Should you buy a home or rent? A financial guide
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Updated Sept. 12, 2018: If buying a home is the ultimate dream, you might just be biding your time until you can make the leap to homeownership. But it can be difficult to know when you’re ready to stop renting and start looking for a longer-term residence.
There are some common signs that tell you it’s time to ditch the rental and buy a home. Here’s when buying your home makes more sense than renting.
Before you purchase a home, consider the length of time you plan to stay. If your current job is stable, you have an established social life and you like the area, it might be time to put down your roots and buy. Ideally, you should stick around for five years or more to develop equity on your home.
“When we approach this topic with our clients, the first thing that we try and determine is the time horizon,” Glenn Moore, certified financial planner at Gibraltar Financial, said. “If you are planning to be in a location for a longer time period and don’t foresee having to sell in a short period of time, homeownership can be a great way to increase your net worth and add value to your personal balance sheet.”
If you can afford a monthly mortgage payment and the expenses that go along with it, you might be ready to buy. Make sure you’re taking the full monthly expenses — including taxes, homeowners insurance and maintenance and repairs — into account. A mortgage calculator will probably only give you a partial picture.
“Ideally you would not want your housing payment to be more than 30% of your gross monthly income,” said Steve Johnson, president of Real People Realty. “One factor in buying is lowering your cost of long-term housing because of the ability to fix the cost of the purchase. You still have taxes and insurance that will continue to increase along with maintenance and repairs, but since the purchase price of the property was fixed at least that will not be going up.”
The more you put down as a down payment, the smaller your mortgage. Also, if you are able to provide 20% of the home’s purchase price, you can avoid expensive private mortgage insurance. Plus, there are closing costs to consider, which can range from 2% to 5% of the purchase price.
“Have at least enough saved for a 3% down payment. Conventional loans require a minimum 3% down payment, but the more you put down the lower your monthly payments and you'll pay less in mortgage insurance,” said Jen Smith, personal finance expert at The Penny Hoarder.
If you have good credit — 700 or greater — the odds of your loan application getting approved are higher. Plus, you’ll gain access to lower interest rates, saving you money in the long run. Check your credit report and credit score to make sure your credit is in good shape.
“Have a credit score and debt-to-income ratio that will qualify you for a conventional loan. Conventional loans cost more up front but for most people, they’re the least expensive mortgage long-term. Qualifying for one is like a litmus test for being ready to buy a home,” said Smith.
To score the best mortgage rate you can, see if you can improve your score before applying. You can sometimes get a relatively quick bump by paying down credit card debt or disputing errors on your credit report. Be sure to comparison-shop among lenders, too. Underwriting standards vary. And look into deals or specials. For instance, Better Mortgage currently guarantees it’ll beat any competitor’s loan estimate by $1,000 or pay you the $1,000 instead.
Homeowners must be prepared to handle routine maintenance and emergency repairs. This either requires being handy around the home, having the funds to afford contractors or some combination of both. You will need both the ability to make minor fixes and address larger issues as well.
An emergency savings fund is essential for everyone, but is extra important when you’re responsible for a mortgage. Your emergency fund can help you deal with unexpected events like a job loss, vehicle breakdown or urgent home repairs. You should have three to six months worth of expenses socked away.
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