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Before you buy a house, do the math

The heating pipes clank and whistle with the ferocity of a locomotive barreling through the bedroom.

One window is painted shut, and you have to, you know, jiggle the handle.

But even worse than chronic annoyances such as those is sending a monthly rent check to your landlord.

Sound familiar?

If today's low interest rates are giving you ideas about abandoning your lease-to-lease lifestyle and plunging into the housing market, you are probably grappling with questions of many first-time home buyers.

For instance, how can you be sure housing prices aren't going to plummet soon after you buy? And even if the housing market is strong, does buying make sense for you?

Unfortunately, there is no certainty in the housing market. "You can't time home prices the way you can't time the stock market," said David Berson, chief economist at Fannie Mae in Washington.

But just like a good stock investor, you can look for indicators of market conditions.

Nationally, all signs point to continued healthy growth in housing prices, says Fred Flick, an economist with the National Association of Realtors, a Washington trade group. "You have low interest rates, growth in incomes, low unemployment and a strong economy in general," he said. Prices are expected to rise 3.9 percent this year, which is strong, though slower than 1997's 5 percent growth.

On a local level, however, the market can veer far from national averages, based on factors ranging from the strength of a school district to zoning issues. "The single biggest reason for growth is the labor market," said David Crowe, an economist at the National Association of Home Builders in Washington. "A growing labor market means workers are moving into the area."

To determine if buying makes sense for you, compare your total estimated monthly costs of homeownership vs. renting. Here's how:

STEP 1: Figure out what size mortgage you can qualify for and what your monthly payments would be.

Most lenders won't qualify you for a loan if monthly payments would equal more than 28 percent of your pretax income. Total debt _ from credit card balances to car loans _ shouldn't equal more than 36 percent.

Use the accompanying "Mortgage size" table to estimate how large a 30-year fixed-rate loan you may qualify for based on your income and expected interest rate (current average: 7.2 percent). Then, using the "Monthly Payment" table, get an idea of what your monthly payment would be.

To be more precise, crunch the numbers yourself using a mortgage calculator, such as those on the Web sites of Fannie Mae (htp://, HSH Associates, a mortgage-information provider in Butler, N.J., ( or Bank Rate Monitor, a newsletter in North Palm Beach (

STEP 2: Factor in the tax deductibility of your mortgage interest. Multiply your tax rate in decimal form by your monthly payment, then subtract the answer from the payment. If your monthly payment is $1,600, and you are in the 28 percent tax bracket, your monthly after-tax burden would be $1,152 (1,600 x 0.28 = 448; 1,600 - 448 = 1,152).

Remember, most tax benefits are realized in the early years of a mortgage, because loans are structured so you pay interest first.

STEP 3: Other monthly costs can vary based on a home's price, so before continuing to tally expenses, determine how much home you can afford. This depends on how much you have for a down payment and closing costs. Some lenders will accept 5 percent, or even less, for a down payment, though 10 percent is more prudent and many advisers say buyers should try to put down at least 20 percent. Then there are closing costs _ appraisal and loan-origination fees, title insurance, transfer taxes, attorneys' fees, among other charges _ that typically amount to 3 percent to 6 percent of a home's sale price.

Suppose you can qualify for a $230,000 mortgage and you're interested in a $260,000 home. You would have to pay $30,000, or nearly 12 percent, down, and, assuming closing costs of 4.5 percent, $11,700 more to close the deal. Without $41,700 in cash, you would have to look for a lower-cost home.

STEP 4: With an approximate home price in mind, estimate your monthly property taxes, utilities and maintenance costs.

Property taxes are tax-deductible and vary according to location and assessed home value. For example, taxes on a 2,200-square-foot $150,000 home would be $490 a year in Montgomery, Ala., and $5,860 in Manchester, N.H., according to Runzheimer International, a cost-of-living research firm in Rochester, Wis.

As you did with your mortgage payments, figure out what your monthly property-tax payment would be after taxes.

Utility costs range widely. In Connecticut, average annual costs are $3,500 a year, compared with $4,400 in Long Island, N.Y., according to Runzheimer. Maintenance costs, which vary according to labor costs and the size and condition of a property, range from $526 a year in Oklahoma City to $820 in New York City suburbs on a 2,200-square-foot home, according to Runzheimer. If this seems low, remember it's an average, and some years you'll need to spend more than others.

Ask your broker for these approximate costs, and convert annual estimates into monthly costs.

STEP 5: If you think you'll put less than 20 percent down on the cost of a home, count on paying mortgage insurance, often required by a lender as protection if you default (ask your broker about cost-saving alternatives). Typically, annual payments equal 0.5 percent of the mortgage loan. So on a $200,000 mortgage, for example, insurance would run $1,000 annually, or $83.33 monthly.

STEP 6: Consider the monthly cost of homeowner's insurance, which is standard, if not required, by lenders. For an idea of what your insurance might cost, divide by 100 the estimated replacement value of your home (provided by your insurance agent; you can use the market value of your home, but the results will be rough), then multiply by 0.35. On a home with a $150,000 replacement value, for example, the yearly premium would be around $525, or $43.75 monthly.

STEP 7: Compare total monthly costs of owning vs. renting a comparable home (for your renting costs, don't forget to include the cost of utilities and renter's insurance). If rent turns out to cost the same or less, remember that buying still has a big benefit: Your mortgage costs aren't going to increase, but you can bet your rent will.

STEP 8: Figure the opportunity costs of buying, which are the potential financial gains you would miss out on by using your cash as a down payment on a home. If you rent, for example, you could use that money to invest in stocks. The average annual gain in home prices is about one or two percentage points ahead of inflation, according to the National Association of Realtors. By contrast, stocks' return after inflation has averaged just over 7 percent since 1926, according to Chicago researcher Ibbotson Associates.

So if you invested $20,000 in stocks, after considering inflation, your cash would grow on average by $1,400 in the first year, $1,498 in the second, $1,603 in the third and so on. If you used the cash as a down payment instead and your home appreciated two percentage points ahead of inflation, your comparable return would be $400, $408 and $416 for the first three years, respectively.

Of course, you probably would be paying 100 percent of the stock prices, said Berson, while for a house "you only have to put a little down, so it's like buying stock on a margin account." Moreover, he says, lifestyle advantages of buying a home typically outweigh the fact that there are other, more lucrative, investments.

How much house can you afford?


This chart can help you determine what size mortgage loan you may qualify for based on your household income and the interest rate you expect to get on the loan.

Household interest rate

income 7.0% 7.5% 8.0%

$50,000 $156,600 $149,000 $142,000

75,000 234,900 223,500 212,900

100,000 313,100 298,000 283,900

125,000 391,400 372,400 354,900

150,000 469,700 446,900 425,900

175,000 548,000 521,400 469,900

200,000 626,300 595,900 567,800


This chart can be used to estimate what your monthly principal and interest payments would be based on your mortgage loan amount and its interest rate. Real estate taxes and insurance costs are not included.

Mortgage interest rate

amount 7.0% 7.5% 8.0%

$100,000 $665 $699 $734

150,000 998 1,049 1,101

200,000 1,331 1,398 1,468

250,000 1,663 1,748 1,834

300,000 1,996 2,098 2,201

400,000 2,661 2,797 2,935

500,000 3,326 3,496 3,669

600,000 3,991 4,195 4,403

Source: Fannie Mae, Bank Rate Monitor, Wall Street Journal