One of the things many of us think about as children is growing up and buying a house. It seems like the crux of reaching adulthood. But if you take the leap into homeownership before you’re ready, you could quickly fall into a financial disaster that may take years from which to recover. So before you make any decisions, let’s take a look at some things that can determine whether or not you really have enough money to buy a house.
Let’s start with down payment. Your down payment is what should determine your home-buying budget. A 20 percent down payment on a home is a great number to shoot for. For example, if you have $20,000 saved up, then you are in the market for a $100,000 home. Why does this matter? Because the amount you put down on a home will determine how much your mortgage will be and — along with your credit score — what your APR will be.
There are many more expenses to buying a home than just the mortgage. You’ll have to be prepared for things like closing costs, real estate agent fees, property taxes, home insurance, repairs, the list goes on and on. Some of these you’ll pay for upfront (such as closing costs, agent fees, repairs that come up during inspection that the seller won’t cover, and appliances that aren’t included). Other charges occur monthly. Think about utilities like heating a home versus an apartment, water, garbage, taxes, and so on. And if something breaks down in the home, you’re the one paying for repairs. Never think that all you’ll be paying each month is just your mortgage payment — that’s just the start.
There are two ways you can prepare yourself for these costs:
1. Save an emergency fund. This should be six months to one year of living costs and will cover you if you’re temporarily out of work or have an unexpected repair to make.
2. Calculate. You need to be able to estimate all the costs that will go into owning a home in your budget. If this number is very close to your monthly take home pay, you might want to rethink your budget or wait a few years until you have a stronger down payment.
Variable vs. Fixed Interest Rates
A variable rate is when you are offered one rate at the signing, with the understanding that this rate could go up at any time. A fixed rate is when you are offered one rate at the signing that will never change. Variable rates can start at a much lower rate than fixed rates, which can make them an attractive option.
However, while the lower variable rate can make your dream of homeownership come true faster, it’s still a risk. You may be offered a rate that sounds like the deal of the century and think you’d be crazy not to take it. You might even think that you’ll save so much on the mortgage payment that you can put that money away for when the rates inevitably go up. But it might not be best to bank on that. If you’re living from paycheck to paycheck at the lower rate, then you run a serious risk of losing your home when the rates go up.
Fixed interest rates might start higher but there’s no risk of an unexpected increase. You can still save money on your fixed-rate mortgage by signing up for biweekly payments and splitting your payment into two halves every other week rather than the whole amount once a month. This is a great way to take years off the life of your loan while taking comfort in the predictability of your payments.
The Reliability of Your Income
How reliable is your income — not just now, but about 5, 10, 15 years from now? How do you feel about your job? Do you plan to switch jobs or careers anytime soon? What about the health of your company? Have you seen any warning signs for cutbacks? And finally, what about the health of your industry? Is there any chance that your job could be made obsolete by technology or a changing market? I know that these are not enjoyable ideas to think about, but they are important to understanding the reliability of your income.
Think about it this way; If you take out a mortgage for 30 years, but you know that you’ll want a different career in that time, would you still feel confident that you can make that payment while going for the new career? Will you prevent yourself from chasing that dream because of fear of losing the home? Or will you struggle to make your payments if it takes longer to make the switch than you anticipated? This is not to say that you can’t own a home and change careers, or that you’ll lose your home if you’re temporarily unemployed. Many people go through this and things turn out fine. Just make sure that you’re prepared for all of the things that could happen before you decide whether now is the right time for you to buy a home.
These considerations aren’t meant to deter you from realizing your dream of owning a home, but rather to help you decide if you’re financially ready to own a home right now. If you take the time to prepare for all of the above, then you can feel confident that you’re ready for this exciting new chapter in life.