Should You Buy a Home?

Should You Buy a Home?

If the recession of 2008 and subsequent housing crisis taught us anything, it is that no investment is a sure-fire winner, not even real estate.  While housing is a basic necessity, knowing when to rent and when to buy a home can get a bit more complicated.  Here are some things to consider before committing to the decision to buy.

Consider Your Timeline

Like most investments, you’re more likely to see a good return on your home purchase if you adopt a long-term mindset and implement a buy and hold strategy.  Sure, there are pro “house flippers” out there, but don’t let the glamour of HGTV fool you into thinking it’s easy.  For the average young professional, committing to a home that you’ll stay in for at least 5-7 years is the best policy to ensure that your purchase and all that upfront investment is financially worthwhile.  

First, take a long-term view of your life over the next few years and see if there are any circumstances - a marriage, a baby, a new job, going back to school, etc. - that might require a location change before putting your roots and money down.

Know Your Budget

If you’ve decided to stay put and make the commitment to buy a home, start by making an honest assessment of your current financial state.  How much can you afford to spend on a down payment and how much can you afford to spend monthly on all home ownership expenses - mortgage, property taxes, insurance, utility bills, maintenance costs, any potential condo or homeowners association (HOA) dues, etc.?  A common rule of thumb is to make sure your total monthly housing costs constitute no more than one third of your monthly gross income.

When applying for a home loan, lenders will want to see that your income is more than enough to fulfill the financial demands of your mortgage and associated ownership costs.  They will also be checking your credit score to determine what kind of interest rate you’ll get on that loan.  Make sure your score is in good shape before applying so that you secure the best possible rate - shoot for a credit score of 760 or higher.

Determine Your Upfront Investment

While you can put down as little as 10 percent on a new home, committing to a 20 percent down payment will save you from having to pay additional private mortgage insurance and a higher interest rate on your mortgage.

Don’t forget to account for closing costs either, which typically range from 2 to 5 percent of the purchase price of your home.

Consider the Lifestyle

Buying a home is not just a financial investment, it’s a lifestyle change.  Not only are you responsible for your monthly payments, you’re also responsible for cutting the grass, raking the leaves, snow removal, cleaning the gutters, fixing the plumbing, etc.  If you’re not prepared to make that kind of time commitment make sure you have more than enough resources to cover the cost of hiring someone who can. 

Beef Up Your Savings

Don’t let your upfront home ownership costs and subsequent monthly payments eat up all of your financial resources. You’ll want to maintain a fully funded savings account to serve as a buffer in case of any future maintenance emergencies or life circumstances, like loss of employment or disability, that could affect your finances and ability to keep up with regular payments.

Buying a home is a big decision with major financial and lifestyle implications.  Consider all of these factors, and seek guidance before deciding if it’s the best option for you.