Effective planning lays the essential groundwork for a successful home purchase. First you need to answer these questions for yourself: Can I really buy a new home? Am I ready?

You can reinvest your equity by borrowing against it and obtaining a home equity loan or second mortgage.

That puts your money to work for anything from remodeling to investments to paying for your child's college education.

Unfortunately, good news is not the whole picture. There are some downsides to owning a home that we would be remiss in not telling you. Move on to see if they are big enough reasons to stay put in your rented residence.

You have to face the realities of owning before you blindly rush into a major decision . . . and buying a home is about as major as you can get when it comes to investing.

The long and winding road: Home ownership involves a long-term financial commitment, not only to monthly mortgage payments but also to utilities, homeowner's insurance, and maintenance and repair costs, as well. Your monthly payments may be higher than the rent you're paying now, not to mention the upfront costs of making a 5-10% down payment plus closing costs. Homeownership is not advisable it if it means you won't have a penny left over for anything else.

Itchy feet sufferers should wait: Don't buy if you don't want to stay. Itchy feet aren't just for athletes. It applies equally to homes. If you aren't willing to commit to owning for at least five years to allow your investment to appreciate, don't buy. That means you won't be able pack up your stuff and leave with a month's notice, which you can do as long as you remain a renter.

One price of home ownership is decreased mobility.

If you expect to move in the next year or two because of a job change or some other reason, now may NOT be the time to buy.

Forget about passing the jobs to a Super! All the around-the-house jobs fall into your lap, the minute you become an owner. Someone (meaning you or someone you pay or cajole) has to mow the lawn and rake leaves; fix the faucet; call (and pay) the air conditioner repairman or roofer. All those things you took for granted as a renter are now your responsibility as a homeowner. That's why some people choose to buy into a condominium. This option minimizes the energy and time required for proper home maintenance upkeep.

Falling market gamble: Buying a home is a risk -- you can win or lose. If the real estate market takes a turn for the worse and home values fall, you run the risk of losing money on your investment. There's always some risk involved in real estate, especially if you buy during an upswing when home values are high.

But, should you fail to keep up your mortgage payments, even for reasons beyond your control, the lender may foreclose on and sell your property. This results in the loss of not only your home but also your investment and your good credit rating.

That next step is a self-assessment of your financial strength, which will show you in black and white if you're actually as ready as you hope you are. It will simultaneously help you discover the proper price range of homes you can afford. Actually, we'll work our way into the answer to both questions in reverse sequence.

Calculating a monthly mortgage payment

Can you afford to buy?
You believe that you're fully capable of making a mortgage payment each month, right?

Since you know that it's pretty much like making a rent payment, with a few additional considerations thrown in.

OK, then. Let's do a sample calculation. Get a sheet of paper, a calculator, and a pencil. This will only take a few minutes. People who think numbers are about as warm and cuddly as grizzly bears will find this exercise surprisingly pleasant. Once you see how quickly you learn to use these tools, you'll be able to tame the REAL numbers in your own market area with the greatest of ease.

Write three words down in a column on your work sheet, just like this:

LOAN :
RATE :
TERM :

1. Pick a repayment term: How long are you going to take to repay? Let's say that you expect to get a standard 30-year fixed-rate mortgage. So, write "30" behind the word TERM on your worksheet.

2. Pick an interest rate: Another easy figure. For our example we're going to assume that the interest rate is 8%. So, write 8% on your worksheet behind the word RATE.

   To find the current interest rate on a 30-year fixed rate mortgage, look in the real estate section of your local newspaper or call a mortgage lender.

3. Pick a price: Try to be realistic! Since you're already interested in becoming a homeowner, you've probably been gazing wistfully at the real estate ads in newspapers or visited a couple of open houses. You have an approximate idea of selling prices of homes in your area. We'll use $90,000 as the selling price for the Example.

4. Figure the total loan amount:
   To establish the total amount of your loan, first figure what amount is 10% of the selling price you've just selected. We'll consider that the amount you'll make as a down payment. In our case, the down payment amount would be $9,000 which means that the rounded-off total loan amount will be $80,000. Write that number on your worksheet behind the word LOAN.

So, in our example, our total loan amount is $80,000, which we'll borrow over 30 years, at a fixed rate of 8% per year.

Now multiply 80,000 by 8%. You get 6400, which will be a total annual interest amount. Divide that by 12 months and your monthly payment is just $533.

NOTE: When you look this up on a standard mortgage chart you'll find that the total principal and 8% interest payment will be $587. These are solid ballpark numbers you can use reliably to estimate monthly housing payments.

