Saving for a Home

An important part of the home-buying process is raising the money for a down payment, closing costs, and financing. Shopping for the best terms on a mortgage can save tens of thousands of dollars over time.

• Prospective homeowners also need to determine how much house they can afford. One frequently cited guideline is that an individual or family should spend no more than 2 to 2.5 times their annual income for a home.
• Another is that monthly costs for principal, interest, taxes, and insurance (PITI), plus consumer debts (car loans and credit card payments, for example) should equal no more than 40 percent to 50 percent of take-home pay.

These are general guidelines and need to be applied with caution because geographic locations, ages, size, and other financial obligations (child support, for example) of families vary.

• One thing that is certain—for everyone—is that borrowing the least amount possible and repaying a mortgage as quickly as possible will reduce borrowing costs.
• Another strategy that can save on home financing costs is pre-paying principal to reduce the loan balance faster, thereby reducing the total interest paid.