Suze Orman
Photo: Marc Royce
I'm sure you've heard reports about all the people who stretched their budgets buying homes and now find themselves unable to keep up with the mortgage payments. Many were first-timers who didn't realize what they were getting into. Here's how to buy smart:

Budget wisely. If you pay $1,200 a month in rent, that doesn't mean you can handle a $1,200 monthly mortgage. On top of the base cost, you'll have to cover property tax, home insurance, utilities, and repairs. Plan on adding about 40 percent to your base cost. If your mortgage is $1,200, add $480 to get a better estimate.

Play house. Spend six months depositing into a savings account the difference between what you spend on rent and what it will cost to own. For example, if your target total cost is $1,600 and your rent is $1,200, put away $400 a month. After six months, if you've been able to keep up the deposits and pay your other bills, that's a sign you can afford to buy. Put your savings toward the down payment.

Skip the piggyback. Most new buyers lack the resources to put down 20 percent. In recent years, lenders have pushed them to take out a second mortgage, or piggyback, to cover all or part of that amount. I don't recommend piggybacks, because they usually carry a higher interest rate than your primary mortgage. Your other option is to pay for private mortgage insurance (PMI) until your equity in the home reaches 20 percent. The smart way to save money is to have the PMI rolled into your primary mortgage rather than pay it as a separate cost. Ask your lender about the SingleFile loan option offered through Mortgage Guaranty Insurance Corporation.
Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action. Harpo Productions, Inc., OWN: Oprah Winfrey Network, Discovery Communications LLC and their affiliated companies and entities are not responsible for any losses, damages or claims that may result from your financial or legal decisions.


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