Home > Mortgages > Are You Ready? 4 Questions to Ask Before Buying a Home

Comments 0 Comments

Many people go through a checklist that tells them how much house they can afford and then run out and buy without giving it any more thought. This might be very wise, but it could also be a huge mistake.

There is no question that the housing market is experiencing new signs of life. Housing starts, building permits and builder confidence is growing albeit slowly. According to MKM Partners, new-home starts were up 15% vs. a year ago and new-home sales are up 20%. But does this mean you should plunge back into the real estate market now?

Maybe. But if you do, be very cautious. From a macro standpoint, the recovery in property has been far weaker than usual. That should instill suspicion in investors. The situation is still very tenuous. So while there are great opportunities to be had, you still have to tread very carefully. This is true if you are buying your residence, a rental or just want to flip a house for profit.

Here’s how to know if it’s the right to buy real estate in your community.

1. Where Do You Plan on Buying?

Prices are much lower across the board now than they were 7 years ago, but you still have to evaluate your local market. According to the California Association of Realtors, the first-time buyer’s housing affordability is 81% across the United States. But there are wide variances in this number depending on where you live. For example, in the Inland Empire of Southern California, 83% of first time buyers can afford to buy a home. But in San Francisco only 58% can.

Do a search for “housing affordability index” in your community to get a sense of what is going on in your market.

2. Can You Afford It?

It’s nice to know the statistics for your community, but it’s more important to know if you can afford to buy a house or not. Even if it is a great time to buy real estate in general, it’s a terrible time to do so if you can’t afford it.

Part of the cost of ownership is your mortgage, taxes and insurance, of course. But the cost of owning a home goes far beyond that. Don’t forget about maintenance, utilities and depreciation.

And there are other costs you shouldn’t overlook. You’ll probably upgrade your furniture and appliances when you buy a home, which is expensive. And you also have to consider the cost to maintain or replace parts of your house that wear out over time like the roof, furnace and plumbing. On top of that, you have to calculate the opportunity cost of what you could earn on the money you used for the down payment. It was probably hard to save money for your home purchase. You could have used those funds for your retirement or for other purposes. That’s why you have to consider the earnings you forgo as a cost of home ownership.

I’ve been a homeowner for more than 20 years. On average, I spend the equivalent of 2 months’ mortgage every year on unexpected repairs and I set up an emergency fund to do so. If you can’t afford such unexpected costs, reconsider buying real estate.

3. Should You Rent Instead?

Many people make the argument that it’s always smarter to rent than to buy real estate. Certainly over the last 7 years, this would have been a good strategy. But accepting this mantra as always true is a huge error. Most of the richest people you know made their money by owning property.

And this might be one of the best opportunities in your life to own real estate because of the deflated values and low interest rates.

But this “rent vs. buy” is a valid question, and to answer it you must be region-specific. According to the Department of Numbers website, some metro areas are a screaming buy as compared to renting — and others are not. In Atlanta, Ga., for example you’ll pay 163% more in rent than if you buy the same home. But in Honolulu, Hawaii, you can rent a home for half as much as it will cost you if you buy it. Tally up all the costs of home ownership and compare it to the cost of renting after you consult the website above. This is important information.

But your analysis shouldn’t only consider current costs. You also have to figure in the tax benefits of owning property and the possibility for appreciation if you want to compare owning vs. renting.

4. Is Appreciation Really Possible?

Of course right now it’s tough to imagine real estate prices actually rising, but they will at some point. Seven years ago, nobody imagined that real estate prices could possibly drop — and they did. The longer you own property, the better your chances are for appreciation.

Certainly it would be silly to count on prices rising over the next few years. But if you plan on holding on to your home for more than 10 years, it would be a huge mistake to completely dismiss the possibility for significant price improvement.

And remember to compare your risks. Assume the average cost of ownership (mortgage, interest and taxes, maintenance and repairs) is $2500 a month after tax. Also assume you can rent the same house for the same cost. In that case you should buy if you are going to stay in the house for 10 years or more.

Why? Because the odds are good that prices will rise over 10 years (although there is certainly no guarantee). Also, when you rent, you have little control over your future. What’s to keep your landlord from increasing your rent? Nothing.

In short, if you are in a situation like that, you take greater risks if you rent than if you buy.

Image: morticide, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team