Check out this article by David Weidner.  Great story on how to fix the problem: start saving.  There will be short term pain, but long term gains.  You can't fix an overspending problem by spending more.

There are a lot of misconceptions about buying a home. Real estate buyers are usually only concerned about the price of a property; however there are many other factors that ultimately determine the total cost of a real estate transaction.  First of all, these days you need a down payment.  For a $200,000 house that means you’ll need $40,000 before you even have a chance at getting a loan.  So with $40,000 down on a $200,000 home, you’ll be applying for a $160,000 mortgage.  Let’s go over some of the factors that come into play.

The higher your credit score, the lower your interest rate.  And a few points difference on your interest rate can vastly change the amount of interest you’ll pay for the life of the loan.  For the first several years the majority of your payment goes toward interest, not principal.  The lender makes sure they’re getting paid first.  After 15 years on a 30-year, $160,000 mortgage at 5% interest, you’ve only put $51,386 towards principal.  You don’t own half of your home, you own about 32% of it.

Another factor is the length of the loan.  The most common loan lengths are 15-year and 30-year loans.  There are benefits to both of these loan types.  A 15-year loan will save you a bundle on interest and you’ll have it paid off in half the time, however a 30-year loan is easier to qualify for, has lower monthly payments, and allows you to purchase a higher priced home. If you go for a 30-year loan make sure the terms allow you to pay off the loan early.  This way if you end up having extra money you can put it towards the principal and ultimately save a significant amount on interest. 

Another thing to keep in mind is the $8,000 tax credit for first time home buyers and the fact that you can write off all interest payments on your taxes.  That’s a huge tax benefit, especially for the first 15-20 years of your loan when interest is the majority of the payment.

Home buyers often go with the first mortgage person they meet under the assumption that all the rates are the same and that a percentage point isn't going to make that big of difference. As you can see above, a point can make a huge difference in your mortgage payment.

Obviously price is a very important factor when buying home, but make sure you look at interest rates and the length of the loan more closely to ensure you’re getting the best deal possible.  Now go buy something. 

Tagged in: Housing, Personal Finance, Interest Rates