Buying a Home: When is the Right Time?
Buying a home is a major life decision. You can spend quite a bit of time visiting open homes, hiring a real estate agent, envisioning the changes you'll make to a place, and still have trouble making the commitment of being a homeowner. Fortunately, several telltale signs indicate that now might be the right time to buy. If you have the finances to cover a down payment on a new home (which can be up to 20 percent of the home's price), if you can afford a monthly mortgage, and if you have a good credit score, you may be ready to purchase a home. Your personal financial situation will ultimately be the deciding factor in whether or not you buy a home at this point in time, but secondary factors like the current real estate play a role too.
Prospective buyers who plan to take out a mortgage to finance a home should anticipate a sizeable down payment. Conventional loans are typically about 10-20 percent of a home's price. That equates to up to $60,000 on a $300,000 home. While the thought of scraping together that money may seem daunting, it can help in the long run. The more you put down initially, the smaller your mortgage will be, and the less you will have to pay in interest. Furthermore, if your down payment is below 20 percent, you may need to pay private mortgage insurance too. You can also look into down payment assistance programs, which help many prospective buyers purchase a home. Another factor is monthly mortgage. The amount that you can pay in monthly mortgages depends primarily on your income and debts. Even if you have a fairly high income, having a high level of debt can result in much higher monthly mortgages. You can see if this will be a concern by using a mortgage calculator to plug in your salary and debts, which shows how much you can expect to pay monthly on a home. That, in turn, can help you decide what price range to realistically consider when getting a house.
Finally, credit score can be a deciding factor in whether or not you should purchase a home. A credit score measures how well you've paid off debts in the past. If you'll be taking out loans for your home purchase, lenders will look at your credit score and payment history to determine what the likelihood is that you will pay them back. If you don't have a credit score, you should start building one, as most lenders need proof of payments (at least one year) before lending money. If you have a poor credit score, do what you can to improve it. A higher credit score increases the likelihood that you'll get a better loan.
What most prospective homeowners don't realize is that buying a home requires many upfront costs that they might never have considered. Ask about any surprise fees like closing costs, property taxes, and homeowner's insurance. Maintenance and repairs can be a factor in housing prices too, and they can add up quickly. If you're considering living in a condominium, townhome, or other type of planned development, you may have to make payments to a homeowners association to help pay for the upkeep of common areas and your own building. These fees can range from $200 to $400 per month, according to Investopedia. The more upscale a building is, and the more amenities it has, the higher the homeowners' association fee will be.
When considering whether or not to buy a home, you should factor in the cost of homeownership with your entire budget. Buying a home lets you build equity in a valuable asset that can be sold for cash or used to fund other purchases. While you should prepare to budget some money towards getting a new home, purchasing a home should not jeopardize the rest of your budget, such as retirement savings and emergency funds for unforeseen life expenses.
Personal finances aside, current market conditions can help you decide if you should buy a home now or wait. Like the stock market, housing markets naturally cycle through highs, lows, and bubbles. As with the stock market, there may be no perfect time to buy a home. But if the price is right for the type of home you are considering, you might want to put in an offer. One way to evaluate current market conditions is by scouting out the inventory. Start by looking through local listings in the area. If most homes have been sitting on the market for six months or more, it's a good indication that the market is slow and prices are stable. If homes are staying on the market for mere weeks or less than six months, you are looking at a seller's market. This may lead to bidding wars or create prices that climb high before returning to normal. Additionally, interest rates on home loans vary depending on market conditions. In 2017, interest rates are fairly low. However, they have been increasing, and experts expect them to continue rising. This factor has sparked many to buy homes sooner rather than later to take advantage of favorable interest rates. Sometimes, people debate whether to rent or buy a home. In some locations, it is cheaper to rent than own based on current market conditions.
Time of year can also influence your purchase decision. More houses tend to go on the market in the spring and summer, which are historically peak selling seasons. However, that also means more competition for buyers and potentially higher purchase prices. You can avoid that scenario by purchasing in the off season (winter and fall). Doing so might give you more negotiating power for the price and closing date, as homeowners are more eager to sell and more willing to make a good offer. Before putting in an offer, determine how long you want to live in the house. Since purchasing a home involves upfront costs, experts recommend staying in a home for at least five years to make the investment worth it.
Just as there are indications that you are ready to purchase a home, there are several signs that now might not be the right time for you to buy. First, before considering buying a home, check your credit score. You can do this through a handful of free sites including Credit.com, Credit Sesame, and Credit Karma. Having a higher score is significant, as a higher score means that you will get a better interest rate on your mortgage. This translates to a better interest rate on your mortgage and much lower monthly payments. If you perform a credit check and find that your score is comparatively low, you might want to hold off on buying a home until your credit score is better. You can improve your credit by keeping balances low on credit cards, paying off debt instead of reallocating it, not opening new and unnecessary credit cards simply to increase your available credit, and not closing unused credit cards as a short-term way to raise your scores.
Personal finance experts advise spending no more than 30 percent of your total income on monthly payments. If you find that you will have to allocate 30 percent or more of your income on budget, your finances will inevitably be tight, and you may face a financial risk if something happens. Additionally, you should be able to afford at least a 10 percent payment. If you have to put down less than 20 percent, you will have to pay for Private Mortgage Insurance (PMI). This is a safety net for the bank in case you fail to make requisite payments. Unfortunately for new homeowners, the cost of a PMI can be as much as 0.5 to one percent of the interest. Depending on the size of the down payment and credit score, that can amount to an additional $1,000 annually on a $200,000 home. Putting down more money initially can lower your monthly mortgage payment by requiring you to pay less money to finance the home. This can save up to thousands of dollars over the life of the loan.
Another indication that you might not be ready for homeownership is if your emergency savings account is not fully funded. Financial planners recommend setting aside several years' worth of living expenses to offset a job loss or other unexpected fee, such as a family member getting sick and an insurance company denying a medical claim. The consequence for homeowners is that without sufficient life funds, they might end up defaulting on a mortgage. That can lead to disastrous financial consequences, including damaging a credit report.
Finally, before committing to a new home, consider your housing budget in the context of future goals. Figure out what expenses might be coming your way in the next few years. If other big expenses are looming, it might make sense to hold off on a house purchase. A good way to figure this out is to assume a mortgage payment of $1,000 per month. If you feel that you won't be able to afford that amount a year from now, it might be best to wait.