I generally advocate buying a home, but sometimes it's just not the most practical thing to do. There are some situations when it's simply not the best idea for where you are in your life; and some cases where you'll be better served financially by renting a house or apartment. So how do you know if you're ready? Here are a few things to think about before committing to the time-consuming house hunting process.
How "stable" are you?
Is there a decent possibility of relocating within the next few years? Is your current job not as stable as you would like? Does your income vary from paycheck to paycheck? These are all good reasons to keep renting.
Buying a home should be a long-term commitment – at least five years or so. Don't plan on buying a house only to sell it in two or three years, as it's very hard to not lose money. Let's say you buy a house for $200,000. Even if the home rises in value, you'll have to overcome the $12,000 or more in commissions to a real estate agent, plus your closing costs, meaning you'll have to sell it at a nice "profit" just to break even.
Are you really ready to maintain a home?
A lot of people who have never owned a home don't really appreciate the sheer amount of upkeep involved. If you rent a house or apartment, chances are the landlord takes care of landscaping, painting the exterior, and other routine maintenance. And if something breaks, they probably come fix it.
Not so if you buy a house. Be prepared to commit a substantial amount of your time and money to maintaining your home. According to one report, a good rule of thumb is to expect maintenance costs to total 1% of the home's value each year. So, if your home is worth $200,000, plan on $2,000 in annual maintenance expenses, and it's probably a good idea to overestimate and set more aside to cover unforeseen expenses.
As far as the time commitment goes, it will vary depending on the type of property, age of the home, size of your yard, etc. But, if you're not ready to spend your Saturday afternoons doing yard work on a regular basis, maybe you're not quite ready for home ownership.
Sure you can buy a house with very little down, but should you?
Perhaps the most compelling reason to wait to buy a home is lack of cash. There are plenty of low down payment options available, but the extra costs may be to the point where you would be better off renting. Consider this example of the most common type of low down payment mortgage, the FHA loan, which requires 3.5% down.
On a traditional mortgage (20% down), you would pay about $811 in principal and interest for a $200,000 home on a 30-year mortgage at 4.5% interest. However, on an FHA loan with 3.5% down, principal and interest jumps to $978, and this doesn't include mortgage insurance, which is required with less than 20% down. Including mortgage insurance, your payment jumps to $1,195 per month, or almost 50% more than a traditional mortgage. Plus, FHA requires an up-front mortgage insurance payment of 1.75% of the total loan amount ($3,378 in this case).
There are some lenders who offer non-FHA loans with down payments as low as 5%, and while they still require mortgage insurance, the rates and upfront fees may be lower since its private mortgage insurance, not the FHA's. Still, when you add in taxes and insurance to the payment, a home could probably be rented for significantly less than the cost of ownership.
When to buy?
The best time to buy a home is when you can truly afford it, have the time to commit, and are going to be in the same place for the foreseeable future. Buying (and selling) a house can be a nerve-racking process, and it probably not something you want to do every few years anyway!
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