We all want to buy a house sometime. It will always be a part of the American Dream. There is nothing like knowing that you are living in your own house. You will feel a different level of security because you will always have somewhere to come home to.
People buy their own home for various reasons. Most people just want to own a house. Some want to downsize. Others want to transfer where they are closer to family and friends. But what most of them say is that when they buy a property, it is usually the right time. They feel like it is the perfect moment to become homeowners.
The thing is, we have to face the reality that there are situations when buying a house is not always a good investment. You see, when you buy a house, there is a high chance that you will be borrowing money to pay for it. After all, it is a very expensive purchase and the average American does not have enough to buy it in cash. Although every debt payment will increase your home equity, that still places you under a large amount of debt. While you will slowly own that house completely, unless you make that last payment, it can still be taken from you. It is very important for you to make sure that this possibility will never happen.
The best way to do that is to make sure that you have a couple of financial goals under control.
Financial goals more important than homebuying
The truth is, although homeownership is really something big, there are a couple of financial goals that should be given more importance. Just to be clear, we are not saying that you need to complete these goals before you buy a house. You might not get there if you wait that long. But we do encourage you to make sure that these goals are, at the very least, under control and progressing well. Do not skip any one of these just so you can be a homeowner.
So what are these financial goals?
Retirement savings contributions
Let us start with your future. Unless you have started contributing towards your retirement savings, you should keep yourself from buying a house just yet. Of all the financial goals that you need to work on, this is among the first that you should focus on. You need to start as early as you can to save for retirement. In fact, as soon as you start working, you have to make contributions towards your retirement fund. The earlier you start, the more you will get and the higher possibility of you retiring early. If you cannot afford to save up for retirement, then you really need to rethink your decision to buy a house. To start saving, find out how much you will need to save first.
Sufficient emergency fund
For this goal, you probably need to complete it first before you look for a house that you can buy. According to statistics, the majority of Millennials have less than $1,000 saved. When there is an unexpected expense, this might not last for long. If you go ahead with the home purchase, the home loan that you have to borrow will compromise your personal finances. Then if something happens and you do not have this reserve fund, you will be forced to use debt to get yourself out of a tight financial fix. Since you bought a property first, you might not be qualified to get more debt. Or, you might be forced to stop paying the mortgage and end up losing your house to foreclosure. With an emergency fund, you will at least have enough time to figure out how to fix your finances before you have to compromise your mortgage payments.
Low credit card debt
Another thing that you need to work on is your credit card debt. We are isolating this debt because of the high-interest rate. If are currently having problems with your credit card use and you have accumulated debt, you want to make sure that you postpone your home buying plans for now. You have to put your credit card debt under control before you borrow something huge like a home loan. This will not only make your finances more secure, it will also raise your credit score. With an improved score, there is a higher chance that you will get a lower interest rate on the home loan that you will borrow. As you can see, this is a win-win situation.
Invest your money
This is something that you can do outside your retirement savings. It can also be used as an additional emergency fund. If you can still wait before you buy a house, it is highly encouraged that you make a couple of smart investment choices. This will strengthen your financial position and will make your home buying plans more secure.
Important tips when buying a house
Buying a house is not a decision to be taken lightly. There are smart ways for you to buy one so it will not compromise your finances.
Have a down payment
First of all, you need to have sufficient down payment for the house you want to buy. While there are options that will help you secure a loan even with a small one, you will end up paying more interest on it. According to statistics, the usual 20% down payment is hard for most people to save up for. With the typical amount reaching ⅔ of the average annual income of most homebuyers, it is understandable why this is a difficult feat. While it is admittedly hard, this is an important requirement. You have to start saving for this long before you plan to make a purchase.
Bigger is not always better
If you do not need a big house, do not buy one. It will not just cost you more in terms of the selling price. You also have to spend more to cool or heat the house. You have to spend more buying furniture. There are so many expenses that will be lessened if you buy a smaller house. While you are not expected to buy a tiny house, at least, just choose a home that fits your needs perfectly.
Consider a passive income
The last thing that you should consider before you buy a house is the possibility of a passive source of income. If you want to purchase a house big enough for your future children, then it makes sense to buy a bigger house than what you need right now. However, you may want to make sure that you will use that extra space wisely. You can fix it up to serve as an Airbnb room. Or you can turn the garage or basement into a small unit to be rented out. You can use the rental income to help pay the monthly mortgage. Once you finish paying off the house, that can serve as an extra income. Of course, you have to make sure that you know the rules in your local area about having rental properties. Make sure to arrange all the documents so all your transactions are legal.