Real Estate Update in Palo Alto & Los Altos

The Basics

You don’t pay cash when you buy a home. If you had to do that then nobody could afford to buy a house. Instead you get a loan from a bank called a mortgage. You make payments on this loan every month for 15 or 30 years, and then you get to stop making payments.
Most homebuyers also make a cash down payment of 3 to 20% of the sale price. The higher the down payment you can make, the easier it is to get a loan, and the lower the interest rate is, and the lower the monthly payment is. But if you can’t afford to make a down payment (or don’t want to), banks are increasingly offering “zero-down” loans. In fact, 43% of first-time homebuyers put no money down. (USA Today, 2006)

If you’re rich and don’t need a loan then see other article about paying cash for a house.

In most cases it makes more financial sense to buy instead of rent, and to buy as soon as you can afford to do so. (see exceptions) Most people think the benefit in buying is to “stop throwing your money away on rent,” but in fact the equity you build from buying is offset by the money you will “throw way” on taxes, insurance, and maintenance, which renters don’t pay. The real benefit from buying is that you freeze your monthly payment for 15 to 30 years, and then you stop paying it altogether.

What kind of home can I afford?

In general you can afford a home worth about three times your annual household income. If your combined income is $50,000, you could afford a $150,000 house.
If it looks like you can’t afford a home then consider getting a bigger home than you need and renting out part of it. This is especially applicable to single people, where the smallest home they can find might be too big for their needs. For example:

House Size       Total Cost         Rent out…                          Your Net Cost
2 bedroom       $1200/mo.       1 room for $400/mo.       $800/mo. for 1 room
4 bedroom       $1800/mo.       2 rooms for $800/mo.     $1000/mo. for 2 rooms
 
In 2006 a friend of mine was paying $600 to live in a tiny 1-bedroom apartment. She bought a 4-bedroom house that cost her $1100/mo., and rented out two of the rooms for $600/mo. total. So her net cost per month is only $500. She’s spending $100/mo. less, and she has twice as much room, a yard for her dog, and she owns her own house.
Earlier I said you can afford a home worth three times your income. Here are factors that could allow you to buy a home worth more or less than that.

How much a home costs

The median price for a home was $225,000 in U.S. metro areas in late 2006. (Natl. Assoc. of Realtors) Of course the price varies according to the part of town, and even the state you’re in. Homes in California cost lots more than homes in West Virginia and Arkansas. And naturally if the median (middle) price is $225,000, there are houses available for much less. In 2004 I bought two houses on the same lot for $86,000 total, or $43,000 per house.

How much will my monthly payments be?

Your monthly payments will probably be 0.75% to 1.15% of the purchase price. On a $150,000 home that’s $1125 to $1725/mo. This includes taxes and insurance. We’ll cover how to estimate your monthly payment more accurately on the next page.
The bigger your down payment, the lower the monthly payments.
The lower the interest rate, the lower the monthly payments.
The longer the loan, the lower your monthly payments. But it’s better to get a shorter loan so you pay it off quicker and save on interest, if you can afford the higher payments.
Don’t forget that you can lower your monthly obligation by renting out a room or two (or a whole side, if you buy a duplex).