Rising rental costs, low mortgage rates, financial benefits, and the ability to customize your living space are just a few of the many reasons first-time homebuyers want to take the plunge into homeownership. Regardless, buying is a big commitment and it’s crucial to make sure it’s the right lifestyle and financial choice for you. Here are a few questions to ask yourself first.
How Long Do You Plan to Stay Put?
Though your first home will not likely be your forever home, the longer you stay, the better. Why? For starters, closing costs. These fees can amount to anywhere between 3 to 5 percent of your home’s purchase price on average. This means that if you plan to hop from home to home, you’ll be forking out several thousand dollars just to close on the deal.
Secondly, equity. Mortgages are on an amortization schedule, which means that the majority of your payments early on will be going toward interest rather than principal. So if you plan to sell within a few years of buying your home, you won’t have made much of a dent on your principal balance.
Regardless, life is unexpected and you can’t always predict where a job opportunity or family circumstance will take you in the future. The rule of thumb is that buying a home is likely a good choice for you if you think you can make a home and location, for that matter, work for at least five years.
How Do Rent and Owning Stack Up Financially In Your Area?
While your rent vs. buy scenario is heavily influenced by your location’s housing market, Trulia’s most recent rent vs. buy study found that purchasing a home is nearly 38 percent cheaper than renting on a national basis. Even in the nation’s largest 100 metros, it’s cheaper to buy in all of them.
While some renters are turned away from homeownership due to the recurring costs of maintenance, renovations, property taxes and homeowner's insurance, this 7-year buying versus renting comparison shows how a homebuyer comes out ahead.
But overall, you should be honest with yourself about an affordable mortgage payment if homeownership is the path you choose to embark on. Remember to include the projected costs of utilities (which will likely be higher if you’re moving from an apartment), routine maintenance and rainy day savings, which will be needed for unexpected costs like replacing a furnace.
What Do Your Finances Look Like?
If you’re looking to purchase a home, the first step you should take is to meet with a mortgage banker. They’ll look over your finances as a whole, as well as your credit score and income to determine which loan type would be a good fit and what you could be approved to borrow. Though you don’t need a 20 percent down payment in most cases, knowing and understanding the projected amount of money you’ll need for closing costs and down payment is vital to your homebuying journey and home affordability.
What Does Your Savings Account Look Like?
Down payment and closing costs aside, many first-time homeowners forget about the costs of home maintenance, which isn’t always predictable. Though you don’t need to have a ton in savings after paying for closing costs and your down payment, a financial cushion is a smart thing to have for any homebuyer. A good suggestion for home maintenance savings is setting aside 1 percent of your home’s purchase price annually for things that come up like servicing your air conditioner or replacing an appliance.
Are You Ready for More Responsibility?
How do you feel about weekends spent mowing the lawn or replacing a faucet? When you own, the perks of a landlord taking care of maintenance and repairs go away.
Buying a home is only part of the homeownership journey – you’ll need to dedicate some time and money to maintain it, as well. Those things set aside; there are some lower-maintenance home options like condos or townhomes if regular upkeep is not your thing.
To learn more about your loan options, credit score and the home financing experience as a whole, download our Mortgage 101 Handbook.