There comes a point when it feels like everyone you know is buying a home. Right? For me, it almost happened overnight when all of a sudden everyone I knew was putting down roots and making that big purchase. It took me a few more years to feel ready (and to be honest, I didn’t really feel totally ready).
Knowing when it’s the right time to buy a house can be confusing. Sometimes, it can be a smart thing to do, and other times, it really isn’t. But there are a few questions you can ask yourself to figure out if buying a house, condo, or townhome is something you should look at right now.
How long do you plan on being there?
Buying a home, as you know, is expensive! One of the great things about renting is that it gives you the flexibility to move easily if you change your job, want to try out a new neighborhood, or change who you live with. When you start looking at whether you should buy or rent, try to have an idea of how long you plan to live in the home. In general, buying tends to be a better idea if you are planning to own the home for a while—there are upfront fees that are paid when you purchase a house, and if you stay a while, the cost of those fees can be spread out over many years.
What if you need to stay longer?
The old theory used to be, buy a starter home, let it appreciate, and then trade it in for a bigger and better home. But when you’re buying, you should think about what happens if you can’t sell and trade up in a few years. Will you be OK staying in that spot? Are you going to outgrow it quickly? That’s not to say you shouldn’t buy a small home to start with, but just know that there is always a chance you could end up staying longer than you intend. Make sure you’re buying a spot you won’t be desperate to leave.
Do you have 20% down (and more)?
There are a lot of lenders out there who are ready to give you a loan with less than 20% down, but be ready to pay more. To make up for the extra risk associated with your loan, they will charge you private mortgage insurance, or PMI. The cost of PMI is usually between .5% and 1% of the total loan amount each year. So if you have a $300,000 mortgage, you could potentially be spending $3,000 a year on mortgage insurance.
You’ll be required to pay this PMI until your loan to value amount (the mortgage as a percentage of the value) is 80%. So if you borrow $250,000 to buy a house that is worth $300,000, your loan to value is 83% and you would need to pay PMI ($250,000/$300,000). Once you’ve paid your loan amount down to $240,000 (and your loan to value is 80%) you would be able to stop making PMI payments.
And just to make sure you know exactly what you need to save up for, there are closing costs when you buy a home. Closing costs can range from 2-5% of the purchase price of the home. So if you’ve just bought yourself a $300,000 home, you would likely pay $6,000 – $15,000 when you close on the mortgage.
Can you afford repairs?
One thing that caught me off guard was the cost of repairs and maintenance. Everyone always emphasizes that you should make sure you can afford the mortgage, but the cost of repairs and maintenance are no joke! While some houses may be more costly to upkeep than others, make sure you have an extra buffer in your savings and your monthly income for unexpected repairs that come up. Plan to spend 1-4% of the cost of the home each year in maintenance. So if your home is worth $300,000, you should expect to pay $3,000 – $12,000 each year in maintenance.
What’s the opportunity cost?
I’m sure we’ve all heard people say that if you keep paying rent, you’re just making your landlord rich, and you’re missing out on owning an asset. This is where the idea of the opportunity cost comes in.
An opportunity cost is the loss of potential gain when one opportunity is chosen over another. So if you spend money on a down payment, the mortgage interest, and maintenance, what is the opportunity cost here? Could you make more money by simply investing that money elsewhere? Or do you make more money by purchasing a home and holding onto it while it appreciates?
I know, I know. That’s a big question: Will you make more money by investing it in property or another place? To help you work through the opportunity cost, NY Times published a calculator to work out the opportunity costs in your exact situation. Of course nothing is certain, but this is a really robust calculator to help you answer that question.
Do you really want a home?
At the end of the day, if you feel comfortable that you can afford to purchase property, you really should be asking yourself if you really want to. Some people may absolutely love the idea of taking a space and making it their own (that’s me!). Others may not want to bother with the maintenance or might not want to be tied down to staying in one location for the long haul.
Whatever the situation is, reflect on whether you really want to do this. It’s the largest purchase most people make, and doing it for the wrong reasons will add unneeded stress.