Falling in love with a house is easy—but committing to one for the long term may not be quite so effortless. No matter what is going on with home prices or mortgage rates, the right time to buy a house is when you are ready to take on the financial and emotional responsibilities.
Is now the time to buy a home? Before you start bookmarking home listings, step back, breathe, think about your finances, your lifestyle, and your personal goals—and weigh the pros and cons.
"Buying a home is a big commitment," says Adheesh Sharma, vice president at Fidelity's Strategic Advisers, Inc. "Don't buy just because it's what most people do. Make sure you are ready."
The primary reason to buy a house should be for shelter, to join a community, and to have a permanent place to raise a family or spend time with the significant others in your life. Even though home prices are rising in many areas, let's not forget the lessons of the housing crisis: You can't count on the home you live in as an investment vehicle. The best time to buy is when you need or want a home for your family, it fits into your financial situation, and you are emotionally ready for the responsibilities of home ownership.
Start by answering these three simple questions:
|1.||Why do I want to buy a home?|
When making any financial decision—especially a big one like buying a home—it's important to stop and consider the "why" behind your choice. What do you hope your home will provide you? And how does it fit into your short- and long-term goals?
On one hand, owning a home can provide certain financial advantages. In the long term, it can grow in value, though you can't bank on it appreciating in value. In the short term, you can benefit from tax advantages with deductions for mortgage interest and real estate taxes.
There are also nonfinancial benefits that go along with buying a house. You don't have to worry about the people living below you—unless your home is a condo. You can paint the walls, or maybe even knock them down if you want. You may feel more connected to the community.
On the down side, buying a home can tie you to one place. What if you land your dream job and can't sell your house? What if your family grows and you need more space? "If you are expecting job changes, or if you know you will make other life changes, you should think twice," says Sharma.
- Read Viewpoints: "How much house can you afford?"
|2.||Am I ready to commit emotionally?|
Once you feel buying a home makes sense for your current situation and future goals, consider whether you have what it takes emotionally to buy and stay in a home.
Remember that the costs and time involved in home ownership can interfere with other areas of your life. After all, you have only so much money. Putting a large portion of your cash toward a home purchase—and then upkeep—could dent your ability to save for retirement or your child’s education needs. Or you may have other life goals, like travel or starting a business that may be delayed if a house soaks up a lot of your funds. For many people, renting is a better option than buying—and that's OK.
"This is a very personal and very big decision,” says Sharma. "Make sure buying a home really fits into your current situation and probable future plans."
- Read Viewpoints: "Should you buy a home or keep renting?"
|3.||Am I financially ready?|
Unless a yacht or a jet is on your shopping list, a house will likely be the biggest purchase you ever make. In order to afford it, you'll probably have to take out a mortgage. Before vetting lenders and shopping for mortgage rates, check your credit report at each of the three credit reporting bureaus. Get any errors corrected and ensure that your overall level of debt is manageable.
When thinking about how much house you can afford, a good rule of thumb is to limit your housing costs—mortgage payments and interest, real estate taxes, and homeowner’s insurance—to 30% of your income. Exceeding that could get in the way of paying for necessities like food, clothing, transportation, and medical care.
And then there's the cost of the down payment to consider. Ideally, you should put down 20% of the home price. A substantial down payment can make qualifying for a mortgage easier and could get you a better interest rate on your loan. By putting down at least 20%, you'll also avoid the need for private mortgage insurance (PMI), which is designed to protect the lender in case you default. It can be a significant monthly expense.
- Read Viewpoints: "Could borrowing let you meet your goals?"
Don't let your other savings slip in order to fund your home purchase. Make sure you have enough saved to cover three to six months of living expenses in an emergency fund, and that you still have enough left over to make contributions to your retirement savings.
Finally, remember that home ownership isn't just about closing the deal. Every house needs maintenance and repairs, so you’ll need time and money to throw at them as they crop up.
If, after carefully weighing the situation, you realize you aren’t ready to buy, there’s no shame in that. Home ownership may not be right for you, at least not now.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917