The decision to buy a home, one of the biggest financial investments you’ll ever make, can be empowering and exciting.
While the 2013 National Housing Pulse Survey by the National Association of Realtors showed that 80 percent of consumers believe buying a home is a good financial decision, it’s not always easy to know when the time is right to take the leap.
Choosing to become a homeowner takes not only a financial commitment but also the emotional maturity to create a plan and a timeline that suits your lifestyle and your budget.
Here are some of the factors that should be part of your decision to rent or buy a home:
1. How Do Home Prices and Rents Compare in Your Community?
While it’s easy to compare rental prices, when you look at the cost of buying a home you need to include not only your mortgage principal and interest payments, but also homeowners insurance, property taxes and possibly a condominium or homeowner association fee. Sometimes it’s more costly to rent than to buy, particularly when mortgage rates are low. A rent-or-buy calculator can help with your evaluation. You should also look at the long-term wealth-building benefit of homeownership that comes with rising values and increasing your equity as you pay off your home loan. A 2010 Survey of Consumer Finances by the Federal Reserve showed that the median net worth for homeowners was 30 times higher than the median net worth of non-homeowners.
2. Are You Emotionally Ready To Buy A Home?
One of the benefits of renting an apartment is that you typically only commit to a lease for one year. If you’re buying a home, you’ll need to choose a neighborhood and a home where you want to live for the next several years while you recoup the cost of buying and build equity.
3. Do You Have a Five-Year Plan?
While no one knows with absolute certainty what will happen over the next five or 10 years, if your plans include switching careers or moving out of state, you’re probably better off renting. If you plan to start a family in the next few years, you should take that into consideration when developing a budget and choosing a home.
4. Are You Ready to Take Care of a Home?
Along with the joy of decorating your home and changing it to meet your needs, you need to budget at least 1 to 3 percent of the home price each year for repairs. Whether you can handle work yourself or need to hire contractors, you should be prepared for the time and expense of maintaining your property so that it can keep its value and avoid more costly repairs in the future.
5. Do You Have Any Savings?
While there are loan programs available to some borrowers with a down payment of 3.5 percent and sometimes less, you’ll need some cash for a deposit, a down payment, closing costs and an emergency fund when you buy a home.
6. What Does Your Credit Profile Look Like?
Request your free credit report at AnnualCreditReport.com to check for errors and any negative information on your report. For a small fee you can get your credit score. Lenders typically require a minimum credit score of 620 or 640 and higher for government-insured loan programs, but for the lowest mortgage rates you need a credit score of 740 or above.
7. What Can You Comfortably Afford to Spend on a Home?
You can have a free consultation with a mortgage lender to find out how much you can borrow to buy a home, but you should develop your own budget to determine how much you can spend on your housing payment while still being able to pay your other bills and save for the future.
8. Will Your Budget Accommodate the Type of Home You Want in Your Market?
You can do a quick search on realtor.com to see what properties are available in neighborhoods where you want to live, or consult a Realtor for a more in-depth consultation about your priorities and your local market. You may also want to take a homebuyer education class to learn more about the buying process.
Your answers to these questions and consultations with professionals such as a lender and a Realtor can help you make the right choice and determine if you’re ready to buy now or need to wait a little longer to become a homeowner.