Before you decide to purchase a home, it’s important to determine whether it’s the right path for you at this point in your life and career. Otherwise, you risk making a major home-buying mistake that will be difficult and costly to amend.
Everything from your personal finances to your lifestyle needs in the future will impact how successful you are as a homeowner. Here’s what to consider when deciding whether to buy a house now or wait.
Factors to Consider Before Buying a House
Buying a home is a major commitment you shouldn’t enter into lightly. Although you may feel pressured to take the leap from renting to homeownership, there are a number of factors you need to consider before you do.
1. How Much You Have for a Down Payment
Your personal finances play a crucial role in your ability to buy a home and support yourself once you’ve taken on a mortgage.
First and foremost, do you have enough for a down payment? Most banks and lenders will expect you to have 20% of the purchase price of the home in order to avoid having to pay private mortgage insurance (PMI).
If you don’t have a large enough down payment, you’ll be required to purchase PMI, which serves to protect the bank or mortgage lender if you default on the loan. Depending on how much you borrow, what your credit score is, and your lender, the Urban Institute estimates PMI can cost anywhere from 0.58% to 1.86% of the original amount of your loan.
If you purchased a new home for $300,000 and were only able to put down $10,000, your home loan would be for $290,000. At a rate of 1%, your monthly PMI payment would be about $240 on top of your mortgage payment, and you would end up paying more than $25,000 in mortgage insurance before you reached the 20% equity mark.
That’s a lot of extra money spent on something that doesn’t really benefit you. When possible, it’s best to wait until you can afford to put 20% down on your home so you can avoid having to purchase private mortgage insurance at all.
2. Whether You Can Afford Mortgage Payments
Even if you have saved enough to put 20% down on a home, you need to evaluate your personal budget to ensure you can afford to become a homeowner. Monthly mortgage payments will have a major impact on your budget, and they aren’t always predictable.
For example, have you considered how your mortgage type and interest rate can impact your monthly mortgage payments? A fixed-rate mortgage means that your payments will stay the same until you refinance your mortgage, but adjustable-rate mortgages lead to unpredictable payment amounts that vary based on fluctuations in an index rate.
Although fraught with risk, many people choose adjustable-rate mortgages because they often come with low-interest rates in the beginning. But as the interest rate changes, so will your mortgage payments, causing you to have to pay more when they increase, which can do a number on your budget.
If your fixed interest rate is high due to a poor credit score, down payment, or other factors like your debt-to-income ratio, don’t opt for an adjustable-rate mortgage unless you’re certain you can afford it. Otherwise, you probably aren’t ready to become a homebuyer just yet.
3. Your Financial Stability
Just because you’re in a good financial position right now doesn’t mean you will be in the future. If you’ve recently changed jobs or you’re concerned about your job security, now’s not the time to add a major financial burden like a mortgage to the mix.
Most banks and lenders will expect borrowers to have a proven job history of at least two years within the same industry or with the same employer. This means if you switched career paths in the past year, you may not be able to get approved for a mortgage.
Financial stability also means that you have an emergency fund you can access to cover your mortgage payments if you lose your job or have to cover unexpected costs like medical bills or home repairs. If you’re living paycheck to paycheck and struggle to manage extraneous expenses, it’s not the right time for you to enter the housing market.
4. Your Credit Score
Your credit score plays a big part in whether you’re approved for a mortgage and what interest rate you’re offered. Borrowers with credit scores of 720 and higher typically benefit from low mortgage rates compared to those with poor credit ratings, who can end up paying thousands more in interest over the course of a home loan.
If you aren’t sure what your credit score is, start by obtaining a credit report. If your score is lower than 720, work to improve it before you move forward with a home purchase by:
- Removing hard inquiries from your credit report
- Paying down debt, like credit cards and auto loans
- Fixing errors on your credit report
- Making monthly payments on time and in full, like cellphone bills and car payments
- Avoiding applying for additional credit cards and loans
If you use your credit wisely, pay your bills when they’re due, and stay away from accruing additional debt, your credit score will improve with time. Consider starting the home buying process when your credit score is high enough to qualify you for a reasonable interest rate.
