Renting VS Buying a Home

By Mike (Credit Expert ), on October 13, 2016

So you are renting now and thinking to buy a house and not sure if you are ready for it or not ? No Problem, lets talk about it and if you can answer my few questions, you will have sure short idea if you are ready or not for a house.

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All people who are renting have the same question on regular basis, and that is "how do I know if I'm ready to go from renting to owning a home?" You know, the fact is there's a lot that goes into that decision, but I think you can get a pretty good handle on your readiness to do this if you can answer yes to the five questions I'm gonna cover today.

The first question is, Is your income secure? You know, every month when you own a home you're gonna have to make mortgage payments and there's a lot of expenses associated with owning a home as well. To make sure that your homeownership doesn't put you in a bad financial situation, you want to make sure that your income is secure not only today but for years and years into the future.

The second question is: Do you plan to own the home for at least five years? Here's why this is important when it comes time for you to sell the home at some point, you're gonna have a lot of costs associated with doing that. Typically it's best if you can take those costs out of the equity that you've built up in the house. Equity is just the difference between what is the house worth versus how much you owe on it. Since your initial years of making mortgage payments tend to go more to interest expense than paying down the debt, that means that your equity is often gonna come from the increasing in the value of the house or the house going up every year. Of course, the more years you have to work with, the better chance you have of the house going up, therefore the more equity you can potentially get. That's why it's important to have the house for at least five years in most cases.

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The third question is : Have you saved enough money for a down payment and closing costs? Now, even if you get a loan that doesn't require you to do that, it's still important, I think, for a couple of reasons to set aside a down payment. The first would be that the larger the down payment you put down, the less likely you're gonna have to pay private mortgage insurance on the mortgage. That private mortgage insurance is just an extra expense that you would have to pay that really doesn't go to doing any value creation or wealth building in your situation, so if you can avoid that that's great. The second reason why a down payment is important or being able to accumulate it is if you can't save it up -- if you haven't been able to do it -- that could be a good indication or a good red flag, perhaps, that this might not be the right time for you to get into a house. Because when you get into that house, there's gonna be an awful lot of extra expenses you don't currently have. Ideally you'd like to be able to substitute that saving you did for the down payment for the extra money you're gonna need to maintain the house going forward.

The fourth question : Have you saved enough money for a solid emergency fund? Here you're looking at three to six months' worth of your committed expenses ideally, and the idea is even if you don't own a home life always throws unexpected expenses at us. Owning a home just adds a whole new layer to that. So it's important you have a good emergency fund to cover those things so you don't have to go in debt. And finally,

Fifth question is : have you saved money for what I call "make it mine" costs? You know, whether it's new window furnishings or new window treatments or furnishings, paint for the house, landscaping, those types of things, there's a lot of potential costs that you can incur when you get into a house initially. If you don't have the money set aside to do those things, you're either gonna have to take it from your emergency fund or you're gonna have to go into debt to cover them, neither of which is a good thing when you're just getting into this house. So there you have my five questions that I think you should be able to say yes to give you a good idea if this is a good time for you to buy a home or not. The fact is, home ownership is one of the biggest decisions you're gonna make from a financial perspective, so you really want to take some time, take a step back, and make sure that you're setting yourself up for success.