Are you contemplating to buy a home or continue renting? That is a common dilemma for first time buyers.
Part of being a financial success is acquiring some assets that will increase your personal net worth. And when it comes of assets, there is none much greater than owning your home. Even if you purchase it with a mortgage, every payment that you make on that loan builds up your equity in that property.
Being a homeowner is something that you will not question because it is after all, still part of the American Dream. It is not really about whether you will be a homeowner or not. It is more of when is it the right time to buy a home.
You only have two options when it comes to your living arrangements. Will you purchase your own home or will you rent? There are pros and cons for each and it pays to know which of them is the right arrangement for your particular lifestyle. A home purchase is an expensive one so you want to make sure that you can make the smart choice about it.
That being said, let us explore which will make more sense to you right now: buying or renting a home.
Why buying a home is better than renting
Let us begin by discussing why homeownership is the better choice. When you own your home, you get to decide how you want it to look. As you make payments on it, you will be growing the equity that you have in that home and that increases your personal net worth. Best of all, any mortgage interest that you are paying for can be tax deductible.
But is it a good time for you to purchase a home? Here are the signs that this is the right option for you right now.
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The market indicates that buying is cheaper than renting. In the end, you want to choose buying because it will be cheaper to pay a monthly mortgage than to continue renting. According to Trulia.com, buying a home will come out to be cheaper by 38% compared to renting this 2014. This is based on a 30 year fixed mortgage rate of 4.5%. Of course, that will vary depending on the market that you want to buy a home in.
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You have saved enough money for a 20% down payment. This is important because it will cost you less in your home loan. If you have less than 20%, you do not have to pay additional on a Private Mortgage Insurance. This PMI is the assurance of the lender in case you fail to make your mortgage payments. While there are government backed housing loans that will allow you to pay as low as 3.5% in your down payment, you have to qualify for that first. You need to consider how you will get a mortgage before you decide for certain about homebuying.
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You have a good credit score. Having a high credit score will allow you to get a low interest rate on the mortgage that you will use to buy a home. That will make the purchase a lot cheaper than it has to because you will not be wasting money on the interest.
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You have a stable job that can support your monthly payments. If you have job security, this is a great time for you to be a homeowner. A typical mortgage can be completed in 15 to 30 years. If your job is not stable, you may want to ensure that it will be first – otherwise, you could end up with no job and a lot of loan to pay for. That can drag you down a debt pit that is hard to get out of.
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You do not have to move in at least 5 to 10 years. When you are constantly on the move, it will be difficult to just pack up and leave when you own your home. You have to arrange for it to be rented or sell it altogether. That can be a hassle especially when you need to move immediately.
These are the important signs that will tell you that you are ready to buy a home. If some of them are not applicable to you, then you may want to reconsider your decision to buy a home.
Why you should continue renting and postpone homebuying
On the other side of the equation is the option to rent instead of buying. There are various reasons to not buy a home and rent instead. The benefits of renting includes the flexibility that comes with being able to move as you please. Not only that, when something breaks down in the house, that will not be your problem but the owner’s. But then again, you will not have the liberty to alter the home as you please.
Given that, here are the signs that will tell you that it is okay to rent instead of buying a home.
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It is not a buyer’s market. If the mortgage rates are high and the inventory is few, you might find yourself competing for homes at a price that is beyond your budget. Try to wait it out even if you have the money to pay for a downpayment. You could save a lot of money if you buy at the right time.
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Renting is cheaper than buying in the state that you want to live in. The infographic published on HowStuffWorks.com, it is cheaper to rent than to buy a home in San Francisco in 2012. In fact, a studio or one bedroom home for sale will cost the homeowner more than 13x more than renting. A larger home will cost 18x more to buy. That should be an important consideration for you. Either you postpone buying or you should move to another place.
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Your debt to income ratio is still high. The reason why a lot of Millennials are unable to buy a home is because of their mounting student loan debts. If you have a lot of debts to your name, you may want to rent a home first before you put yourself through another big debt.
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You credit score needs improvement. In some cases, an identity theft or bad credit behavior left your credit report in ruins. You may want to improve this first before you buy a home. If the need for homeownership is not urgent, it may be wiser to just wait.
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Some financial goals may be affected if you add your home loan payments. In some cases, everything checks out except for one – you need to give up one financial goal that you had been working on. Weigh your options and see if you can finish that one goal first before you take on another financial obligation.
Among all of these, it is important to consider the signs that you are not ready for a mortgage yet. Because in the end, if you are unable to pay for the loan, it will come back to get the home that you just bought.
Reminders when opting to buy a home
In case you really want to go ahead and purchase a home, here are a few reminders that you need to consider.
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Make sure you have saved enough money. Saving for a large purchase such as a home is not easy. It needs time, goal setting and commitment to follow through the plan. It pays to start early so you can save up more money.
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Understand what is included in your mortgage. If you think that you only have to pay the home loan, you are mistaken. Your mortgage includes 4 payments – the principal, interest, tax and insurance. Factor this in when computing for your monthly payment assumptions.
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Do not forget the closing costs. This has to be paid in cash and it includes the fees involved to make the homebuying process successful. You have to understand that the closing cost will depend on where you intend to buy. You can check out Bankrate.com for the average closing cost by state. On a national average, the closing cost is around $2,400.
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Ensure that you have an emergency fund. This should be kept untouched. If you do not have this, you need to save up for it first before you buy a home.
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Consider your budget for the furniture that your new home will require. You should also take into consideration that money that you will use to buy the items that will be placed in your home. Otherwise, you might be forced to use credit for it and that is not advisable considering your mortgage loan.
Think carefully if you can really afford to buy a home or it will be wiser to keep on renting for the meantime. You do not want to own your dream home only to end up under huge amounts of debt.