Buying a home has been part of the “American Dream” for decades but changing demographics and an uncertain economy have pushed home ownership out of reach for many families while others have just decided it’s not right for them.
Your first home – whether it’s a sprawling farm house or a tiny condo – is one of the biggest and most complex financial decisions you will ever make so it’s important to make sure the time is right for you. Answering these questions will help you decide if you’re ready.
1. Can you afford it?
It seems like an obvious question but it’s easy to get caught up in the home ownership hype. Do you have a down payment of at least 15% of the average purchase price in the area where you want to buy? Has a lending institution already pre-approved you for a mortgage? If you haven’t taken this step yet, you may want to check your credit report and clear up any red flags. You can check it for free once a year at AnnualCreditReport.com.
2. Have you considered all the costs?
Don’t just compare your monthly rent payment with your anticipated mortgage premium. Buying a home comes with hefty closing costs such as legal fees, title insurance, home inspections and appraisals, taxes, moving costs, small repairs or renovations. Utility costs that are covered by your landlord will now be on your plate. Finally, have you budgeted for unexpected costs like a new roof, a replacement furnace, outdated electrical or old plumbing. Annual repair and maintenance costs add up to 1 to 3% of your home’s value.¹
3. Are you handy with a wrench?
When the furnace fails in an apartment, you put on a sweater and call the landlord. In your own home, you’ll need to roll up your sleeves or pay someone else to fix things. Throughout your time in the home, you will spend a lot of money replacing appliances, mending fences, shoveling snow and mowing lawns. Does this fit into your desired lifestyle and budget?
4. Are you disciplined about saving?
Some say renting is “throwing away money” but a renter who takes the extra money they would spend on a home and puts it into a high-yield investment could actually come out ahead. The question is, can you be that disciplined each month? If not, you may benefit from the forced savings aspect of home ownership.
5. Are you prepared to reduce your standard of living?
You may love your spacious apartment on a tree-lined, downtown street but will you also love a dated bungalow in the suburbs? Can you afford to buy where you currently rent? If your new home is a “fixer-upper”, can you live with the orange shag carpet or pink bathtub while you save for renovations? And, are you willing to forego vacations and dinners out in place of shingles or new hardwood floors? These lifestyle considerations can’t be overlooked when you’re making your decision.
6. Do you have an emergency plan?
If you or your spouse lose your job, even temporarily, will you still be able to cover the mortgage and carrying costs of your home? Are you prepared for an increase in your mortgage interest rate? Buying a home is also a good time to consider a term life insurance product which may enable you to stay in your home in the event of the loss of a loved one.
7. Are you ready to settle down?
The benefits of home ownership accrue over time and will be lost if you have to move or sell your home in a few years so it’s important to think about your plans for the future. Are you thinking about graduate school? If you plan to have children, will you or your spouse stay home to look after them or will your dual income cover childcare costs? If you’re unsure about any of these things, you may want to look hard at your cash flow to help determine if now really is the best time. Regardless of what the “experts” tell you, the right time to buy a home is when it’s right for you, your life stage and your lifestyle.