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These 5 Questions Will Tell You If You’re Ready to Buy a Home

There are many good reasons to own the roof over your head, but there are many tradeoffs as well. Here’s how to decide if the time is right for you.

No doubt, there are plenty of good reasons to own the roof over your head, both emotional and financial. But there are many trade-offs as well. With the added control comes a laundry list of responsibilities. With the stability of staying put comes a loss of flexibility. And with the opportunity to build equity comes the risk of losing money.

In fact, homeownership in America is at its lowest rate since 1995. It was recently just 65%, according to the Census Bureau, down from 69% in 2004. Although tighter lending standards, economic uncertainty, and in many cities high home prices are partly to blame, many would-be buyers are staying on the sidelines by choice. Which often makes sense.

Here are five questions to ask before you make the leap into ownership.

1) Is my financial house in order?

If you’re already struggling to pay your bills, buying a home will only compound your money woes. Ideally, you’ve saved at least 10% for a down payment – keep in mind you’ll have to pay private mortgage insurance if your down payment is less than 20% — and that’s in addition to saving for retirement and building an emergency fund.

2) Am I sticking around for a while?

The old rule of thumb was that buying made sense if you planned to stay put for at least three to five years. These days, many financial planners are recommending an even longer window. “I say at least seven years because the transaction costs of buying a home are signification,” notes Vento.

When you buy, there are the costs of securing the loan, closing on the sale and moving, not to mention all of the miscellaneous items (fresh paint, new curtains) that can easily add up to thousands of dollars. When it’s time to sell, you’ll lose a big chunk – 6% is typical – in real estate sales commissions. Given the historical rate of home price appreciation, says Vento, it will likely take at least five years to break even when all is said and done.

3) What is the after-tax cost of owning?

If you’re on solid financial ground and ready to make a longer-term commitment, the next step is to get a realistic estimate of what you can expect to spend, and how that breaks down monthly.

4) And what are the hidden expenses?

Most single-family home owners will need to budget – money and time – for routine maintenance costs, as well as big-ticket projects, such as paint jobs and new roofs.

5) What’s happening in my market?

Economists may talk about real estate in national terms, but the market varies greatly from one city to the next, even from one neighborhood to the next. Although home prices in most U.S. cities are still relatively affordable, some cities (i.e. San Francisco) have seen their home prices bounce back to near boom-time highs.

Then again, in many cities, the rental market is as competitive, if not more competitive.

Therein lies one big benefit of owning the roof over your head: Assuming you plan to stay put for a while and lock in a fixed-rate mortgage, your costs should remain relatively stable from year to year; in time they’ll actually go down. For many buyers, that’s all the reason they need to get off the fence and into the housing market.