Think about your current financial situation and personal aspirations. Where does home ownership fit in? If you’re itching to settle down, now may be a good time to determine whether you’re ready to handle this exciting commitment and take the first steps towards obtaining a mortgage.
The ideal time to buy a home unique to each individual, but it is important to know that you are financially secure before making this large and exciting investment. Before you buy a home, make sure that you are financially and mentally prepared. Owning a home is a lot of work, but the rewards are tremendous once you are confident that the time is right.
We’ve developed a checklist of factors to help you decide if now is the right time to purchase a home. If you can say “yes” to at least four out of five, you should pat yourself on the back for being ready to take the leap into home ownership!
1. Do you plan on living in the same place for several years?
When looking for a home, you will want to plan on living at that location for at least five years. The process of finding a home, buying it, and paying a real estate agent can be arduous. If you buy a house every two or three years, you will be wasting thousands of dollars in real estate fees and lost time.
Beyond losing real estate fees, you will also want make sure that you get your money back when it’s time to sell. It is unlikely that you will earn a profit from a home that you owned for just a year or two. By owning a home for longer, you increase the chances that the value of the property will rise. At the very least, you will have more time to make payments and develop equity in the home.
2. Do You Have a Down Payment?
When you buy a home, your lender will make you pay private mortgage insurance (PMI) if you do not have a large enough down payment. Most lenders require a 20 percent down payment before they will give you a home loan. This protects the lender or credit union because it means that there will be equity built up in the house if the borrower stops paying. If you do not have a large down payment, they will want you to pay for insurance so that they are protected if you are unable to pay on the loan.
If you do decide to buy a home, right now is an ideal time to do it as prices are still not as high as before the real estate bubble
Depending on the lender, the PMI rate may vary. Generally, lenders charge between 0.05 percent to 1 percent of the loan amount. If you receive a $100,000 loan, you will have to pay at least $41.50 each month for mortgage insurance. If you have an FHA-insured loan, then the upfront premium will be 1.75 percent of your loan amount. A second premium on FHA loans is assessed annually for about 1.3 percent of your total loan amount.
Ideally, you should prepare a large down payment before you ask for a loan. If you borrow $200,000 for a house and pay 1 percent in PMI, you end up spending $166 more than you have to. By saving up 20 percent for the down payment, you avoid this monthly cost and save significantly over the long run.
3. Are You Financially Stable Enough to Buy a Home?
Before you buy a home, the property will be inspected. You should know of any imminent repairs before buying the home, but that does not mean that things won’t break later.
Once you are a homeowner, you may have to pay for new appliances, repairing HVAC systems, cleaning the gutters, hiring a plumber, or replacing the roof. While it is impossible to know what will need to be fixed in the future, you can expect to spend about 1 percent of your purchase price on repairs every year. If you purchased a home for $200,000, you will want to have $2,000 a year budgeted for home repairs. To make this easier to handle, assume that you have to set aside about $170 every month.
While you may not need the money in your repairs budget, you should always plan ahead. Buying a home costs more than just the loan fees. You cannot prepare for every natural disaster and emergency, but you can do your best. Having a stable job, a savings fund, and a long-term plan help you to ready yourself for every eventuality including maintenance, repairs, and renovations to your property. As long as you know what to expect, you will be handle any disaster that is thrown your way.
4. Do you have an emergency fund?
Whether you’re living in a rental or your own home, you will need to have an emergency fund for those unexpected issues that can arise. Disasters happen unexpectedly, and you will need to have enough money to outlast a job loss, medical emergency, or roof repair. As a rule, most financial advisers recommend having at least three to six months of living expenses saved up. This money should be easy to access in the event of an emergency, so you will not want it tied up in stocks and bonds.
Although an emergency fund is not a requirement for a mortgage, it is something you should consider doing beforehand. Having an emergency fund prevents you from losing your home if you get injured and cannot work. It also means that you have emergency money that you can use if your house floods or the roof needs to be repaired. Before you begin the home buying process, make sure that you are in a good financial standing.
5. You are (or already have) started a family and need space to grow
While renting a studio or a small apartment can seem fairly inexpensive, rentals become far more expensive as you look for larger properties. If you are planning on starting a family or already have a family, you may want to consider buying a home.
Instead of giving your money away to a landlord each month, you will be able to build up equity in your new home. Additionally, home loans generally have a lower payment than rent. By owning,you may be able to have a smaller monthly payment than if you were to rent the same space each month. If you want to have a family and afford your monthly housing costs, buying a home is an ideal first step.
If you do decide to buy a home, right now is an ideal time to do it as prices are still not as high as before the real estate bubble, and interest rates remain near record lows. If you are financially prepared to buy a home, you can take advantage of low interest rates and invest now.
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