Buying a home is one of the largest financial decisions of our life; but how do you know when you’re ready to buy a home? Are you daydreaming about leaving your renter days behind, and ultimately owning a place of your own? Congrat! You’re about to embark on the joyful adventure of homeownership.
Before you hit the open house scene, let’s take a moment. Home ownership is a giant step. Yes, there are paint swatches and decisions about countertops in your future, but there are also down payments (DP), homeowner’s insurance, moving expenses, and many other costs to consider first. You need to be certain you’re truly prepared for this important financial decision.
Whether buying a condo or a three-bedroom ranch in the suburbs, you’ll be on the hook for immediate hefty costs, like a down payment and closing expenses. Homeowners also have ongoing expenses like utilities, maintenance, property taxes and potential renovation expenses. So, before you purchase a house, you have to assess your current and long-term financial picture. Do a status check of your emergency fund. Evaluation how stable your income is. Determine if your retirement savings is on the track.
How many job changes have you had in your whole life? Until you discover that one career you plan on keeping for a while, you may find that your next job may make a 2 hour commute or, worse, lead you to another city or state.
Unless you are in the flipping business, your house is a long term investment. Home prices, on average, appreciate around 3% per year. In other words, if you buy a home, and sell it within a year, or two, there’s a chance that the increased value won’t even cover the closing expenses you paid to buy the house.
I recommend planning on staying in your home for at least 5 years. If you aren’t ready to commit to that length of time yet, it’s all right. Just don’t jump on the “I need to buy a home because everyone else is” bandwagon.
You can always rent your home out, if you were to move out of the area. In fact, I’m a believer in turning prior homes into rentals; it’s how I got began investing in real estate. It takes hard work to be a landlord, however, and you have to know what you’re getting into, before diving into real estate investing.
How much you can afford to spend on a home?
Understand how much home you can afford means, having a clear idea of not only how large your monthly payments will be, but also closing expenses, insurance, and taxes. Compare how your current housing expenses relate to a new mortgage payment, whether you’re upgrading to a new house or a renter looking for your first home.
A best way of getting an idea of how much home you can afford is to use a mortgage calculator. By using this tool, you can input information, such as interest rates and down payment amounts, to see how your monthly payment would change. In turn, you’ll get a better idea of how much you feel cozy and comfortable paying.
Most financial experts recommend the 28/36 rule when determining affordability. This means that you ought to spend only 28% of your gross monthly income on mortgage payments, and 36% on your total debt.