To figure out how much your loan will really cost you, use our calculator which determines how much house you can really afford. In the box asking for your APR, substitute the interest rate if an APR is not available. This will give you a good idea how much your loan will really cost you in the long run.

You can also save a fortune in interest costs if you pre-pay your mortgage by making small extra monthly payments.

Wow! That's less than my rent!
Yes, low numbers can be exciting ... especially when they are lower than your current rent. But, wait a moment. We aren't done yet. You still have a few things to add. Don't run to your real estate agent based on these numbers yet.

Don't forget that you'll pay property taxes and homeowners insurance on top of that figure. Tax rates are set locally and both the insurance premium and tax payment will vary according to the cost of your home. In addition, you might need to pay private mortgage insurance (PMI) if you put less than 20% down.

Calculate the Add-ons
This means adding all those other numbers that are bound to occur. To cover these expenses, multiply the purchase price by .002% (two-tenths percent), and add that figure to your monthly principal and interest payment, just to be safe. In the above example for a $90,000 home, that equals $180 on top of $587 for a total monthly cost of $767. Remember also the additional expenses of maintenance and repair.

Lenders will look at two basic numbers in deciding how much you can afford to borrow. Keep in mind: Once you know how much you can borrow you'll also know the price range of houses to look at.

What a lender inspects
This is where the paper pile begins! Your monthly housing costs, which include mortgage payment, taxes, and insurance; and, your total debt, which includes monthly housing costs - plus any long-term debts like a student loan, car loan, credit cards or other installment debt.

Understand basic borrower guidelines
They aren't too difficult... The lending guideline is that you should spend no more than 28% of your monthly gross income (before taxes) on housing expense. That can include business income, disability or retirement benefits, alimony, child support, etc.

Also, your total monthly debt payment, including housing and other long-term debts, should be no higher than 36% of your monthly gross income.

Check your credit rating
This is essential! A good credit report is an important part of your financial profile. Before you begin the process of applying for a mortgage loan be sure that you review your most recent credit report.

Be certain all of the information included in it is accurate.

Errors or misinformation in your credit history could have a negative impact on your chances for the best loan and interest rate.

When NOT to buy
There are times when you should just walk away. If you've had some past financial problems, it's not the end of the road; you just need to fix them before you try to purchase a home. Even if you've gone through bankruptcy, all you need is time to handle your debts and repair your credit history. It may take a year or two to fine-tune your financial profile, but it's well worth it.

Perhaps your credit picture is not as black as the bankruptcy scenario but not picture perfect, either.

How much can you qualify for? With stable employment and income, you should be able to qualify for a mortgage loan worth almost twice your annual income. By taking time to improve your credit rating, you could raise that figure substantially.

Single borrower's gross annual salary __________
Total monthly Income (annual salary divided by 12) __________
Monthly gross income __________
Multiply by 28% __________
Allowable monthly housing costs __________
Home purchase price __________
Down payment __________
Mortgage loan amount __________
30-year loan/8% Interest – monthly payment (PI) __________
Taxes and insurance __________
Total monthly housing costs __________
Monthly gross Income __________
Multiply by 36% __________
Allowable total monthly debt __________
Other monthly debts __________
Car payment __________
Credit cards __________
Total monthly other debts __________
Total monthly housing costs __________
Total other monthly debts __________

Total monthly costs __________

It's not the end of the road if you fall outside the guideline percentages by a few points. The guidelines are just that, guidelines. You can use this chart as a tool to calculate approximately what you can afford. Lenders will treat the guidelines flexibly. So have some faith!

Mortgage: A Contract in which a lender loans funds and receives secured Interest in property until the funds are repaid.

Equity: The difference between the fair market value of the Property and the amount of Debt outstanding against it.

Foreclosure: The legal process by which a borrower is deprived of their Interest in the Mortgaged Property. This usually is the last action taken by a lender to collect from a borrower in default. Foreclosure involves a forced sale of the Property at public auction with the proceeds of the sale being applied against the mortgage debt.

Homeowner's Insurance: An insurance policy that protects a dwelling and its contents from personal liability and damage. Sufficient coverage is required by lenders.

PMI: Private Mortgage Insurance, which protects the lender in case of default by the borrower. PMI is often used when buyers obtain financing with less than a 20% down payment.

Point: A charge by the lender representing 1 percent of the amount of the Mortgage.

Property tax: A charge imposed on the assessed value of real estate, to be used to support the State or municipality who in turn utilizes the funds in the best Interest of the general public.

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