Gauge your financial and situational readiness before purchasing your first home.
The housing market has been hot, and we’ve seen a major uptick in inquiries about home ownership. The decision to buy a home should not be taken lightly. Owning a home is a long-term investment and time commitment.
Your readiness may depend on
(1) what stage of life you’re in,
(2) what you want to financially accomplish in the 2 to 3 years after you buy a new house,
(3) and other financial goals you want to simultaneously tackle.
Home ownership is not as simple as comparing what you currently pay in rent to what your monthly mortgage would be.
Those who rent and want to buy a home often say: “I feel like I am just throwing away money at rent and not owning anything at the end of the day.”
That is true. When you rent, the landlord is responsible for the maintenance expense. You’re just paying rent, and maybe renter’s insurance on top of it. That’s it. When you own a home, you’re not just paying the mortgage. There are property taxes, maintenance expenses, and home insurance. You may also encounter HOAs and PMI costs. As reported by CNBC, homeowners pay 33% to 93% more for housing each month than renters.
Want to buy a home? Answer these 4 questions first to determine your readiness for this type of large investment.
(1) If you had to move within the next 2 to 5 years for any reason, can you handle the costs, planning, and logistics of selling your home vs keeping it to rent it out? Do you even want to bother with these responsibilities?
Rather than owning a home, renting may be better for those who are in the beginning stages of developing their careers. Perhaps you live in Atlanta and you get a wonderful job offer in another state. It’s much easier to pack your bags and sign off on a lease than dealing with the logistics of selling your home or becoming a landlord.
(2) If you are buying a home with the intention of leasing it in the future, are you realistic about the responsibilities of being a landlord?
Is your house in an area where there’s a demand for renting, and will you be able to make a monthly profit? As a landlord, you are still responsible for the repairs and maintenance of the home as well as any expenses you may incur looking for a responsible tenant.
(3) Have you done your due diligence of understanding the housing market?
Home ownership is an investment. The value of your home will fluctuate throughout the years depending on how the economy performs. Also, your home is part of your net worth, so make sure it’s in a location that can sustain its value or has the potential to increase in value. Keep in mind interest rates as well!
(4) Besides having enough for your down payment, do you have enough money to meet the additional expenses that will arise during the home-buying process?
You will likely need to tap into your current cash reserves to pay for closing costs and upfront lender fees, on top of the down payment necessary. These additional expenses throughout the home-buying process catch many first-time home buyers of guard.
THE BOTTOM LINE
Buying a home can be an expensive process and is time-consuming. Owning a home can cost you more in the short term if you don’t perform thorough due diligence and evaluate all the expenses. More importantly, you need to have an honest assessment of your financial planning and determine whether you will have enough cash flow to meet the demands of home ownership in the long run.
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