You’re tired of renting. You’re thinking about possibly taking a major step into adulthood—buying a house. But, you’re not sure if it’s the right decision. What are the pitfalls? What are the benefits?
On one hand, you’re still battling student loans. You’re not satisfied with your finances. You’re not sure you want the financial and physical commitment of a mortgage.
On the other hand, you’re over it when it comes to renting. You feel like you’re throwing money down the drain. Buying a house feels so very…grown up.
Should you buy a house? Or should you wait? Here are a few factors to consider.
#1: How Long Will You Live There?
First and foremost, how long do you plan on living in your current city or town? If the answer is roughly five years or less, there may be an argument that points to renting.
Why? Buying a home triggers a massive amount of ‘closing costs.’ You’ll need to pay a loan origination fee, attorney’s fees, inspection fees, appraisal costs, title search, title insurance, transfer taxes and more.
Typically, these closing costs come to 2 to 5 percent of the purchase price of a home. That’s $6,000-$15,000 on a $300,000 home. If you’re in a strong buyer’s market, you can negotiate with the seller to cover part or all of the closing costs. But the seller might say no—or might reject your offer in favor of another buyer.
In addition, mortgages are amortized, which means you pay the bulk of interest upfront. During the first few years of homeownership, only a small sliver of your payment builds equity. The vast majority of your payment goes towards interest, property taxes and homeowners insurance.
If you put down less than 20 percent, you’ll also need to pay monthly mortgage insurance, which will be included in your mortgage payment. The cliché that renters are “throwing money away” also applies to homeowners who at the start of their amortization period; equity-building through mortgage payments doesn’t start (in any significant manner) until years down the road.
Finally, selling a home carries a host of costs, including the commission to the real estate agent that’s typically around six percent. Your home needs to appreciate at the rate of inflation, plus another six percent, just to break even on the cost of the sale.
All of this leads to one conclusion—it’s often not worth buying a home unless you plan to live there (or rent it out) for a decent number of years. Five years is a good rule-of-thumb, though the specifics depend on your interest rate, area appreciation rate and other factors.
#2: Are You Willing to Be Hands-On?
Unless you purchase a newly constructed home under warranty, there’s a decent chance that you’ll need to tackle a few fix-it jobs around the house and yard. You may need to install a sprinkler system, seal the deck or clean the gutters. You may need to repair or replace broken appliances, refinish the flooring, or deal with mechanical or electrical issues.
When these issues arise, you have two choices: you can do it yourself or you can hire professionals. The former will cost your time (plus materials); the latter will cost money. Remember, a portion of your rent payment compensates your landlord or property manager for handling these tasks on your behalf, so that you don’t need to worry about it.
That said, however, there does come a point in most people’s lives when they realize it’s time to start watching YouTube videos about how to replace a faucet (or at least become comfortable reading Yelp reviews about those services). If you’re ready to become handy—or to hire help—you may be ready for homeownership.
#3: How Ambitious Are Your Debt Repayment Plans?
If you have significant existing debts—ahem, student loans, we’re talking about you—you might want to focus on repaying these before you dive into homeownership. You may qualify for a mortgage, but remember that loan eligibility isn’t the same thing as loan advisability.
This is a tricky topic, because there’s no simple answer for “should I buy a house while I still carry student loan debt?” If you can easily cover your student loan payments and your mortgage (plus extra for repairs and maintenance), it’s not necessary to delay homeownership.
That said, if you have an emotional or psychological desire to eradicate your student loans as quickly as possible by throwing every spare dime at this debt, then there’s an argument to be made for renting while you focus on this singular goal.
If you’re planning on keeping your house (either as an owner-occupant or as a landlord) for at least half a decade, and you have enough breathing room in your budget to allow for repairs and maintenance in addition to the mortgage payments, you’re a decent candidate for homeownership. However, the final decision should be guided by your goals.
Five years from today, would you like to be the proud owner of a home that’s building equity, or would you like to have made a bigger dent in your student loan balance? There’s no right or wrong answer; your choice reflects your values and priorities.