Whether you’re simply tired of renting, planning a family or your financial situation has changed, before you jump the gun and sign on the dotted line for your dream home, take a hard look at your finances.
Is it better to rent or own?
There can be more upfront costs to owning a home than apparent at first glance. You’re looking at an initial down payment, closing costs, property taxes, homeowners insurance and a large assortment of fees.
If you think there’s a possibility that you may lose your job, or you are considering a career change, now may not be the time for a new home. The monthly payment may not be an obstacle, but renting removes the chance of unexpected costs that can commonly crop up when buying and maintaining a home.
A common argument against renting contends that the amount of rent paid over the course of 5, 10 or even 15 years could pay off the bulk of a mortgage. But to argue this you have to look at the home you are buying versus the property you are renting. How much will your home cost you to maintain?
On the other hand, over the life of your mortgage, your interest and principle payment will freeze while rent is subject to inflation. Under normal circumstances, experts agree that owning outweighs renting if you expect to keep your home past a break-even period of four or five years. Of course, the more your home costs, the higher your break-even period.
Your house is a home, not an investment.
Before the housing bust, conventional wisdom had buying a home as a sure investment. Engaging in bidding wars on a home was common, and real estate agents couldn’t close fast enough. Now, the reality is entirely different. Distressed homes – homes selling for less than what they’re worth – and foreclosures clog the market, credit requirements are tightened and lenders are suitably wary.
According to Yale economist Robert J. Shiller, U.S. homes tend to appreciate at approximately 1% a year above the inflation rate. Stocks, measured by the Standard & Poor’s 500, tend to beat inflation by 6 or 7 points.
There are some tax benefits to buying a home, as your mortgage interest is generally deductable. For more information on mortgage taxes be sure to check out the most rules and regulations as published by the IRS.
Are your finances ready?
Here’s a quick list to check off before you move forward with your decision.
- Be sure to have your credit history in order. You’ll want to grab free copies of your credit report and fix any errors you may find. Work on clearing up any issues a few months in advance.
- Don’t buy a home you can’t afford. A common rule of thumb is that you can buy a house two-in-one-half times your annual salary. Try out our mortgage calculator to find out what mortgage payment you can comfortably afford.
- Aim for a 20% down payment. While you can still find lenders with an offering of less than 20% as a down payment, you may encounter more difficulties and a higher interest rate. Save as much as you can for as long as possible in order to have a sizable down payment.
- Before house hunting, get pre-approved. You’ll save a lot of valuable time and energy by avoiding homes you can’t afford.