You don’t just buy a house without doing your homework first. It’s a major expense that can set you up for success or failure depending on how well-thought-out your decision is.
In the following article, we’ll be discussing some of the benefits of homeownership, the pitfalls, and how to know when you’re ready to take that step. Let’s start building.
Owning home accounts for about 12 percent of the gross domestic product for the US economy each year. When homeownership dips, economic strength tends to as well.
But moving beyond the general report card, homeownership has a number of personal benefits to the individual for family doing the purchasing. Some examples:
Not right away, of course. Most homebuyers commit to a 30-year fixed-rate mortgage before they truly own their home. But they begin building equity right away, and that allows them to have something in the place of the nothing that renting an apartment brings.
Homes are isolated from other lifestyles in a way that apartment living is not. Additionally, you tend to buy around people in the same socioeconomic condition as you.
This is less common with rentals. And while correlation may not necessarily be causation, police calls for service tend to be higher at apartment complexes than well-maintained neighborhoods.
Your home is your home. That means you get to dress it up and decorate it the way you want. (Within guidelines of your neighborhood ordinances, of course!)
The rental life comes with a lot of the same floorplans and uniformity. It can be depressing feeling like you’re surrounded by such a lack of variety.
Tax laws change every year. But for now, you can enjoy a generous tax break on the mortgage interest deduction if you’re under a 15- or 30-year mortgage.
You may never sell your house for a true profit when factoring in yearly maintenance requirements, interest, and the purchase price. But your home does retain value and as your equity builds into full ownership, that’s all yours when or if you should decide to sell.
Renting an apartment or duplex, on the other hand, means paying a mortgage payment amount every month and building no equity for yourself. Every penny you pay goes into the pocket of a landlord.
Now that we’ve covered the clear benefits of homeownership, it’s time to take a test. Let’s see if you’re ready.
Credit card debt consumes over 40 percent of Americans. The average debt per household is about $5,700. But among people who aren’t paying off their balances every month, the total is over $9,300.
What often keeps people in debt, and keeps the debt growing, is the exorbitant interest rates that come with most credit cards. Can’t pay it off at the end of the month? Have an APR of 25-30 percent!
Escaping credit card debt generally frees up hundreds of dollars in disposable income per month. It also makes lenders feel more comfortable about doing business with a first time home buyer.
Anything above 700 is going to make you a likely candidate for a home loan. Above 750 or 800? You’re a shoo-in!
Take a look at your credit rating through any of your available credit cards each month. These are called “soft pulls” and don’t go against your rating.
While they’re not as detailed as something you’d get from the major credit reporting agencies, they’re a barometer of your financial health. If this number stays consistently high and your debt-to-income ratio is low, then it’s time to think about homeownership!
Lenders are far more likely to take a chance on you if you have a sizable down payment. Twenty percent of the purchase price is ideal for your home loan.
Lower than that will not disqualify you. However, it could affect the amount of home you’re eligible to purchase because it indicates a shortage of disposable income.
How long have you been in your position? Do you foresee any job fluctuations in the coming year?
Make sure you’re answering these questions openly and honestly. The worst thing you can do is buy a home you can afford now while knowing a layoff is coming.
Locking yourself into a home mortgage that’s likely to end up in foreclosure will damage your credit rating. And that could make it more difficult for future larger purchases.
Got the job security? Great. Just get a raise to a new position?
Even better! Income increases, particularly merit increases as opposed to cost-of-living, are good indicators that the time is right for a home purchase.
Word to the wise, though. Don’t push the limits of what you can afford based on a raise. The home will require ongoing maintenance as well.
The cost of maintaining a home is anywhere from 1-4 percent of the purchase price per year. So, if you’ve purchased a $200,000 home, you’ll need to be able to save anywhere from $2,000-$8,000 per year (depending on the age and vulnerabilities of the home) to address maintenance costs.
If you can do that, you’re ready. If you can’t, consider reducing the cost of the home for purchase.
What are the goals you have in mind for your money? Is homeownership important to you? Or would you rather have money to go shopping, eat out every other day, and enjoy other assorted forms of entertainment?
Some people just aren’t keen on the idea of homeownership and the obligations that it involves. For these people, renting might be worth the loss of equity. But if you don’t like the idea of that money going into someone else’s pocket, it’s time to consider a purchase.
If you meet all seven of the criteria listed above, just buy a house already. The time is right. And before you go, make sure you check out more of our helpful Money and Home blog posts.