Ought to I purchase a home now?

Buying a home has been sold as an important part of the American dream, but for many people it doesn’t make sense for financial or lifestyle reasons. There are some good reasons to buy a home, but it’s important to consider your reasons before making one of the biggest financial decisions of your life.

Here are 5 guidelines to help you decide if you are ready to buy a home.

1. Will you live there for 10+ years?
2. Are your total monthly housing costs less than 28% of your gross monthly income?
3. Did you save a 20% deposit?
4. Are you okay when the value of your home goes down?
5. Are you happy about the purchase?

Will you live there for 10+ years?

When buying a home, a long time horizon is important because of the huge fees involved in buying and selling a home. There are closing costs, taxes, furniture, brokerage fees, and maintenance.

Closing costs for the house sale run about 10% of the sale price of the home. That means if you sell your home for $ 300,000, it could cost $ 36,000 or more to close. And these are just closing costs!

If you’re moving in a short amount of time – say four years – these fees will dwarf any stock gains you might have. Imagine driving a car out of a parking lot: we all know that it immediately loses value. The same goes for your home, and it takes time to amortize (or spread) the cost over a long period of time.

Most of the people stay in their home for less than 8 years – and this number is actually higher than it has been in decades! Before the 2008 financial crisis, the average length of stay for Americans was only about 4 years.

Don’t give in to peer pressure to buy a home if you may not stay there for the long term. If you know you want to move in less than 10 years, you will likely make more money by renting and investing in S&P index funds.

• Common mistake: “I’m not moving for a couple of years. I should buy so I don’t throw away any money on rent! “
• Reality: If you are buying for a short period of time, you will almost certainly lose money, considering all the costs.

Are your total monthly housing costs less than 28% of your gross monthly income?

Your total housing costs should be less than 28% of your gross income. When housing costs exceed 28%, you run the risk of being overwhelmed with expenses if something goes wrong (e.g. an unexpected repair, job loss, etc.). Use the 28/36 rule to see if you can afford your place to stay.

Here is an example:

• For example, let’s say you make $ 10,000 gross (that’s $ 120,000 a year gross or before tax).
• Assume your total housing bills are $ 2,000 per month. Big! Your apartment will cost you 20% of your gross income. You pass this test and you can afford your apartment.
• Note that the total cost of housing includes everything: taxes, interest, maintenance, furniture, electricity, water, even the roof repair in 7 years (project it).

Why gross income? I use gross because it’s easy to calculate. Everyone knows their gross income and taxes make net income difficult (different people choose different deductions). However, if you’d rather use net income, go ahead! I love hearing when people develop their own views on their finances.

Exceptions to the 28/36 rule

• If you live in a HCOL (high cost of living) area like NYC or Los Angeles, many people extend the 28% figure to 35% or even 40%.
• If you have no debt (such as no car payments, student loans, or credit card debt), you can stretch the numbers a bit. I would consider going around 33%, but I’m conservative with my finances.
• If your income is expected to increase soon, e.g. Again, I would conservatively consider going to 33% … maybe.

Did you save a 20% deposit?

If you haven’t saved a 20% down payment, you are not ready to buy a home.

Why? Not just because of the PMI, an additional fee that you often pay when you get a mortgage without a 20% discount.

The real reason to save 20% before you buy isn’t intuitive: it’s important to get into the habit of saving before you buy and face unexpected housing costs like a broken water heater, roof, or unexpected taxes.

I often get frustrated comments about how “impractical” this rule is. “How am I supposed to save 20%? It will take years! ”

Yes it will. This is exactly why you should save now. Saving is a habit that is better practiced before your mortgage is at risk.

If you write a review like this, you are not ready to buy a home

Note: I don’t mean you have to take 20% off. In some cases, such as low interest rates, many people make a conscious decision to deposit a small amount. But you should be able to do it.

Are you okay when the value of your home goes down?

If you buy because you believe the price of a home will always go up, here are some things to reconsider: Real estate is not always the best investment.

Here are some great reasons to buy a home

• You have children and want to stay near you, your school district, and make memories in the same house for at least 10 years
• Your parents are moving in with you
• You want to design a house with your spouse
• You love repairing and tinkering a house and making it your own
• They just want!

Notice what’s not on the list: “The price of the house has to go up.” Maybe it will – if so, great! Perhaps you could have had a much better return on a simple S&P index fund, when you factor in expenses and opportunity costs.

Buy for the right reasons.

Are you happy about the purchase?

If you find yourself facing home buying fear – such as a strong sense of obligation or peer pressure – just stop. You don’t have to buy and you should never feel guilty about renting. I rent according to your choice.

If you are really excited about buying then you may be ready to buy.

Final thoughts on these rules

Not you to need to follow one of these rules. Your money is yours.

I am sure you can refer to someone who bought a home with a 3% discount and did well.

But you will rarely hear from people who have made disastrous housing decisions. They just disappear, never to admit their mistakes. Often times, they don’t even know why they got into trouble.

I hear from hundreds of them every month. And I can tell you that these rules will protect you from the greatest financial hardship for people buying a home.

These are conservative rules that will keep you out of trouble. Yes, it may take longer to purchase. And yes, you could see people seemingly “skipping the line” and buying a house in front of you.

But for the biggest purchase of your life, I think you should be conservative. Take your time – there is no rush. Most of the time when you hear people in a big hurry it’s not a careful weighing of facts – it’s the fear that they will be “priced out” or an emotional rush to see headlines from homes selling for much more than you can afford yourself.

Many people who run into financial trouble skip these rules. Don’t be one of them.

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