SHARE
READ & LEAVE A COMMENT
Filed in
Buying vs. Renting
The most common dream among most Americans is that of owning a home. And it is an awesome dream to have. Knowing when the right time to rent is and knowing when you are financially stable enough to buy will keep the dream from becoming a nightmare.
Buying a home is the largest purchase (and most risky) you will ever make. It is not a decision that should be based on social convention. What I mean by that is more has to go into the decision to buy a home than simply what everyone else thinks and is doing. There is no shame in renting and you should rent until you are financially in a position to buy a home. And even then, in many cases, you need to start small and build up to the “dream house”. Rome wasn’t built in a day and neither will your dream life.
The best way to help you navigate when is the right time to buy is by showing you the financial parameters first because without those in place, everything else will fall apart.
Monthly payment – Your monthly payment should never be more than 25% of your take home pay including taxes and insurance. This monthly payment should also never be based on a roommate’s income or any income that is risky. If you are married, I would go so far as to say consider setting your monthly payment based on one income as well in case of a life change such as job loss, deciding to stay home with kids, etc.
Down payment – Most loans nowadays do not require 20% down unless you have a low credit score. Therefore, it is very tempting to put just 3-5% down because you can buy a home sooner. However, the ideal down payment is 20%. One reason is it eliminates PMI insurance which is an additional payment of around $150-$200/month until the equity reaches 80/20. Also, you are almost guaranteed to never be underwater with your home which means that if something happens and you need to sell it, you will be able to come out ahead.
Emergency fund – You really need an emergency fund of 6-8 months of expenses in place before buying a home. Two very important reasons for this: things will need fixing and you are responsible for fixing them and you will be able to make the payment if something unforeseen happens such as losing your job, etc. Even if you are buying a new home, something can go wrong. There are no guarantees, but with an umbrella in place, you will be covered when it rains.
If these criteria cannot be met, it is probably not the right time for you to buy a house. Millennials are notorious for jumping in before the time is right and not because they are young, but because they don’t know the risks. They are told over and over to buy a house – it is a good investment. And it is, but only if done correctly.
A house is not an asset if you owe more than the house is worth. And no matter what anyone tells you, there is no shame in renting and you are not throwing your money away. You are simply doing what you need to do until you are financially prepared to move up. Don’t try to justify why you need to buy a house or why you need a bigger place to live. And don’t try to justify why you need all the bells and whistles. If you have the money and are financially ready, no justification is needed. Just do it and do it with confidence. Live your dream!
4 Responses
Thanks, Debbi. This was a great article. Very straight to the point. It touched on a lot of areas that I was already thinking about, but a few new things to consider, as well.
I have a couple of questions.
One, is a house a good investment?
When people have the most trouble financially, it comes down to a home. Also, from what I have heard and done some research on…the housing market over the past 100 years has averaged less 1% return on an investment.
If those are both true, wouldn’t someone be better off investing 20% of the cost of a house into something that will produce a higher return and keep renting?
In most cases a house is a good long term investment. It is one of the only items that appreciates over time. For example, my house has doubled in value since I bought it 15 years ago. Some homes may lose their value over time based on how they are maintained and the area they are located in as well as the current market. People being in trouble with a home financially is based on buying more home than they could afford and mortgaging it at 100% or more. But you have to do what you feel is best for you. If you want to take your 20% that would be a down payment, invest it and rent, that is perfectly fine. Many people do and that was the point of the article. You have to do what is comfortable for you, not what everyone else does. Thank you for your comment and question.
I would advise millennials never to buy a house until maybe they are 35 or older, i have never seen so many helpless kids who cant fix anything or even try. they were never taught by their fathers its ok to use a drill or a saw or even use a soldering iron to repair a headphone cable.
also they never teach you what the right price for a house is…and there is a right starting price…whether it is $80k $800k or even $8 million……. the right price is add up your monthly bills and can you rent it out for at least 10% more? if not then its overpriced….its that simple….your 25% is also a good starting point…..but if you think it’s investment property then why are so many losing money each month to own it?
And also who in their right mind would overpay for a house? multiple bidders….$40-100-200K+ over asking ….wacko thinking….there is only 2 reasons to overpay one you both have high paying secure jobs or own your own company and its less than a 10 minute walk. to overpay and commute 1-2 hours each way is beyond dumb.
second its your toe tag home, the last home you will ever buy because you expect to die in it. so you want it to be perfect……….hope this helps
Buying a home is never an investment unless one plans to turn it into an income property. For those not looking to rent out or flip their home, purchasing a home is a money pit and for it to appreciate in value, more money must be spent on costly upgrades, renovations, appliances, etc. The other thing many buyers fail to recognize is that buying a home can also stifle careers. It forces you into a corner and should you be required to pack up and move, instead of having one monthly payment, you have two. The amount of money spent in repairs, maintenance, insurance, PMI and HOA fees over the life of the mortgage can certainly go towards retirement, investments, etc. Who cares if you don’t own a house? The only value in owning real estate is that it can help your overall net worth and make it easier to acquire loans that typically, are for opening a business, expanding a business or acquiring other real estate. Just my opinion.