There are many reasons to buy your own home and stop renting. But there are many factors to consider before deciding to make the plunge into home ownership. It worth considering this question carefully; one of the reasons for the last financial downturn was too many people had mortgage they could not afford. When millions could not pay anymore as the economy declined, the entire world economy suffered. The U.S, economy and housing markets have rebounded since then and first time home loan programs have emerged with new niches and attractive pricing.
To ensure you are ready as a renter to buy a home this year, here are some essential questions to ask:
#1 Is Your Financial House in Order?
If you are renting right now, you should not have difficulty paying your bills. You also should be able to save at least 10% of your take home pay every month. Also, you should be able to put down at least 10% on a down payment. Keep in mind if you do not put down 20%, you will have to pay for mortgage insurance; this is an additional cost of at least $100 per month that you pay until you have 20% equity.
It is possible today to get a mortgage with as little as a 3.5% down payment, but many financial experts questions whether you are ready to buy a home if you do not have a 10% down payment on hand. Having enough money for a serious down payment shows a level of discipline and financial seriousness that not everyone has.
#2 Are You Going to Stay Put?
In the old days, it was said buying was better than renting if you were going to stay in the home for three to five years. But many financial planners think these days, the number is more like seven years. Today, buying a home costs more and closing costs are substantial – usually 2-4% of the loan amount. It can take as long as seven years to break even in terms of what you paid out to get the mortgage.
Other costs related to buying a home are furniture, curtains, paint and the costs of moving. Also, when you sell the home, you can lose up to 6% on the sale. Given typical home appreciation of 3% or so per year, you will need to hang in there for at least five years before you sell.
Just as key as the financials, you need to know if you are in the place in life where you are ready to tie yourself down to a certain area in a certain city.
#3 What Is Your After Tax Cost of Ownership?
If you have enough money for the down payment, can pay your bills and are ready to live in one place for at least five or seven years, you should now get an idea of what you can expect to spend each month.
Get a rough idea by plugging in your home price minus down payment into a mortgage calculator online. Most calculators will allow you to put in home owners insurance and property taxes too. If you live in a more expensive area with more real estate taxes and insurance, this will cost you more each month. Keep in mind the newly passed tax reforms will limit the amount of mortgage interest and real estate taxes you can write off. This will affect your financial calculations in more expensive areas of the country when you decide if renting or buying is for you.
After the new laws were passed, you only can write off mortgage interest on a first mortgage for homes up to $750,000, and you only can write off property taxes up to $10,000 per year. Many homes in expensive parts of California, for example, will quickly bump up against these limits.
Also, note that a small part of the mortgage you pay monthly will pay off principal. This is a forced savings method and is one of the major benefits of home ownership. You are slowly building wealth in your own home. Also, when you sell, you can enjoy up to a $500,000 gain as a couple before you owe any capital gains tax.
#4 What Are Your Hidden Expenses?
There are many costs of home ownership you may not consider at first. Most buyers most pay home owner’s association fees each year. In expensive neighborhoods, these can be substantial. This can be especially taxing for those who buy condos or townhouses.
Most homeowners need to budget for regular maintenance costs, including roof, water heaters, paint, and general maintenance.
#5 What Is Going on In Your Market?
Real estate is often discussed in national terms, but so much of what matters in the rent vs. buy discussion is based upon your local real estate market. Some areas have lower home prices and higher rental prices that make it better to buy; expensive markets with high home prices may make renting make more sense.
The last thing to consider about buying a home is you usually do not need to worry about your mortgage payment changing. Most people lock in their rate for 15 or 30 years. But rents can go up each year, sometimes a lot. So bear that in mind as you make your decision.