its value increases 20 percent, to $120,000. That 20 percent increase represents a 100 percent increase in the value of your $20,000 stake. That's the best-case scenario. The worst case: the house loses 20 percent of its value and your $20,000 stake is wiped out. If its value falls even more, you can wind up with a mortgage bigger than the market value of the house.)

 Real estate prices tend to keep pace with inflation. The World War II generation had a windfall in their houses, thanks to the soaring inflation of the 1970s and 1980s. But inflation is much more modest in the 2005s. Also, baby-boom homeowners outnumber the demographic group that follows them, which means the supply of houses for sale may outstrip future demand. The bottom line: the value of houses is likely to grow much more modestly than in the past.

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