5 Questions To Gage Your Readiness For Home Ownership
For many Americans, the home that you own is often the primary source of wealth accumulation and emotional security. Each year, hundreds of thousands of renters pool together their hard-earned life savings for a down payment in an increasingly tight real estate market. However, very few have taken a step back to ask whether or not they are ready to buy a home. Should you be pouring your hard earned dollars into real estate?
This article is designed to explore the pros and cons of home ownership so that you can make an informed decision before diving in to buy your home.
Ask these are 5 questions to help figure out if you’re ready to buy a home:
1. Are You Financially Stable To Buy A Home?
While investing in Real Estate can present great financial opportunities (check out 4 Ways To Make Money With Real Estate), home ownership requires great financial responsibilities and stability. Being financially stable implies that you have a consistent source of income that can comfortably service the monthly mortgage payment. Many banks require that you have some working history (e.x. two years). This makes sense given that the lenders want to minimize their risk of the loan being defaulted. A long employment history with a high and consistent income will allay the lender’s concern. In short, if your source of income is unstable or if you’re unsure about the continuity of your future employment, then you may consider waiting until everything stabilizes.
2. Are You Ready To Settle Down?
This is more of a psychological and emotional question. Are you happy where you are? Do you plan to be at this spot for at least the next 5-10 years? Are you planning to eventually start a family here? You should meditate on these questions before you consider buying your first home because owning a home will drastically reduce your flexibility, particularly if you have to move for work or family. If your immediate plan is to move back home or travel the world indefinitely, then you may not be ready to buy a home.
3. Do You Have Enough Saved and Can You Manage The Monthly Expenses?
For the majority of home purchases, you’ll need to come up with a down payment to secure a loan from the bank. The lender typically requires 20% of the purchase price as down payment. For a $500,000 house, the down payment will be $100,000. Not a small chunk of change!
Second, once you have secured the loan, you will have to consider your monthly payments. Your fixed monthly payments will include mortgage principal, interest, property tax, and home insurance. Use the mortgage calculator below to find your specific payment. Note that insurance and taxes are not included in the calculator. Using our $500,000 home example above with 20% money down, your loan amount will be $400,000. At an interest rate of 3.5%, you can expect a monthly mortgage payment of $1,796. Let’s further assume that your property tax is 1.25% of property value ($520 per month) and your home insurance is $1500 ($125 per month). This will bring your total monthly fixed payment to $2,441. This will be the amount that you are responsible for paying each and every month until your mortgage is paid off in 30 years! Are you ready for this level of responsibility?
Finally, you will also need some additional savings for a rainy day. If you need a new roof, replace a leaky faucet, or if you simply lose your job, you will need a contingency fund to cover these unexpected expenses. The rule of thumb is to keep about 6 months worth of your monthly payment in reserve. Using our example above with a monthly payment of $2,441, you will need to maintain a reserve of $14,646.
This is a huge financial responsibility and it’s certainly a discussion you’ll need to have with mortgage specialists. In short, do you think you’ll have the necessary savings and organizational discipline to buy a home?
4. Can You Deal With The Stress of Fixing Things When You Buy A Home?
As a homeowner, the buck stops with you. If the faucet leaks, or if the heater breaks, you can’t call the landlord anymore. You own the property so you own the repairs as well. This means that there are generally two courses of action you can take: either develop the skills to fix the problem yourself OR pay for a professional to do it. In either case, you must have the financial and emotional stamina to deal with these potentially stressful tasks. If the thought of unclogging toilets or picking up dead mice seems unthinkable, then you should maybe reconsider buying your first home.
5. Are You Organized and Disciplined To Buy A Home?
This is an overarching comment on your emotional and psychological state. Are you the type that can handle paying your bills on time, that can schedule regular maintenance for your gutter and furnace? If an issue appears, do you have the emotional impetus to get it fixed? Many newbie homeowners assume that tiny problems like a leak or a few late mortgage payments will simply go away or that someone will take care of it. However, with home ownership, little problems often festers into much greater issues. Multiple months of late payment can lead to foreclosures. An unfixed ceiling leak leads to massive repairs and replacements. In short, are you responsible enough to take on the task of owning a home?
Owning A Home Is A Keystone Of Wealth – Both Financial Affluence And Emotional Security
Suze orman
The questionnaire is not designed to be a scare tactic to discourage would-be homeowners. As Suze Orman once said, “owning a home is a keystone of wealth – both financial affluence and emotional security.”
If you’ve answered yes to the questions above, then congratulations and let’s jump start your journey to home ownership!
