Becoming a homeowner has long been considered the American Dream, but there's a fair amount of hoopla behind that sentiment. Not only is homeownership a huge responsibility, but in some cases, renting can actually make far more financial sense. For example, if you're able to find an affordable home in a desirable area, and don't particularly need the tax breaks associated with ownership, why dump your savings into a down payment and bear the brunt of the ongoing costs that are maintenance, property taxes, and repairs?
On the other hand, homeownership certainly has its advantages, provided you've thought the decision through. Here are a few questions to ask yourself before diving in.
1. Have I saved enough to put down 20%?
Though you don't necessarily have to put down 20% to buy a home these days, doing so is advantageous in that it lets you avoid private mortgage insurance. PMI is a premium that gets tacked on to the cost of your home loan when you fail to put down 20% of your property's purchase price, and it can easily equal up to 1% of your mortgage. Therefore, if you're signing a $300,000 loan, you could be on the hook for an additional $3,000 a year, or $250 per month, on top of your regular costs. And that could spell the difference between covering your payments or struggling to keep up.
2. Will my monthly expenses exceed 30% of my take-home pay?
It's estimated that 39 million Americans can't afford their homes, and much of that boils down to folks taking on too much house from the get-go. Before you buy, make sure your monthly expenses, including your mortgage payment, real estate tax bill, and insurance, don't exceed 30% of what you bring home in your paychecks. Otherwise, you might really have a hard time keeping up with your expenses once that property is yours. If you really want to play it safe, you might even include your estimated home maintenance costs in that 30% figure to ensure that you don't go over budget.
3. Do I have a strong emergency fund?
There are certain costs that are a natural part of owning a home, whether it's maintaining the lawn or servicing the heating and cooling system at the start of each season. It's repairs, however, that tend to catch homeowners off guard, and the scary thing is that they can come about when you'd least expect it. For example, you might hire a home inspector before you buy your house and get the all-clear, only to have your roof cave in a year later. At that point, you'll be on the hook for many thousands of dollars, and if you don't have money in the bank, you'll be up a creek without a paddle.
That's why you need strong emergency savings before you buy property -- ideally, enough to cover six months' worth of living expenses. If your savings level is low, or if you expect your down payment to mostly deplete your savings, then it pays to hold off and build that safety net before buying.
4. Do I see myself living here for at least three to five years?
There are certain expenses that come with buying a home -- namely, your closing costs. These typically equal 2% to 5% of your home's purchase price so that if you buy your property for $300,000, you could be on the hook for up to $15,000. Therefore, if you're not planning to stay in that home for more than a couple of years, you could lose money when the time comes to sell by failing to recoup your closing costs, unless prices happen to skyrocket in your area. It generally doesn't pay to buy a home if you're not planning to hang on to it for at least three years, and in some cases, that magic number is closer to five years, so think about where you see yourself in life before committing to that mortgage.
5. Am I buying for the right reasons?
Some people want to buy homes to plant roots, enjoy certain tax benefits, and remove the risks that come with renting. But buying a home because you feel that's what you're expected to do doesn't make sense.
There are plenty of scenarios in which renting is a smarter financial move than owning, and contrary to what some folks will tell you, a home isn't a straight-up investment -- think of it more like a hybrid investment/expense. Yes, you could make money if your property appreciates in value over time. On the other hand, the money you sink into that home is money you could otherwise invest or do other things with. There's nothing wrong with buying if you've come to the conclusion that it's something you want to do and it makes sense economically. But don't let people pressure you into becoming a homeowner -- unless, of course, they're volunteering to cover your mortgage payment as well.
Buying a home is a huge leap, and one that can pay off in the long run. Just be sure to think through the decision before doing something you might one day regret.