August 29, 2012

3 Questions Before You Buy a Home

With home prices and mortgage rates as low as they are right now, many renters are wondering whether they’d be better off buying their own place. Is home ownership the right decision for you?
There’s no simple answer to that question, and it’s not just a matter of finances. Issues such as lifestyle and how long you plan to stay in the same location also come into play. The following sums up three key considerations.

1. Can you afford it?

This is the biggie. Can your financial resources cover the cost of owning a home? It’s not just a matter of whether you can afford the monthly mortgage payment – there’s also the matter of being able to pay for regular maintenance and upkeep, in addition to coming up with a down payment and closing costs.
Most people can readily figure out if they can afford a monthly mortgage payment and come up with the necessary down payment – that’s not the hard part. What many prospective homeowners fail to account for is the ongoing costs of owning and maintaining a home.
At some point, if you’re a homeowner, you’re going to get hit with a major and unavoidable repair bill for something like a new furnace, roof, septic system, driveway or the like, and it’s going to be very expensive. In fact, it’s likely to happen more than once. Failing to budget for major repairs is one of the main ways homeowners get into financial difficulty.
You also have to remember to budget for all the ongoing minor repairs and maintenance as well – the leaky pipes, broken dishwashers and the occasional flooded basement, not to mention such regular upkeep as painting, mowing the lawn, snow removal and all the associated costs of the equipment used for those tasks.
On the plus side, mortgage interest is tax-deductable for most homeowners. That not only reduces your home ownership costs, it can also be the key factor that puts you in a position where it’s worthwhile to deduct other expenses as well. So that’s worth considering.

2. How long will you be there?

This is another key question. Because closing costs when buying a home are typically equal to 3-6 percent of the purchase price (the higher figure is usually associated with buying discount points to get a lower mortgage rate), you have to stay in that home a certain amount of time to balance out those costs against what you’d pay to rent.
The rule of thumb is that you have to live in a home for five to seven years to make ownership more financially attractive than renting. However, that depends on where you live – in areas where average rents are relatively low compared to average mortgage payments, the break-even point will take longer to reach; in areas where rents are relatively high, you’ll reach that point more quickly.
To figure the break-even point for your area, you have to consider 1) the monthly cost of renting versus owning comparable properties in your area, 2) what you would pay in closing costs when buying and 3) how quickly you would accumulate equity in the property if you bought it.
Equity is money you’ll recover when you eventually sell the property, so you need to subtract it from the cost of your mortgage payments to figure out how owning compares to renting over the long run. However, this can be pretty unpredictable, since equity increases with rising home values and decreases when they fall – which is part of the financial uncertainty of owning a home.

3. What is your lifestyle?

A lot of people set their hearts on owning a home because they like the idea of having a place to call their own. They want to be able to do with the property as they please, make whatever modifications they desire, without having to run them past a landlord first. They like having their own private space without a landlord coming around to knock on the door periodically.
That’s one set of lifestyle considerations. But coming at it from another angle, is your lifestyle suited to home ownership? Are you willing to put in the time and effort it takes to maintain the property? Will you be happy hanging around the house mowing the lawn or doing other projects during the weekend, or would you rather be out golfing?
One of the biggest positive aspects of being a renter is that it’s largely worry free. If something breaks, you just call the landlord. The landlord mows the lawn and takes care of maintaining the rest of the property. Your time is your own. If you have personal interests that take up a lot of time, renting can be an attractive option.
Of course, homeowners can contract out for a lot of these services if they have the means to do so. Another option is to choose a less time-consuming form of home ownership, such as a condominium, where the majority of property maintenance is done for you. However, condominium ownership also means you have less freedom as an owner to do as you wish with the property.

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