I’m out of debt, and I’m now saving for a down payment on a home. It’s always been my dream to be a homeowner. But lately, I read a lot of arguments against buying a home in favor of renting. How do I know if it’s a good idea for me? Should I buy or keep renting?
For a long time, conventional wisdom seemed to be that you grow up and buy a home because, hey, that’s the American Dream. But lately, people are questioning this advice. Whether or not buying a home is a smart investment depends on your unique situation. Here are some questions to ask yourself and factors to consider.
How long do you expect to be in the home?
The longer you plan to stay, the better off you are buying. That’s because buying and selling cost money – and require a significant amount of time and effort. If you plan to stay less than five years, you might want to rent instead.
Have you lived in this area before?
If you aren’t as familiar with your new location and you don’t have family or friends nearby you might consider renting first. This is especially true if the new location is a drastic departure from what you’re used to (i.e., moving from the city to the suburbs, or a new state altogether). And if you have children or are thinking of starting a family in the near future be sure to research local schools in the area.
Do you have a credit score in the mid-600s or above?
Borrowers with high credit scores tend to get lower interest rates on mortgages than those with low credit scores — and sellers like that. According to CoreLogic, the average credit score for homebuyers increased 7 points between Q1 2016 and Q1 2017, rising from 734 to 741. But don’t be alarmed. Mortgage Hippo CEO Valentin Saportas adds “You don’t need perfect credit or even good credit,” he says, “but generally above 620 you can qualify for a conventional loan.”
How stable are your job and your life?
If you’re in a declining industry and your job is not secure, you may not want to lock yourself into a mortgage or a specific location. If you’re involved in a long-distance romance, or are considering relocation for other reasons, you may want to rent. Buying a house and selling it a year later to relocate is likely to cost you some money.
Do you have savings for a 20% down payment, plus closing costs?
While it is possible to buy a home with less down, usually this comes with additional costs. With a Federal Housing Administration mortgage you can buy a house with as little as a 3.5% down payment. But in a competitive market, you may find sellers choosing offers with higher down payments and fewer contingencies. Usually lenders will require 20% of the home value as a down payment, especially if you want to avoid mortgage insurance.
And don’t forget about the closing costs. Typically, homebuyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. According to a recent survey, on average, buyers pay roughly $3,700 in closing fees.
How much can you afford?
One rule of thumb for figuring out this number: your home should cost no more than 2.5 times your salary. Of course, this doesn’t take into account the ongoing cost of homeownership.
Do some realistic math. This calculator will help you consider all the monthly costs of owning, including property taxes, home insurance, homeowner or condo fees and other regular costs. Utility costs also may be higher if you buy, since many rents include water service and garage collection.
Do you have an emergency fund?
All homes, even new homes, sometimes need repairs. Water heaters break, pipes leak and termites periodically drop by to wreak havoc on your home. Even condo owners aren’t immune because they can face sometimes hefty assessments to pay for repairs to the entire building. As a home owner, it’s a good idea to have an emergency repair fund. You’ll also want to consider the pros and cons of a home warranty.
Are you saving for other major financial goals?
While buying a home is a major financial accomplishment, it’s unlikely that it’s the only one you ever intend to make. Certified financial planner Mary Beth Storjohann of Workable Wealth remembers a client and her husband who were “really gung-ho on buying their first home.” But after getting a financial plan they decided to postpone their purchase in order to finance their other goals, like starting a business.
Ultimately, buying a home is a personal choice you’ll have to weigh, considering your own circumstances. These questions should at least point you in the right direction when thinking about owning a home. And when you’re ready, it’s a good idea to get a Housefax Report — even on a home you’re renting. Know before you buy or rent.
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