With interest rates low, many renters are thinking about purchasing a home of their own. While simple rental cost vs. mortgage cost comparisons can be very attractive, buying a home is a serious commitment, and there are many factors to consider:
How Long Do You Plan to Live in the Home?
Selling a home costs money. If you may have to move in the short term, the value of your home may not have appreciated enough to cover the costs of buying and selling. The length of time that it will take to cover those costs depends on various economic factors. Average appreciation tends to sit at around 5% per year. In this case, you should plan to stay in your home at least 3-4 years to cover buying and selling costs. The real estate market can be particularly volatile, however, and dramatic swings up and down are not uncommon.
How Long Will the Home Meet your Needs?
What features do you require in a home to satisfy your lifestyle now? Five years from now? People tend to remain in homes longer than they initially intend, primarily due to the work and expense associated with moving. Therefore, it’s worth considering a home with room to grow. Could the loft be turned into an extra bedroom? Is there a basement to work with? – Unusual in Arizona, but we do have some basement homes! Having an idea of what you’ll need will help you find a home that will satisfy you for years to come.
Your Financial Health…How is 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? While you can always find a lender to lend you money, people with poor credit tend to pay far more to borrow.
Some say you shouldn’t borrow as much as you qualify for because it’s wiser not to stretch yourself financially. Another school of thought says you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, a big payment today will seem like less of a payment tomorrow. It is, however, important to stay within your comfort zone. Purchasing a house involves many up-front and ongoing costs; the stress of worrying about those costs often outweighs the satisfaction that may come from owning a slightly nicer home.
To determine how much home you can afford, talk to a lender (we can recommend a great one!) or use a home affordability calculator to get an estimate of a comfortable price range. Then call a lender. While some may say that the “28/36” rule applies, in today’s home mortgage market, lenders are making loans customized to a particular person’s situation.
The “28/36” rule means that your monthly housing costs can’t exceed 28% of your income and your total debt load can’t exceed 36% 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, it’s important to know your options. If you’d like us to connect you with our trusted lender for an initial discussion, contact us.
Where Will the Money Come From?
Typically, homebuyers will need some money for a down payment and closing costs. However, with today’s broad range of loan options, having a lot of money saved is not always necessary – if you can prove that you are a good financial risk for a lender. If your credit isn’t stellar but you have managed to save 10-20% for a down payment, you may still appear to be a very good financial risk to a lender. High-ratio mortgages can be a good option for those who haven’t managed to save a large chunk of money (who has?), but naturally, these have additional costs associated with them.
Have you Factored in the Ongoing Costs of Home Ownership?
Taxes and insurance are added to a monthly house payment, plus the possibility of a homeowner’s association or maintenance fee, depending on the property type and location. Don’t forget lifelong maintenance and improvement costs. If these additional expenses are a concern, you can make choices to lower or avoid some of these fees. Be sure to make your Realtor® and your lender aware of your desire to limit costs like HOA fees, or maintenance.
Contact the Donnelly Group Today
We don’t want to dissuade you from purchasing your first home, as it is a much better long-term investment than renting, but we do want you to be aware of all the facts.
If you’re a first-time buyer, the Donnelly Group would love to be your guide on this journey. Call 480-792-970 or email us to learn how we can help you. We can connect you with trusted partners – an accountant, mortgage lender, and financial planner – to help you assess how a home purchase fits into your overall financial goals.