Are you ready to buy a home?
The last time you mailed your monthly rent check, did you find yourself wishing that you could put that money toward investing in a home? Ownership does offer certain advantages and fulfills many peoples’ dreams. But before you buy, you’ll want to ask yourself if ownership suits you, whether it’s the right step right now, and whether you can afford it.
Does ownership suit you?
Ask yourself these lifestyle questions.
- Will career advancement require you to move?
Although home ownership won’t completely tie you down, it adds obvious complications if you must move to take a new job.
- Will you miss the benefits of renting, and are you ready to take on the obligations of ownership?
Maintaining a home and a yard take time out of every week. Fixing the dripping faucet and the clattering furnace become yours to manage. Would you rather rent and be able to call the landlord? Will you miss apartment amenities such as a workout room or hot tub? How about apartment security features including locking mailboxes, secure parking, and a secure entry system?
- Owning a home offers certain benefits. How important are the following to you?
- Having a yard/garden
- The ability to decorate and landscape your way
- Having a garage, shed, or workshop where you can store belongings or pursue hobbies such as woodworking
- Living in a neighborhood
- Increasing your living space
Is now the time to buy?
You may feel that you should buy now because the market may never be better than it is now. Depending on the area, that may be true. But historically, most markets go up and down, favoring buyers, then later, sellers. If you feel pressure for this reason, remember that the market will probably swing back in your favor in the future. Your agent may be able to advise you regarding the market in your area.
Mortgage rates historically have also gone up and down, sometimes within relatively short periods. Consider the big picture. Ask yourself whether your current resources allow you to get the kind of home and loan you want at this time.
Can you afford it?
The outlay of cash required to buy a home can be quite high. There also may be secondary costs that come with making the transition from renting to owning. If you’re not sitting on a huge nest egg, though, and still want to buy, there still may be options.
How much should you save in order to cover a down payment and closing costs?
- Down Payment. The amount you need for a down payment varies depending on how much money you have to contribute and the type of financing you obtain. Some lenders want you to put down as much as 20%. On the other hand, you may qualify for 0% down financing, requiring you to cover only closing costs and incidentals. 5% down (the minimum many lenders will accept) on a $100,000 house is $5,000. Don’t have that much saved? You could consider borrowing the down payment from a relative or another lender, but that means more money to pay back and greater overall cost because you pay interest on the down payment too. You may be better off waiting until you have enough tucked away for a down payment.
- Closing Costs typically range from 3 to 6% of the home sale price. On a $100,000 house, that’s $3,000 to $6,000.
- Private Mortgage Insurance (PMI). If you put down a minimum down payment, the lender considers it a risk to give you a loan. But they’re more willing to loan you money if you pay for insurance that covers the lender against your default on the loan. The monthly PMI fee depends on how much coverage the lender requires and what the PMI issuer charges. If you get a conventional loan, you can eventually get rid of PMI.
- Property Taxes. This amount depends on local property tax rates. Check with the local tax assessor or your real estate agent.
- Homeowners Insurance. The amount varies depending on a number of factors including the amount of coverage, deductible, and so on. An agent will be able to give you a rate quote.
You also may encounter secondary costs. Take these into account as you determine the cost of making the transition from renting to owning.
Figure in the cost of purchasing appliances and furnishings that you do not already own if they are not included with the home.
What stays with the home varies from one seller to the next, but typically, the stove stays while the refrigerator, washer, and dryer do not. Often, a built-in dishwasher stays with the home while a portable may not.
If you don’t have these things, decide whether you need them right away and can afford them. If you plan to buy these items on credit, first find out if payments will fit your new budget.
You can expect to spend some money on maintenance and repair. You may need to obtain lawn and garden tools, a small tool kit, and perhaps a ladder. Be prepared for the unexpected, too. Even the best home inspector may not be able to foresee your water heater breaking down two weeks after you sign papers. A little money set aside for such emergencies is a good thing.
Financial advantages of ownership
Owning a home isn’t all about expenses and obligations. Ownership offers financial benefits too, including these.
- A way to save for the future. Each time you write a mortgage payment check, you gain a little more ownership interest in the home (called equity). Like savings, equity is the amount you could convert to cash if you were to sell the home.
- Increased value. Like any good investment, you are in a favorable position if you buy low now to sell high later. You stand a good chance that your home will increase in value the longer you own it (depending on the local market), and that’s like money in your pocket.