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Don't buy that house -- yet
Not until you make sure all these factors are in place. A step-by-step guide.
August 11, 2005: 5:36 PM EDT
By Les Christie, CNN/Money staff writer
Mortgage Rates
30 yr fixed 4.41%
15 yr fixed 3.33%
5/1 ARM 3.34%
30 yr refi 4.39%
15 yr refi 3.31%

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Rates provided by Bankrate.com.

NEW YORK (CNN/Money) - You've fallen in love for the first time. Your instincts tell you to follow your heart, make a commitment. But would that be wise? After all, it does cost $400,000.

That may not be too bad for a three-bedroom, two-bath colonial on a half-acre plot in a nice part of town.

But it's still a lot of money, perhaps the biggest financial decision you'll ever make.So step back and do a simple exercise before you take the plunge.

Ask yourself:

Do I have all my finances in place?

Crucial to buying at the right price is arranging for mortgage pre-approval.

"Cash buyers carry more leverage when it comes to negotiating a deal," says Tom Early, president of the National Association of Exclusive Buyer Agents. Pre-approval is almost as good as cash.

Pre-approval includes a verification of employment (which confirms the buyer's income) and a verification of deposit (which confirms the buyer's assets).

"We submit these pre-approval documents along with the offer," says Early. "We want the seller to think the buyer walks on water. The seller knows that, 30 days down the road, the buyer won't back out because he can't qualify for the loan."

Because pre-approved buyers also know exactly what their ceiling is, they can focus on properties they can afford.

How do I know that the price is right?

Houses don't come with a "manufacturer's suggested list price" and comparable values are sometimes hard to establish. A real estate agent can arrange for a comparative market analysis (CMA), an independent appraisal of the value of the property based on other sales.

Try not to be so enamored of a particular place that you're tempted to overpay.

Keep a list of things you like and things you don't like about each house you see. That will help you make a more rational buying decision.

Am I buying too much house?

Overextending yourself can cost years of grief. It could mean skimping on many of the other necessities of life -- and all of the luxuries.

Your mortgage payment should not exceed 28 percent of gross income and your monthly debt repayments should be no more than 36 percent. That means a household with income of $80,000 should keep their mortgage payment below $1,867 and their total bills should come to no more than $2,400.

Obviously, if you're paying heavy debt service on auto loans, credit cards, and student loans, that will leave less for the mortgage; you'll have to cut back from the 28 percent mark to keep total payments within the 36 percent maximum.

For a 30-year, fixed-rate mortgage, a monthly payment of $1,867 means you can afford a home costing about $410,000, given a 5.5 percent interest rate and a 20 percent down payment.

Many buyers who spend more than that count on mortgage options such as adjustable rate or interest-only loans to stretch their dollar, but these choices carry risks. The monthly costs of ARMs can leap after the initial low interest rate.

Right now, the average interest rate for a 5/1 ARM (which means its initial interest rate adjusts after five years and can change once a year after that) is currently about 5 percent.

By using a 5/1 ARM, you could afford a house costing up to $435,000, at least for the first five years. If you expect to be earning a lot more after that, an ARM might work well. Remember though, if rates soar, you may wind up ultimately spending a lot more for the house.

What if there are problems with the house?

Every buyer needs to have the house inspected independently for defects and potential repairs before closing. "The choice is to have it inspected or to buy a pig in a poke," says Early.

Don't depend on real estate agents to recommend an inspector; they're trying to sell the house, not protect your interests.

You need someone working exclusively for you. Ask friends and relatives for recommendations, or go to the Web site of American Home Inspector for a directory of independent inspectors.

In some overheated markets, sellers sometimes balk at home inspection requests. In these circumstances you may have to make an exception and forgo the inspection.

How long will I stay in the house?

People planning to live in an area for a very short time, say two years or less, should consider renting.

There's a host of buying expenses, many of which you have to come up with in cash, before you take possession of that front-door key.

There's title search and insurance, and attorney, recording and transfer fees. There may be flood certification and survey fees. You'll write a lot of checks at the closing and you don't recover these payments when you sell.

Swiftly rising prices could offset these expenses, even in the short term, but you can't count on that. Historically, housing prices have gone risen at a rate just a lttle faster than inflation.

Remember, like every other commodity, housing can go down as well as up.

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Some housing markets seem ready to fall. For more, click here.

Mortgage rates seem destined to rise over the next several months. Click here for more on that story.  Top of page

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