You’re tired of “throwing money away” on rent. You want to buy your own home. But you’re not sure if now is the right time.
You hesitate about “now” for two reasons: time and money. In term of time, you’re not sure if you’re committed enough to staying in one place. How long will you really live in this home? And on an economic level, you’re not sure if you can afford all of the expenses that come with having a mortgage.
Before you do something impulsive, let’s assess whether you should buy a house right now –- or whether you should wait.
In most parts of the U.S., home prices are currently higher than they’ve been in the past five years. Does this mean that you should lock-in the current prices before they rise even higher? Or does it mean that we might be heading for another downturn?
The best answer: Do what’s right for you. If you’re planning on staying in your home for a decade or more, short-term fluctuations in the houses’ underlying value shouldn’t make a difference. After all, the primary purpose of your home is to provide you with a place to live, coupled with the opportunity to grow equity over time.
So don’t fret about the possibility of an interest rate hike in 2015 that might trigger a drop in demand. Don’t stay up late, worrying that builder oversupply will glut the market. If you’re an owner-occupant who wants to buy a home where you can raise your children, these issues aren’t going to make-or-break your financial future.
You should, however, be concerned about whether or not you can personally afford the expenses. Let’s take a look at some of the costs that should factor into your decision about whether to buy now or wait:
Do You Have a 20 Percent Down Payment?
Most lenders require a 20 percent downpayment before they’ll grant you a mortgage. If you can’t come up with such a hefty downpayment, they’ll charge “private mortgage insurance,” or PMI, to make up the difference.
PMI rates vary from lender-to-lender, but generally cost 0.05 percent to 1 percent of the total loan amount. At 0.05 percent, you’ll pay $41.50 per month for every $100,000 worth of loan that you carry.
If you’re holding an FHA-insured loan, you pay two different mortgage insurance premiums. The upfront premium is 1.75 percent of your loan size, and it will be added to your borrowed amount (thus increasing your monthly costs). You’ll also pay a second premium, which is assessed annually and billed monthly. This second fee, often known as “monthly mortgage insurance,” will cost 1.3 percent annually if you carry a 30-year mortgage and put at least 5 percent down.
The bottom line? Not having a 20 percent downpayment on-hand can be a very expensive proposition. If you borrow $200,000, for example, and you’re charged 1 percent PMI, you’ll be forking over $166 per month – not an insignificant sum of money.
Do You Have Room in Your Budget for a Higher Mortgage Payment?
Your mortgage payment is comprised of four items: principal, interest, taxes and insurance. (Together, these are known as “PITI.”)
If you have a fixed-rate mortgage, your principal and interest will remain a flat monthly fee, regardless of what’s happening in the overall economy. However, your taxes are set by your local county government and are based on their assessment of your property. These taxes are subject to rise at any point – either if your county re-assesses your home at a higher value, or if your local government decides to boost its tax rates.
Do you have the space in your budget to accommodate that type of tax increase? If your budget is so tight that this will cause you to miss payments, you might not be in a strong enough position (right now) to buy a home.
Likewise, you might decide to buy a home in a community that’s governed by a homeowner’s association, or HOA. This HOA can assess mandatory “dues,” and put a lien on your house if you don’t pay the bill. And the HOA can decide to raise its dues at any point. Do you have enough wiggle room in your budget to accommodate a rate hike?
Do You Have Money for Maintenance and Repairs?
The mortgage isn’t the only expense you’ll need to worry about. As a homeowner, you’re responsible for cleaning the gutters, replacing the roof, fixing the HVAC, refinishing the floors, calling the plumber, installing a new dishwasher and repairing the broken garbage disposal.
As a very broad rule of thumb, you should budget one percent of the home’s purchase price annually for repairs and maintenance. If your home cost $300,000, for example, set aside $3,000 per year, or $250 per month, for these costs.
You won’t literally spend this amount each month. Some months, you’ll spend zero. But other months, you’ll need to replace every window in your home, at a total cost of $7,500 (that’s replacing 25 windows at $300 per window.)
How Long Will You Stay in Your Home?
Buying and selling a home incurs thousands in closing costs – including inspections, title insurance, transfer tax, attorney fees, and real estate commissions. If you’re going to hold onto your home for several years, those costs will spread themselves out over time. But if you might be selling your home after two or three years, those costs (in addition to property taxes, homeowner’s insurance, mortgage interest, and maintenance) might add up to more than the amount you would have paid in rent.
In other words: The length of time in which you plan to stay in your home will make a huge impact on whether or not you’d be better off renting.
So should you buy now? Or wait? The answer has less to do with the overall economy, and more to do with your personal budget and life plans.
By Paula Pant