Are you debating whether homeownership is a wise or foolish decision? Homeownership isn’t a good or bad idea on its own. Your situation really determines if it’s a pro or con for your life. Sometimes, buying a home is the smart thing to do; other times, it really isn’t. Whether or not it’s smart for you will depend on a few different factors. Here are a few important things to consider:
• How Much Can You Afford to Pay? One rule of thumb for figuring out how much home you can afford to buy: your home should cost no more than 2.5 times your salary. According to Corey Fick of 20sfinances, you should also take into consideration your take-home pay, all debt, priorities (children, retirement), and down payment amount. TIP: Remember to leave a cushion in your monthly budget between income and total monthly expenses (see the bullet below for “Avoid Being House Poor”). Once you know the number you’re working with, you’ll have a better idea of whether buying a home is a smart financial move for you.
• What Is the Opportunity Cost of Renting Vs. Buying? While your home might not be the best investment, in the end, it’s still yours. Even if it barely outpaces inflation, at the end of the day, you own it, and that’s worth something. When you rent, you own nothing—the money is given to someone else. The New York Times has a useful interactive calculator that provides perspective and comparison on buying (and paying off your home someday) versus paying rent for the rest of your life. Plug in all your details, and you’ll get a detailed view of what the costs and opportunity costs are.
• What are Your Long-Term Plans? Speaking of opportunity costs…is this going to be your “forever-home”? Buying and selling a home is a complex, expensive process that includes closing costs and a real estate agent’s commission that could be 5 or 6% of the property’s price when you sell. It generally makes financial sense only if you plan to stay put for at least five years, says Leslie Ransom, a financial planner in Chicago.
• How Do You Avoid Being “House Poor”? You don’t want all of your net worth to be tied up in your home, and that’s essentially what being house poor is—when you can’t afford to make ends meet, because you’ve spent everything on a house. Obviously, you should have enough, after your down payment, to cover your mortgage and monthly expenses. But what about maintenance and unexpected repairs? And the little expenses that make life, well… life? Beyond simply making ends meet, you want to make sure you’re financially secure and comfortable, too.
• How Do You Reap the Full Financial Benefits of Homeownership? Low interest rates make homeownership attractive because it decreases the amount borrowers pay on their loans. Mortgage rates remain near record lows after the 2008 financial crisis. The average rate on a 30-year fixed-rate mortgage is 3.9 percent, according to Bankrate.com. If you itemize your federal return and don't qualify for the alternative minimum tax, you can deduct your mortgage interest and property taxes from your tax obligations. And most importantly, you can build equity in your home, something that isn't possible with a rent payment.
• Do You Qualify for Financial Assistance? Programs aimed at first-time homebuyers through government agencies such as the Federal Housing Administration and traditional banks will let you make a down payment of 3.5%, or even less, on your first home. In fact, the median down payment among millennial homebuyers, those ages 18 to 35, was 7%, the National Association of Realtors’ Home Buyer and Seller Generational Trends Report found. You can also get help from state and local homeowner assistance programs. But it’s in your best interest to pay as close to that 20% down payment as possible. The larger a down payment you can make, the more financially secure you appear to lenders. You’ll get a lower interest rate on your mortgage, meaning a lower monthly payment. In addition, you won’t have to pay mortgage insurance, which protects the lender in case you can’t repay the loan.
“Ultimately, buying a home is a personal choice you’ll have to weigh, considering your own circumstances,” advises nerdwallet.com. Homeownership is not inherently a smart or dumb decision—it depends a lot on individual factors and where you’re at financially. But these considerations should at least put you in the right direction.
Sources: twocents.lifehacker.com;.cnbc.com; nerdwallet.com; hud.gov
