Your home is probably the most expensive thing youll ever buy.
In some cases, you may not be able to afford to buy a home, and thats okay.
Theres no shame in renting.
People assume, because renting doesnt lead to owning anything, its a waste of money.
You just have to do some serious number-crunching to figure out which is best for you.
The New York Times hasthe best rent vs. buy tool Ive seen.
You want to get a general idea of how much home you’ve got the option to afford.
We recommend putting down (or at least saving)the standard 20 percent.
Always save more than you need for any maintenance issues or emergencies.
Of course, home affordability isntjustabout a down payment.
Back-End Ratio: The percent of your annual gross income that goes toward paying other debt.
When you figure out how much you might afford, youll want to consider those factors, too.
As a general rule: your front-end ratio should be no more than 28 percent.
That means you shouldnt spend more than 28 percent of your monthly income on housing costs.
However, theyre good rules to follow toavoid being house poor.
If you want to save up as quickly as possible, that might meancutting back on some spending areas.
Ifyoure a Mint user, they have a decent tool for budgeting out your savings goals.
you’re able to also note if some of the savings comes from other sources, like interest.
Were big fans ofpaying yourself firstto see to it you reach your savings goals.
When you get paid, set aside a certain percentage in your savings.
Or better yet,make it automaticand set up a monthly transfer at your bank.
It wont garner much interest, but it will be liquid, meaning you have easy access to it.
If youre planning to buy within the next year or two, this is probably your best bet.
But if your time frame is a little further out, youmight consider some other options.
A Certificate of Deposit (CD) is great if your time frame is three years or less.
In exchange, the bank offers what they deem a high interest rate.
The New York TimesBucks blogrecommends considering short-term, high-quality, no-load bond funds.
Those are low risk, low return investments (Fidelitys bond fund is FBIDX, for example).
An online brokerage firm like Fidelity, Vanguard or E*Trade can help you set up an account.
Vanguard offers their ownLifeStrategy Fundsfor goals like this.
Each fund is designed with a specific time frame and risk in mind.
you could also save money in yourIndividual Retirement Account(IRA).
AsBankrate points out, with a 4% interest rate, youll pay about $950 a month.
With 5%, that adds up to $1,075 a month.
Consider an extra $100 a month over time, and youre paying quite a bit extra.
It also just makes good financial sense to pay off any debt before you take on a massive one.
And, of course, your credit will improve, giving you a better interest rate.
This affects your credit score.
Obviously, you should also see to it to pay all bills on time.
If youre going to settle old debts,do it carefully.
If youre prepared, it shouldnt be too bad.
Its a headache because the underwriters want to check that the money in your bank accounts belongs to you.
if you have an FHA or VA loan, all of the down payment can be gift money.
Buying a house is exciting, but its also incredibly expensive.
Illustration by Fruzsina Kuhari.
