Am I financially ready to Buy a House?
We can all agree that buying a house is a very important financial decision. So, before you call your realtor or think about a mortgage, or even interest rates, let’s discuss some of the important questions to consider when buying a house. Can I Buy a House?
In this post, I will outline the 5 questions that will improve your chances of making a successful move into home ownership. These home buying tips are a guideline that will prevent you from becoming house poor and drowning in a house payment you can’t afford.
House poor is a situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities.
Let me be honest, these questions might annoy you. But, whether or not you can buy a house really depends on the answers. So, let’s begin.
I believe in a few guidelines for buying a house:
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Are you going to live in the area for 7 years?
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Can you afford a 20% down payment on the house?
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Can you afford to pay off the mortgage within 15 years?
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Is the cost of the home at or below 25% of your income?
Now, how do you feel about those questions?
If you’re annoyed with me, you might have House fever. A house should be a blessing and if a home mortgage is too expensive for your budget, it can become a huge burden and become incredibly stressful on a family and on a marriage.
I get it: Real estate in many cities is very expensive: Los Angeles, San Francisco, Miami, and New York etc… Home prices are incredibly high due to low interest rates.
I don’t expect real estate returns to outpace the returns available in the stock market. So, having a huge portion of your income going to housing as an asset is not recommended.
If you can meet the criteria I described above, then a mortgage won’t be a huge burden and you can also save for retirement and meet other financial goals like funding your kids college education.
But if you can’t, you are at risk of having too much invested in a home you may not be able to afford right now. It may require more savings or even increasing your income.
In addition, once in a new home, many people wind up spending to upgrade the house, buy new furniture, etc… And these additional expenditures can prevent you from paying down debt and being able to afford to save for retirement. I am in favor of home ownership and realize that it is difficult in many expensive cities.
However, I am in favor of doing it the right way.
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I believe one should minimize debt before buying a house. Getting out of debt and saving for a down payment are good exercises to get one started towards buying a house, condo, co-op, or any real estate.
I grew up in a medium size city outside of New York. The economy has struggled. The real estate market did not beat inflation. Real estate was not a good investment for my parents or my friend’s parents.
If you didn’t allocate portions of your capital to other investments, businesses, real estate, and the stock market, then you are not in a good position financially solely due to your home. This is not what that generation was told. And it has been sad to watch many people struggle financially who did what they were told.
I believe in buying a home, but as a portion of an overall investment strategy.
Rent or Buy: For me personally, I’ve moved extensively in my life and have not owned a home. I have done well in my investments – mostly in the stock market. It does bother me at times when I pay rent, but it’s not a dollar to dollar comparison. In order to purchase a home, I would need to allocate 20% to a down payment and then it would be a dollar to dollar comparison between rent vs. owning. Also, I am not convinced I will stay in this city for the next 7 years. So, I am following the same rules on, Can I buy a home.
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