More and more single women are buying homes on their own these days, while others are becoming solely responsible for their houses after a divorce, the death of a spouse or other relative. But for all these women, home ownership has its share of challenges and rewards. So, in a special week-long series called “Today's Money for Women,” Jean Chatzky, “Today” financial editor and Money magazine editor-at-large, discusses women and home ownership. In day two, Chatzky talks about what you need to consider before financing the home of your dreams.

When you think about buying a house, chances are you think about shopping for a home – traipsing through foyers and kitchens, weighing the convenience of a manicured quarter acre against the privacy of a more rustic full one, being certain you're in the very best school system for your kids' needs. But there's another part of the process that's equally important to your financial well-being and that's shopping for a mortgage. Getting the right loan at the right price can set you on a course toward financial security while getting the wrong one – one that's too large, too pricey, too risky – can sabotage your chances of reaching your financial goals.  

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That's a very different question than it's been in the past few years with interest rates at 46-year lows. Today rates are climbing, albeit slowly, so you need a slightly different strategy. Here are the questions you need to ask yourself before you make your decision on how to finance your new home.

How much monthly payment can you afford?
According to a recent study on women and homeownership by Sears, Roebuck & Co, only half of all homeowners (regardless of gender) say they estimated what it would cost to live and maintain their homes before they bought them – big mistake. If you factor only the cost of your mortgage, interest and taxes, you'll fall behind as soon as the first maintenance and repair bills roll in. According to the Harvard Center for Joint Housing Studies, you should count on spending 1% of the value of your home each year on maintenance. That doesn't include optional expenditures like lawn care, housekeeping and furnishing your new place. So if you plan on spending money in that way, make sure you budget for those items as well.

How long will you be in the house?
Once you know the size of the monthly payment you can afford, then you can figure out the best loan for you.  In order to answer this question, though, you need to know how long you'll be in the house. A 30-year-fixed rate mortgage at 6.4 percent right now on average according to HSH.com, is not the no-brainer it was a year ago at 5.5 percent. That's not to say that rates, are high, they're still comfortable. But you can get a less expensive loan if you're willing to take an adjustable rate mortgage that gives the lender the right to charge you a higher interest rate down the road. A 5-1 ARM, fixed for the first 5 years, and then can start adjusting is priced right now at 5.5 percent on average according to HSH.  If you believe you'll only be in the house for 5 years, or even a few more, a loan like this can be a better move. 

How much risk are you willing to take?

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If you don't like the sound of an adjustment – typically loans can go up as much as 2 percentage points in a single year and 6 percentage points max – and you think you might be in the house a little longer, then you might want to look at a different ARM. A 7-1 ARM, for example, which is fixed for the first 7 years, is more expensive at 5.8 percent but less risky, 10-1 arms are also available.  The longer the fixed period you take, the more insulated you are from any adjustment in rates. In fact, experts say, if you take a 7 year fixed rate loan (looking back at past cycles in interest rates) the chances are pretty good you'll side-step any rate adjustments that we have in the interim.

How about interest-only loans?
Be careful. And make sure you know what you're getting yourself into. The initial monthly payments on an interest only loan may look incredibly attractive because we're still in a low rate environment today. But your payments could double in a 5 year period, going from $1,000 to $2,000. And, you won't have been making any equity payments — what that means is that you don't own the house. If rates go up more than you can handle, you could find yourself out on the street. My bottom line on this: If the only monthly payment you can afford to buy the house you want is an interest-only payment, then you really can't afford to buy this house. Find something smaller and less expensive.

What's the best way to shop around?
Take your time. Particularly if you're a borrower with good credit quality, leaving you with enough time to shop carefully — over the Internet as well as from local lenders — is a very good idea right now. Lenders are overstocked in terms of loan-making ability. They have a lot of money to dole out and a lot of mortgage brokers on the payroll and that can work in your favor.

Should you lock in?
That really depends on the language we hear coming out of the Federal Reserve. If they start alluding to the fact that rate increases could come faster than anticipated, mortgage rates will move in response. Usually they spike and then settle. So it depends where you are in the news cycle.  It's probably a mistake to lock on the initial reaction, you might be better off to wait for the settling for a couple of days.

What to be careful of if you jump in
You need to manage your equity.  Of the women homeowners who took out home equity loans or lines of credit in the last five years, 35 percent didn't use any or used only some on a home improvement.  One-third used the money to pay off credit card debt.  And of those, more than a third had racked up substantial credit card debt a short four years later.  In other words, if this is the asset you plan to bank on in the future, you better keep your money in it – and not pull it out — today. As interest rates rise, these loans will become a much more serious burden.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Copyright © 2004. For more information, go to her Web site, www.JeanChatzky.com.

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