Home ownership has always been part of the American dream. We’re told that owning a home is a key step toward financial independence. While this is often true, if you’re not ready, the home ownership dream can turn into a financial nightmare. So how do you know if you’re ready to purchase your own piece of the American dream?
You’re committed to living in the same location for the next five years
Owning a home limits your flexibility. That’s fine if your career is stable, but if you’re climbing the corporate ladder or looking to change careers, flexibility is crucial. A home could prevent you from moving to take advantage of a career opportunity.
In addition, it takes five years or more living in one location to recoup the upfront costs associated with purchasing a house. Move before then and you’re likely to lose money on your home.
You have enough saved up for a significant down payment
While it might be possible to get away with only putting a small down payment on your home, you’ll end up paying for it in the long run. First, most lenders will require you to purchase private mortgage insurance (PMI) if you put down less than 20% of the value of the home. PMI protects the lender in case you default on the loan, but will cost you thousands over the life of your loan.
Second, you will typically be offered a lower interest rate if you put 20% or more down on your home. This reduction in interest rate alone will save you additional thousands over the life of your loan. Finally, the higher your down payment, the less you’ll need to finance, ultimately reducing the total amount of money you pay in interest.
Home ownership can be a joy. It can also help your family create wealth, but only if you’re ready for it.
You’re financially prepared for the extra expenses associated with owning a home
After you purchase a home, your financial commitment doesn’t end with the mortgage. You’ll be on the hook for home insurance costs, property taxes, and utilities. It’s crucial to obtain an estimate of these expenses to make sure they comfortably fit into your budget.
One often overlooked expense is that of maintenance. Water heaters break, pipes burst, and appliances need to be replaced. It’s estimated that maintenance and repair costs will set a home owner back 1% of their home value, each and every year. Therefore, if you own a $200,000 home, expect to spend $2,000 annually just for maintenance.
You’re ready for the time commitment
Owning a home is not like renting. As a renter you can simply call the landlord when your toilet breaks or the dishwasher stops working. Unfortunately, you don’t have this convenience as a home owner. When something breaks, you’re the one that must take the time to fix it, or find someone who can fix it for you. Likewise, you’re the one who has to mow the grass, shovel the snow, and clean the gutters. Your new home will require money and attention.
Home ownership can be a joy. It can also help your family create wealth, but only if you’re ready for it. Just because people claim ownership is a financial right of passage, doesn’t mean you have to rush to take the plunge. Sometimes, the best decision is to wait until you are on better financial footing.
BMWK: How did you know you were ready to buy a home?