Are you ready to buy a home? Lots of renters are pondering that question right now. But even if you're sure your budget and credit are up to the task, you may still be hesitant to take the leap.
To be sure, people are more hesitant about buying a home than they were a decade ago. What was widely viewed as a can't-miss investment back then is today regarded, appropriately, as a big commitment.
Overall though, most people still aspire to own their own home. Fannie Mae surveys consistently find that about three-fifths of young renters think homeownership makes more sense than renting. Unfortunately, many also think it's beyond their grasp.
If you think you'd like to buy a home but aren't quite sure if it's the right move for you at this time, the following six questions can clarify the issue for you.
1 - Can you afford it?
Being able to afford a home is about more than just being able to cover the mortgage payments every month. First of all, your mortgage payment will include more than just the cost of your home loan - your homeowners insurance and property tax payments will be included in there as well. Those can easily make up 20-25 percent of your monthly payment, though the exact costs will vary depending on where you live.
Lenders generally want to see you spending no more than 28 percent of your gross income on your mortgage payments - including taxes and insurance - and 36 percent on debt of all kinds - credit cards, auto loans, etc. Beyond that, you need to ask if you're comfortable spending that much of your income on housing. Would it force you to cut back on saving for retirement or a children's college fund, or would it force you to cut back on other things?
You also need to take into account ongoing maintenance costs. Although these are unpredictable, a good rule of thumb is about 1 percent of the cost of the home per year will be required to keep it in shape.
2 - Do you have the savings?
You need to have savings for two reasons - the down payment and unexpected emergencies. Down payments can be anywhere from 3.5-20 percent of the price of the home for most first-time buyers. With the higher figure, you'll avoid the need to pay for mortgage insurance, which can be costly.
The lower down payment is available on FHA loans, but the upfront fees and annual mortgage insurance tends to be more costly on those. Many first-time buyers find a 5-10 percent down payment to be a happy medium.
It's also a very good idea to have a reserve of at least six months savings to cope with emergencies - such as if you lose your job or can't work due to a medical situation or other circumstances. You may need to balance your down payment against your emergency fund - that is, go with a bigger down payment to reduce loan costs and the total amount borrowed, or a smaller down payment in order to maintain a larger emergency fund?
3 - Do you plan to stay put?
Buying a home generally doesn't make sense unless you plan to live there for five to seven years or longer. That's because it usually takes that long to recover the closing costs involved in buying a home and taking out a mortgage compared to renting a property over the same period of time.
Closing costs usually run from 3-6 percent of the cost of the home. So, using the lower figure, 3 percent of a $200,000 home would be $6,000. Spread over five years, that works out to an average of $100 a month. But if you move after only 2 ½ years, it works out to $200 a month.
Because of interest costs, it also takes about five years before you start building significant equity in a home. The way amortization (the loan repayment schedule) works, the vast majority of your mortgage payments go toward interest at the start. It takes about five to seven years before you really start building equity as your interest payments shrink.
Of course, if renting is relatively expensive compared to home ownership in your area, it could be worthwhile to buy for a period of just a few years.
4 - Is your income dependable?
It's one thing to be able to afford a home on your current income. It's quite another to be confident that you'll still be able to afford it on your income of several years down the road.
Buying a home is a long-term commitment. While the general assumption has long been that our incomes will continue to rise over the course of our careers, recent experience has shown that is not always the case. Small business owners and those who work on commission often see their earnings fall during an economic downturn. And those in vulnerable industries can see their jobs wiped out entirely.
Another thing to consider is how confident are you that you want to stay in your current job or field? Having a house payment to cover could limit your options if you want to head in a new direction a few years from now.
Buying a home is for those who are established in their line of work and are confident they navigate any unexpected obstacles that may arise. But if you don't have a strong sense of certainty about your financial future, it may be better to keep renting until things are on a firmer footing.
5 - Do you know the market?
Have you been looking into buying a home for awhile? Have you been checking the listings, seeing what prices are, have a general understanding of how various neighborhoods compare? Do you know what to look for and look out for when evaluating a home? Can you tour a home, hear the asking price and get an immediate sense of whether it's a good deal or not? Do you know how fast homes are selling in your area?
This is a key factor. Once you have a good feel for what homes cost and what you should be able to get for your money, you're in a good position to know what kind of offer you should make for a given property and be able to get a good value in the final deal.
6 - Does it fit your lifestyle?
This is something many people overlook. Do you really want to be a homeowner? Do you want to be responsible for your own repairs, for calling the plumber when a pipe breaks at 2 am or wading down there to fix it yourself? Do you want to spend a hour or so each week during the warm months mowing the lawn? What about clearing leaves in the fall or the driveway when it snows? Are you ready to give up other activities for the time every week most homeowners spend on minor maintenance tasks?
On the other hand, do you like the idea of having your own space? Of building equity? Of being able to modify your residence as you like without a landlord's approval? Of having room for kids to play, a dog to run or perhaps do a little gardening?
If you find you value your free time but still like the idea of owning your own place, a condominium can be a good middle ground. The exterior upkeep and maintenance of common areas and shared systems are the responsibility of the management firm, while you have authority over the inside of your own unit. However, there will be certain restrictions and limitations that you wouldn't face as a homeowner.