Maybe you still consider home ownership the fastest path to the â€œAmerican dream.â€ Maybe youâ€™re fed up with increasing rent rates and think paying a mortgage every month could actually be cheaper. Maybe you think buying a house is the best way to get enough room for your growing family or your best (furry) friend.
There are many wonderful reasons to take on home ownership, but just as many to avoid it â€¦ at least for now. Trying to decide whether youâ€™re ready to buy a house? If any of these seven bullets apply to you, you should wait before putting in an offer:
You Donâ€™t Have Enough Saved for a Down Payment
Technically you can purchase a home with much less than the suggested 20 percent down. But you shouldnâ€™t. Primarily because a down payment of less than 20 percent requires the buyer to also pay private mortgage insurance, or PMI. PMI is an additional cost that protects the lender in case your mortgage falls into foreclosure. Depending on your credit score and loan amount, PMI usually ranges from 0.5 percent to 1 percent of your mortgage value. Youâ€™ll pay toward it every month until your equity reaches 20 percent. Thatâ€™s a lot of money that would go straight to equity if you saved it up beforehand. Besides, proving to yourself that youâ€™re able to save for a full down payment â€“ and getting in the habit of living below your means â€“ is good preparation for home ownership.
You Have a so-so Credit Score
And if you have a so-so credit score, youâ€™ll get a so-so interest rate on your mortgage. The difference between 4 percent and 4.25 percent interest might not sound like much, but over a 30-year loan, it can really add up. â€œTypically, when you have a score of 700-plus, youâ€™ll get a pretty good interest rate,â€ David Lin, former director of risk management for consumer credit at Barclays and Citibank.Â Luckily, there are plenty of actionable ways to improve your credit score before applying for a mortgage.
Youâ€™re Only Considering the Cost of the Mortgage
New homeowners often underestimate the costs associated with buying. Even if you can comfortably afford the mortgage, consider all the other expenses that come with buying a house. Moving, furnishing a bigger residence, increased utility bills, routine home maintenance, home emergencies, higher insurance rates, and one-off purchases can really pile up. Think about it â€¦ does your potential new house have a yard? Within the first year, youâ€™re probably going to need a lawn mower, a ladder, hoses, a sprinkler â€¦ you get the idea. Make sure you budget for all the other ownership costs when youâ€™re thinking about how much house you can afford.
Your Other Savings Accounts Arenâ€™t Fully Funded
In addition to the emergency savings and monthly budget padding youâ€™ll need to stay afloat in your new house, you need to be contributing to longer-term savings before buying a house. If your retirement accounts arenâ€™t adequately funded, make that a priority before sinking your money into a house.
You Want to Buy Because You Think Itâ€™s a Good Financial Investment
Buying a house can be a very good emotional investment â€“ living in a house you own often means stability, family memories, and a feeling of having â€œmade it.â€ Occasionally, people can make a real estate purchase at just the right time and get an enviable return on their investment. But not often. â€œIf you look at the history of the housing market, it hasnâ€™t been a good provider of capital gains. It is a provider of housing services,â€ says Yale economist and Nobel prize winner Robert Shiller. â€œCapital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.â€ If youâ€™re looking to buy just to have somewhere to put your money, it may be better invested elsewhere.
You Might Need (or Want) to Move Again Soon
Most experts recommend only buying a house if youâ€™re planning to stay there for a while. Take into consideration realtor fees, moving costs, the amount of equity youâ€™re likely to gain (or lose) before moving again, and the potential for capital gains tax. The break-even point is different for everyone , but many experts suggest only buying if youâ€™re planning to own for at least five years.
You Like the Convenience of Renting
Donâ€™t let anyone try to convince you you canâ€™t be successful without owning a home. Itâ€™s simply not true â€“ especially considering todayâ€™s rental opportunities and real estate markets. If you love to travel, work long hours, live alone, arenâ€™t in the physical or mental health to keep up with home maintenance, love the commotion of apartment living in a city, or just plain donâ€™t want to take on another responsibility, thatâ€™s okay. Love your life, create a space for yourself (even if that space is your camera and a suitcase) and never feel bad for not trying to keep up with the Joneses.
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