5-Your Desire to Stay in the Same Place for a Long Time
Even if your credit is perfect and your personal finances are in order, you shouldn't purchase a house right away. If you expect to remain in the house for a long time, you may want to reconsider being a first-time homeowner.
Closing fees, in addition to the asking price, may add up to several thousand dollars when selling a house. These include things like legal expenses for transferring the property's title and loan application fees.
Furthermore, just a small portion of your first mortgage payments are applied to the principal debt. Instead, the bulk of your first mortgage payments are used to reduce your interest rate..
A realtor's commission is another expense you'll have to bear if you decide to sell.
You may not be able to recoup your costs, let alone make a profit, from a home sale if you purchase one but intend to sell it within the next year or two.
After five years of living in your house, it's generally advised that you put it on the market for the first time.
6-The Situation of the Real Estate Market
Real estate market conditions play a major role in determining whether or not you should purchase a property. The housing market has a significant impact on a wide range of factors, including not just the price of a property but also the interest rate at which you borrow money.
The best time to buy a property is when the market is favorable to buyers. In a buyer's market, the supply of homes for sale is more than the demand for them, which helps to keep prices low and gives potential purchasers several options.
Buyers are outnumbering sellers in this situation, which is known as a "seller's market." You'll encounter stiff competition and high prices when buying in a seller's market. Even in a seller's market, the value of a property might double or even treble, resulting in skyrocketing housing prices.
Reach out to a real estate professional before making a purchase decision to learn about the current situation of the market. They'll be able to tell you when it's the ideal time to purchase, what the market forecasts are, and whether it's better to wait till things calm down.
7-How Do You Want to Live Your Life Right Now?
To determine if now is a suitable moment for you to invest in real estate, consider your present and future lifestyle. Getting married, starting a family, starting a company, or taking a lot of trips all have the potential to affect your final choice.
You should think about if your lifestyle will change considerably in the near future and how those changes could affect your capacity to finance a mortgage or your desire to remain in one area before signing on the dotted line for a mortgage.
For example, if you're considering freelancing or being a digital nomad, you should avoid tying yourself down with a mortgage and home. If you're expecting a kid in the near future, the expenses of child care may have a significant influence on your finances, making it difficult to keep up with your mortgage payments.
8-Whether or whether you can afford the home of your dreams is a major consideration.
There are a slew of factors to think about while searching for a home to purchase, ranging from the size and location to the amenities available. However, the more coveted a property is, the higher the price tag will be on it.
When looking for a house, think about what you actually want and what's most essential. Are you looking for a turnkey home in the heart of the city or a certain neighborhood? It's possible that the buying price of your desired house will be more than you anticipated and hence out of reach for your financial plan.
In contrast, you don't want to settle for a property that you're unhappy with.
See what's available in your neighborhood and within your budget by looking at houses for sale on a site like Zillow. Wait until the market changes or until you can afford the kind of house you want to purchase if you can't locate the perfect one.
9-The Costs of Owning a House
Owning a house doesn't always indicate you're ready financially, even if you've saved up enough for a down payment and know your budget will sustain monthly mortgage payments. When you own your own house, you'll have to pay for everything from insurance to maintenance to repairs to property taxes to utility bills.
Property taxes and insurance may be included in your monthly mortgage payment, but they aren't part of the loan itself.. As a result, your monthly payments will go more, but you won't be able to borrow extra money to cover them.
The entire amount you'll be expected to pay each month — not simply the amount you'll owe on your mortgage — will often be shown in a mortgage calculator.
Unless your income and budget can handle these new expenses, you'll have a hard time staying afloat.
10-Your Reasons for Purchasing the Product
Another factor to keep in mind is why you want to become a homeowner. Are you purchasing because you can afford it and are enthusiastic about owning a house, or because you just acquired a new job and your buddies are doing the same?
In the end, you should only purchase a property when you are financially, professionally, and otherwise ready to do so. There is no need to do it only because you feel the need to. Without waiting for the right time to act, you risk making a bad choice and placing yourself in a difficult financial position.
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