To rent or to own, that is the question.
Buying a home is a big decision. While you might be anxious to finally take full decorating liberties and really make a home your own, you’ll want to ask yourself if it makes financial sense or if you’re just feeling pressured to do so.
Whether you’re receiving listings from your friends in the suburbs, or your mother-in-law is mentioning (with increased frequency) that it really is a good time to buy, those seemingly innocuous “ready-to-move” comments can really get you thinking.
While your mother-in-law is absolutely correct, in a matter of mortgage rate terms, you’ll want to ensure it’s a good time for you to buy. And the best way to do that is by taking a good, hard look at your finances, the true cost of owning a home and the options available to you.
Let’s get started:
1. See where you stand and start calculating your budget
First, you’ll want to look at your income, expenses, credit profile and outstanding debt. Typically, lenders require about a 620 FICO score and a 43% Debt-to-Income DTI, though some are willing to stretch that to 50%.
Next, add up all of your living expenses—any recurring monthly payments and other fixed outgoing costs—then subtract that figure from your after-tax earnings. What remains is your discretionary income. Take a look at that, too. You might find some areas where you could cut back.
If you find you’re paying for not one, but three streaming services, multiple online workout subscriptions or recurring monthly orders that keep arriving before you’ve finished your supply, you’re not alone. Though these expenses don’t add to your DTI, unless they’re appearing on your credit card balances, you can see if there are payments you could cut and put towards your housing budget.
2. Factor in the extra expenses of homeownership
Owning a home comes with additional costs that you don’t have to worry about as a renter, so budgeting isn’t quite as simple as swapping out your rent payment for a mortgage payment. The monthly payment is only part of the picture.
There are four elements that make up your monthly payments as a homeowner:
- Your mortgage principal
Your mortgage payments cover the first two (your principal and interest payment), while you’ll typically manage property taxes and homeowner’s insurance premiums through a separate escrow account.
Other expenses to account for include routine maintenance, landscaping, HOA fees, snow removal and appliance repairs. Here’s where Murphy’s Law comes in: what can go wrong, will go wrong.
As a renter, it’s a pain when water pipes burst, the AC goes out or the roof starts leaking, but your landlord has to pay to fix these problems, not you. As a homeowner, you’ll want to have an emergency fund to account for the unexpected. Two of the most common ways to do this are by:
- Putting more of your discretionary income toward a savings account instead of investing it.
- Putting less money down during the home purchase. Just remember, a lower down payment can increase your monthly payment.
3. Learn about down payment options
Putting down 20% is far from a requirement. In fact, approximately 68% of buyers put down less than 20%, and some lenders will allow customers with strong financial profiles to use a variety of low down payment options.
Though generally, if you pay less than 20% of your potential home’s price as a down payment, you’ll need to factor in private mortgage insurance (PMI). So, if you’re going to go the less-than-20% route, it’s a good idea to explore any resources that could help you boost that down payment total. Some city and state governments sponsor down payment assistance programs (often administered as an additional loan with a low interest rate—or sometimes no interest at all).
4. Determine how much house you can afford
Guaranteed Rate’s GRaffordable tool can help you review personalized options —and it will only take as few as 90 seconds. By entering some brief information about yourself, the type of home you want to buy, the estimated purchase price and the amount you’d like to put down, you’ll see loan options tailored to your situation, including a breakdown of the monthly payment.
With this information at your fingertips, you’ll feel more confident with your decision of whether or not it’s the time to buy.