After the U.S. housing crisis, many young adults resigned themselves to never owning a home. Along with a decrease in first-time home buyers, the market saw even homeowners seeing themselves becoming renters.
Although this is somewhat still the case, more young people are beginning to warm up to the idea of owning their own home. More than one-third of all homebuyers are currently under 35, while three-quarters of renters believe that owning a home is a better living option due to its investment value.
Now that owning your own home is a potential reality, it’s important to consider whether it’s a wise one. Jumping from renting to owning is a significant financial decision; pay attention to these factors to help inform it.
How Long You’ll Stay
Buying your first home is only financially wise if you plan on living in it for at least a few years. Since buying and selling homes cost a lot of money and involve a significant amount of time and effort, you should plan on at least a five-year stay to avoid losses.
Closing costs and real estate agent commission – which can be up to 6% of the property price – make buying and selling your home a complex, expensive endeavor. Since home values don’t always increase or even stay level, selling too soon after buying could result in a net financial loss. For instance, people who purchased “starter” homes in the early 2000s found themselves stuck in those homes, or selling at a loss, due to the housing crisis. Avoid getting stuck in a similar situation by committing to staying for a while.
Another important aspect to consider regarding your length of stay in a new home is how long it will take you to pay back costs associated with buying one. When you take into account brokers’ fees, title insurance, appraisal fees, mortgage origination fees, and more, quite a few thousand dollars can be added to the list price of the home. The longer you live in a house, the more time you have to spread out paying back these costs, as well as your mortgage.
In essence, if you aren’t ready to stay in one place for the next five years – if there’s a new job, romantic partner, or other out-of-town possibility, for instance – consider allowing yourself the flexibility of renting.
How Much You’ve Saved
Once you’ve decided that you can commit relatively long-term to a location, it’s time to turn to your finances. Pay attention to the overall cost, down payment, and monthly expenses associated with owning a home so that you don’t become “house poor.”
In general, a new home shouldn’t cost more than 2.5 times your annual household salary. Take a look at your after-tax pay, your debt and monthly payments, your down payment amount, and other relevant expenses in your life. Using a financial calculator can help you figure out if buying a home is a smart financial move.
Although you can pay for a house with as little as 3.5% down payment, a good rule of thumb is to put down 20% of a home’s price to beat out other potential buyers, keep your mortgage and interest payments low, and avoid having to pay Private Mortgage Insurance. This percentage can get steep – 20% of a $350,000 home is $70,000, for instance – but it will save you a lot of headache in the long term. If you can’t get close to that 20%, consider waiting.
Even if you can afford a down payment and mortgage, you should calculate all of the monthly costs of owning a home: property tax, HOA fees, insurance, yard maintenance, repairs, and utilities, for example. If you’re struggling to get a down payment together, you might also have a hard time keeping up with all of these monthly expenses. Although this might be disappointing now, waiting until you’re more financially secure will save you stress later.
How Ready You Are for the Responsibility
Compared to renting from a landlord or landlady who fixes issues that come up, owning your own home can be stressful. Be prepared for pipes to leak, insects to invade, and appliances to break. If you don’t feel ready to take on these challenges, that’s perfectly fine – but it may be best to rent your home until you’re okay with frequent Home Depot trips.
Buying your own home can be a gratifying, exciting, and generally positive experience if you’re at the right point in your life. Paying attention to issues like commitment and cost will help you make an informed decision about this big step.