To build or not to build? For some, the time is now

WASHINGTON (8/20/07)--The number of people building homes fell to its lowest level in more than a decade thanks to the worst housing slump since 1991 (USA Today Aug. 15)

Many would-be home buyers--or builders--have taken a wait-and-see attitude about their housing plans, mainly because of the subprime loan fiasco and high-building costs. Some builders are responding by discounting building costs and offering nonprice incentives as well (National Association of Home Builders Aug. 15).

Although the headlines might make it sound like the time couldn't be worse to build, for some individuals, the timing still may be perfect. Owning your own home offers many advantages such as tax benefits and the equity you'll build.

Here's what to consider:

• How much you can afford. One common guideline is that your mortgage payments--which include principal, interest, property taxes, and property insurance--should amount to no more than 33% of your monthly gross income (income before taxes, Social Security, and other deductions). Also, your total long-term debt (such as car payments, college loans and installment payments) should not exceed 38% of your gross income.
• Upfront costs. Buying or building a house means more than monthly payments. Upfront costs include your down payment and closing costs.
• Your budget. Remember, you don't want to put all your surplus into housing. You'll need savings for other big-ticket items such as college expenses, emergencies, and so on.
• Type of mortgage. Mortgages fall into two broad categories: fixed rate and adjustable rate. With a fixed-rate mortgage the interest remains the same throughout the length of your loan. An adjustable-rate mortgage (ARM) has an interest rate that varies over the term of the loan. With an ARM, the starting interest rate is lower than the going market rate, but can increase or decrease a certain amount at specific intervals such as once a year (or every six months, three years, or five years).

If you're thinking of building a house, talk to the people at your credit union. They can look at your financial situation and help determine what you can afford.

And, for more information, read "Construction and Bridge Loans Match Special Needs" in Home & Family Finance Resource Center.

courtesy of cuna.org