Buying a home is perhaps the biggest financial decision you’ll make in your life, so you want to make sure you do it right. You don’t want to dive head first into the home buying process if you’re not 100% sure you’re ready. But how exactly do you know if you are?
In this article, we give you several key questions you need to ask yourself before you buy a home:
Are you financially ready?
To answer this question, take a closer look at any debts you currently have, such as student loans, personal loans, or auto loans. Having debts doesn’t mean you can’t buy a home, but be aware that it could be a symptom of a bigger problem: not having enough money.
In case you often find yourself needing to use your credit cards to make ends meet, then buying a home might not be a good move just yet.
Do you have enough money saved up to make a down payment?
One of the single largest investments you’ll likely make within your lifetime is the down payment on your first home. This will include all of the unexpected costs associated with your new home, not just the money you need to finance the purchase.
You may already be aware that nowadays, it’s possible to buy a home for as little as a 3.5% down payment (only $7,000 if you’re buying a $200,000 home). While it might sound enticing for most people, remember that you’ll also need to cover taxes, insurance, closing costs, furnishings, and repair and maintenance fees to make it a livable home. All of these combined can add thousands of dollars to the final cost.
Will you be able to afford the monthly payments?
Common costs associated with owning a home include:
- Homeowner’s association fees
- Property taxes
- Water, sewer/garbage disposal
- City assessments
These charges can add hundreds on top of your monthly mortgage payment. While you’re still completely in charge of your personal budget, it’s a good idea to avoid taking a monthly payment that exceeds 25% of your monthly income. There are lenders who might convince you that it’s perfectly fine to go beyond 25%, but it’s best to avoid going down that path if you want to avoid any potential problems.
Are you prepared to settle down?
Unless you’re a seasoned house flipper, you need to look at your home as a long-term investment. Home prices appreciate around 3% each year on average. This means that should you decide to sell your home a year or two after buying it, any increased value it has (if any) likely won’t even cover the closing costs you had to pay to purchase the house.
Staying in the home for at least five years before you relocate is ideal. It’s perfectly fine if you can’t commit to staying in one place for that long, but you may want to reexamine your plans to buy a home and see if you need a little more time before you’re prepared to settle down.