Are you thinking of buying your first home? This milestone is often seen as a right of passage into adulthood. There’s even a sense of societal pressure to conform and buy a house. However, for most people, homes will be the largest purchase they make, so it is crucial to understand whether you are ready to make the jump, or whether you should hold off a bit longer.
Next week, we will explore whether it makes more financial sense for you to buy or rent. But today, let’s explore whether it even makes sense for you to consider buying now.
We can’t deny the allure of buying a home. From a cultural perspective, we are constantly bombarded with images of what the American dream should look like. Everyone is taught to dream of the home with the white picket fence and the large yard with green grass for the kids to play on. At this point, home ownership is as American as apple pie. (Interestingly, neither the apple pie nor apples themselves, are originally American. Both came ashore with immigrants.)
Isn’t Buying A House An Amazing Investment?
A person’s home tends to be their best investment over their lifetime, but the reason why might surprise you. It’s not because real estate is the best-performing investment class. In fact, the stock market has historically outperformed housing prices! Home owners just simply tend to hold their investments for a very long time and don’t try to sell their home when the housing markets are up. Remember what we told you about trying to time the market? (Hint: don’t do it.)
Everyone says buying a house is a no-brainer. I mean, who doesn’t want to build equity for themselves instead of building it for their landlord through rent payments? The problem with this line of thinking is that it assumes that paying rent is a waste of money. The truth is that unless you view a roof over your head and a safe place to sleep as a waste of money, then paying rent is actually not a waste at all. That designer jacket for your pet… No comment.
As we will explore next week, renting could be the right financial decision for you. But buying may also be more financially prudent. However, there are some important factors that you should consider prior to house hunting.
Does Buying A House Make Sense For Me?
Is your social / domestic situation solid?
If you are planning to purchase a home with a spouse, significant other, or friend you need to be sure about the relationship. People and relationships change over time and you can’t predict the future, but if you aren’t confident about the relationship, then now is probably not the best time to buy a home with that person. The cost of buying and selling a home after a few years will likely end up costing you more than if you had rented.
Alternatively, if you and your partner are hoping to very quickly expand your family, then jumping into that 1 bedroom house probably isn’t the right move.
Before buying you also want to be as sure as possible that you like the neighborhood, city, school district, etc. If you know there’s no way you’d want to be in a specific place long-term, then it doesn’t make sense to buy a home even if you think you’re getting a killer deal, unless your plan is to rent it out to others eventually.
Are you currently working at a job you enjoy or industry you love and plan to be there for the foreseeable future?
If switching careers or going back to school is on the horizon, it’s probably also not a good time to be looking to buy a home, unless you have a very secure plan for making your mortgage payments. You don’t want to go through a stretch where you won’t be able to make your mortgage payments once your emergency fund runs out. If you think paying rent is a waste (it’s not), then imagine the feeling of making years of mortgage payments and having your house taken away.
Again, things change and stuff happens, but if you’re on probation at work, it makes sense to figure that out before buying a house. A new job may also make your new commute unbearable, so be sure to take that into account. This ties well into financial stability.
Are you financially prepared to buy a home?
Do you have enough money saved up for a down payment, potential repairs, and all of the taxes and fees that come with ownership? We recommend saving at least 20% for a down payment on the home to avoid having to pay for private mortgage insurance (PMI). Your credit score should also be in great shape to ensure you get the lowest interest rates. Even small changes in interest rates can lead to BIG differences in interest paid over the lifetime of your mortgage.
Remember that no more than 30% of your take-home income should be spent on your housing. Mortgages and related costs are no exception to this rule. The less you can spend on housing, the more money you’ll have to save and invest.
Did you pass the test?
If you answered ‘no’ to any of the above questions, then it makes sense to rent a little longer. In fact, depending on your situation, renting could end up saving you money long-term when compared to buying. Changing your mind quickly can also be very costly. Buying and closing costs each time you buy or sell a home are not insignificant, and there’s always the chance that your home could go down in value!
In terms of full transparency, both of us have always rented because we’ve always been on the move for school, work, etc. Our geographic uncertainty meant we’ve always ruled out buying. We have tons of friends who own their houses, and that’s okay too. You have to do what is right for YOU.
Lastly, just because you’re renting does not mean you have to cram the family into a small 1 bedroom apartment. You can still rent a spacious 4 bedroom house with that large yard you’ve always dreamt of. Just make sure it fits into your budget. It’s okay to rent for a few years while you figure out if that new job or neighborhood is the right one. The most important thing is making sure your social, professional, and financial lives are all ready! It’s better to delay and make a right decision than to rush and make a choice that is tough (and costly) to unwind.
Think You’re Ready To Buy A Home?
Our awesome article on Renting vs. Buying A House explores when it makes more financial sense to purchase vs. rent a home.
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