Should you buy a house now or continue renting?
Here are five make-or-break considerations.
1. How long do you plan on living in the home? If you purchase a home and then get a job transfer or decide to move after only a short time, you may end up losing money because of the transaction costs. The value of your home may not have appreciated enough to cover the costs that you paid to buy the home and the costs that it would take you to sell your home.
The transaction cost — commisions and fees — plus the transition cost — moving, changing utilities, storage – could wipe out several years’ worth of hard-won equity.
Do this simple calculation to estimate the tradeoff.
Transaction cost + Transition costs = X
How many years will it take for your equity to be greater than X?
That is how long you must own to actually gain equity just on the cost of selling. Add in property taxes, improvements, and maintenance, then offset that with the value of the mortgage tax deduction, and you will soon have a true picture of how many years you must own the house to pull ahead of renting.
2. How long will the home meet your needs? What features do you rneed to meet your current and anticipated needs? Your household’s needs five years from now? Do you want to buy a house that fits your current needs exactly, or do you want to adapt or grow into the house as your needs change?
3. How is your financial health, including your credit? Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? If you don’t have a down payment of at least 10%, and if your credit is not stellar, lenders will make your rent-or-buy decision for you: No.
If you are eager to own, it’s worthwhile to have a heart-to-heart with a mortgage lender to scope out your financial situation, see what you must repair and save, and plot your strategy for qualifying for a market-rate mortgage.
To determine how much home you can afford, use a calculator at Bankrate.com. It will serve up a range of purchase prices likely to fit your financial situation.
A time-tested formula is the “28/36” rule, which means that your monthly housing costs can’t exceed 28 percent of your income and your total debt load can’t exceed 36 percent of your total monthly income. Depending on your assets, credit history, job potential and other factors, lenders can push the ratios up to 40-60% or higher. While we’re not advocating you purchase a home utilizing the higher ratios, its important for you to know your options.
4. Where will the money for the transaction and down payment come from? At the very least, you will need a 3% down payment to qualify for a government-guaranteed mortgage under a special program for certain regions, or for people in some circumstances, such as veterans. As well, you must prove that you are a good credit risk — in other words, that you will pay back the loan.
5. Do you have enough to cover emergencies and the ongoing costs of homeownership? The down payment is just the start. You must have several months’ worth of mortgage and property tax payments saved in case of unemployment, illness or income-interrupting emergency. You also need to have or start a savings fund for predictable expenses such as insurance, maintenance, repairs, and improvements. If you buy a condominium or a town home, in certain communities a monthly homeowner’s association fee might be required.
