Now that my husband and I have been living in our house for a little over a month, we’re 95% unpacked and I’m 100% happy here. Every day I wake up excited to be in a house we picked together, our first house as a married couple. Also, having a pool in 110 degree weather has been awesome – swimming almost every day! I’m so thrilled I should be extolling the virtues of home ownership to every Millennial I know, right?
Not quite. In fact, if I weren’t married, I’d probably still be happily renting. Am I crazy?! Aren’t homes an investment? Isn’t it nice to own something and put down roots? It depends. Unfortunately, you can’t just go on someone else’s recommendation about whether or not you should buy a home, and neither can you go on a “feeling” of wanting to buy a house. To truly determine if you’re ready for home-ownership, check out these following questions.
How Much Can You Put Down?
In general, it’s recommended that you have a down payment of at least 20% before purchasing a home. Even for a $100,000 home, that would mean you need $20,000 saved up – pretty difficult for Millennials without any equity or significant savings. Also, unless you live in a smaller, affordable city, I don’t know any major city (i.e. a place with lots of job options) that has homes in safe neighborhoods for $100,000. So that would mean you need more than $20,000!
However, you don’t necessarily have to have 20% saved up for a down payment. If your credit is good and lenders are willing to work with you, you can put down less than 20%, but you will have to pay private mortgage insurance. This adds to your monthly mortgage amount every month, so be careful to read carefully through any documents and make sure you understand PMI’s impact on your budget.
How Much Do You Have in Your Emergency Savings?
Buying a home is expensive. That $20,000 down payment for a $100,000 home I quoted above? That’s not taking into account closing costs associated with buying a new home, plus any repairs that need to be done after you buy the home.
Our home needed significant work, and some work we didn’t even know it needed until after we moved in. While we had a big emergency savings to start, several unexpected and large expenses hit us, which decimated our savings. We were lucky because we had such a savings, and you may get lucky and not need to use as much of your savings, but it’s always better to be safe than sorry. Making sure you have a healthy (i.e. several months if not a year’s worth of savings) emergency savings before moving forward with purchasing a house is imperative!
What Are Your Short Term Plans?
Moving away from the budgeting part of buying a home, what are your short term plans? If you like to travel, want to move around a lot before “settling down”, or are considering jobs in other cities, it really might not make sense for you to buy a house.
Buying a house is a rather long-term commitment – no one is saying you have to live in your house for 20 years, but it’s generally recommended you stay in your house for at least 3 years before considering selling it. Of course, if you live in a crazy market (like Denver) where prices are extremely high year-after-year, you might want to sell it after a year or two and make a tidy profit 🙂
In general, though, you will need to live in the house you buy for several years. So if you’re planning on making a big move or tend to get itchy feet, it might not make sense for you to buy a home right now.
How Do You Feel About Neighbors – Seriously
I thought this was a ridiculous question when our realtor asked it. After all, I’d lived in apartments for years and had almost a dozen roommates over the years, and everything more or less worked out fine. Wouldn’t living in a house be even better than living in an apartment?
Not quite… it turns out, while apartment turn over can be high among neighbors, plus you can break leases or move out once you’ve had enough of your neighbors, you can’t do that when you buy a house. That annoying guy across the street with the loud motorcycles? He’s going to be just as annoying a year from now, and you’re stuck in a home that you have to keep for another 2 years to break even (see above).
When thinking about buying your home, consider the neighborhood, how far your neighbors are from you, what type of activities your HOA or city prohibits, and try to ask current neighbors about the neighborhood.
Do the Calculations
Long term, it usually is better to buy than to rent. However, if you’re trying to decide if buying a house right now is a good idea for you, follow this simple calculation from our own Harry:
If you’re looking for a rule of thumb, my advice is to compare the cost of a mortgage+property tax+insurance+HOA to the price you pay for rent. Conservatively estimate that your tax savings and principal addition will be canceled out by expenses(there are lots of expenses that most new homeowners fail to consider). If the numbers are equal, than it’s obviously a better deal to rent.
For Phoenix, rent in neighborhoods that worked for us (in terms of location and safety) were easily $1,200 and above. Everything included (mortgage, taxes, HOA), we pay less than $1,400 a month – and we own our home. While it worked for us, it might not work for you, which is why it’s important to really sit down and calculate what you pay renting and what you might pay monthly to own a home.
Zillow does a lot of this calculating for you – when you find a home you like for sale on Zillow, scroll down to the word “Mortgage” and Zillow will help you calculate your estimated monthly payment, depending on the size of your down payment. We found it to be pretty spot on for us.
If you answered positively to these questions, you probably are in the right place to consider purchasing your first home. My answer, if I were still single, would be “no” to most of these questions, especially because I love to move states, but buying right at this stage in our life right now makes a lot of sense.
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What do you think about this list of questions to ask yourself before buying a home, and would you add to this list of questions to ask yourself before starting the home-buying process?