To Buy Or Not To buy?

My Post copy (1)Do you have that one relative that is always asking you when you are going to buy a house? They probably have a laundry list of reasons why they think you should stop wasting your money on rent too, right? Their reasoning is probably totally valid, but there are things to consider on both sides of the equation, before you decide that buying a property makes financial sense. This post won’t cover every single thing to consider but we hope it will get you thinking about the types of questions you should be asking yourself.

Have you ever plugged your rental payments into one of those mortgage calculators and thought, I can’t believe I can afford such an expensive property for exactly what I pay in rent now? Well, it is isn’t always as simple as comparing your rental payment to your mortgage payment. There are lots of other fees associated with homeownership. There are lots of benefits too, and the equation isn’t totally apples to apples.

One of the big questions to think about is how long you plan to be in a particular location. If you have plans to move to another city or state, or even to another part of the city where you live, renting might make sense until you know where you want to be for at least few years at a time. Buying a house comes with a whole lot of fees that you will end up paying every time you buy or sell, mortgage closing costs being one of the biggest. If you haven’t decided where you want to end up long term, or simply don’t want to be tied to one location, then renting might be a more financially advantageous option for you.

Another question you will want to ask is, do you have a reasonable down payment? The answer to this question depends on the markets interpretation of ‘reasonable’. Putting 20% down used to be the standard that most banks required. Nowadays, banks will offer mortgages with less than 20%, but require PMI (remember what we told you about PMI in our last post) payments which will increase the overall expense. Generally, if you can avoid paying PMI, more of your money will go toward equity in your home, but in some markets (like parts of California right now, for example), the housing prices have been rising faster than you would be able to save to get the 20% down payment. In cases like that, it might make sense to buy with a smaller down payment just to get into homeownership before prices rise even more.

Some schools of thought suggest that if you don’t already own, it makes sense to wait for the next market crash and then buy when prices are low, but everyone’s prediction on when that happens next is different, so do your research and decide what you think makes the most sense. We’re not here to tell you what to do, we’re here to help you think through the options for yourself.

Houses are expensive. They don’t call them money pits for nothing. If you have gotten to this point in the article and are thinking, yea, I’m where I want to be for the next 5+ years and I’ve tucked away a reasonable down payment, then you will want to consider the added expense of maintaining a home. If you think you are ready for home ownership, make sure you have some savings ready for those repairs that will happen sooner or later, in addition to the down payment. Since you’ve read our post on hidden expenses of home ownership, you already know all about these kinds of things.

The last big thing to think about is building equity. You can just hear your great uncle now, can’t you? But he’s right. Building equity in a property can be a hugely advantageous financial move. The difference between rental payments and mortgage payments is that rentals payments go completely to your landlord each month. Mortgage payments go partly (and in the beginning, largely) to the bank, but a portion also goes toward your equity in your home. So when you compare your expenses, think about the rent vs. the interest on the mortgage, when you are comparing expenses that don’t come back to you each month. And if home prices are rising, then that equity is growing even faster than you are paying into it.

There is lots to consider before you decide to buy a home. We hope this article has helped you start thinking about some of the major ones. If you have topics you have questions about or would like us to cover, send us a message! We love to hear from readers!

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