Whether you're a recent college grad or have spent some years working and saving, you might be thinking about making your first home purchase. But is now really the right time for you to step into the real estate market? Can you even afford a house purchase? When is the right time to buy a house?
Should You Buy a House at This Point in Life?
Here are some pluses, minuses, and things to consider before investing in a house.
Downsides to Buying a House
- Buying means staying put. When you rent, you probably won't sign a lease lasting longer than a year, which gives you flexibility to move. But when buying a house, you should plan on staying put for at least three to five years, so as to recoup the initial purchase and closing costs (around 2-5% of the purchase price). If the real estate market drops, it could take longer than that for the value of your home to recover. You might feel stuck, waiting until you can avoid a loss upon selling.
- Buying means having less free time. Most buyers spend more time maintaining and improving their homes than they did with their rentals. There's no landlord to call when the toilet leaks! You'll either have to do such things yourself, or hire repairpersons or contractors. Also, keeping track of things like when to change the heating filter or get a regular termite inspection can pose a challenge if you've never had to think about this stuff.
- Homeownership costs go beyond the mortgage payment. Don't compare the cost of buying to renting by looking at mortgage payments versus rental prices. Buying involves additional costs, including homeowners' insurance, property taxes, and maintenance and repairs. All of these can add significantly to the expense of owning.
Upsides to Buying a House
- Homeowners can personalize and customize their space. You'll have no rental agreement that prohibits you from tearing out a wall, changing the bathroom tile, or getting a dog, cat, or alligator. And of course, any improvements you make might increase the value of your property. There's little motivation to make improvements in a rental, where you'll only be benefiting the landlord, if the landlord consents to them in the first place.
- Increased property value is all yours. Over time, the value of homes tends to increase (though it can take years, and sometimes with alarming downturns in between). When you sell, any return on your investment is yours, not your landlord's, to keep.
- Eventually, you won't have a monthly payment. One of the biggest benefits of buying real estate is that unlike with renting, where you'll be writing a check every month forever, you can eventually pay off your mortgage. Or, you'll be able to use the equity to buy your next house, and eventually pay that one off.
- You're allowed certain tax benefits. If you're among the few taxpayers who itemize on their income taxes, you can deduct all or a portion of your mortgage interest and property taxes. And when you sell, there's a big exclusion in place to reduce your capital gains tax debt. See Tax Deductions for Homeowners.
Who Really Isn't Ready to Buy a Home
Buying isn't for everyone, and might not be for you at this stage in your life. That's okay. It's especially important to choose your next move carefully if you're uncertain where your life is headed. It doesn't make much sense to buy if:
- You plan to return to school or take any sort of sabbatical. Unless you're sure you're going to stay put and can afford the mortgage payment, or you know you can rent the house out for enough to cover its costs, now probably isn't the right time to buy.
- The size of your household might grow. It's hard to predict the future, but if you can't afford to buy a home that will accommodate your new dog, new significant other, or new baby, and any of these is a distinct possibility in the next few years, waiting might be better (unless prices are rising crazily where you want to live).
- You want freedom from the responsibilities of owning. Now might be a time for you to explore, travel, or take on a new hobby. Owning a home tends to limit one's flexibility. And selling a house, or even renting one out, also takes time. Home maintenance, repair, and improvement can be an added drain on your time and finances.
- You can't afford to buy where you want to live. Keep your mind open, but don't buy in a neighborhood just because you can afford it. You'll be miserable if you're a true urban dweller stuck in suburbia, for example.
- You really can't afford a home at all. This sounds obvious, but not all prospective homebuyers have a handle on whether they've saved enough for a down payment, and have a good enough credit score and history, to allow them to get a loan for the house they want. You might want to talk to a mortgage broker, and see Mortgages: What You Need to Know.
Of course, by paying attention to these factors, you might put yourself in a better position to buy in the future.
Alternatives to Make a Home Purchase More Affordable
If it appears that although you're otherwise ready to buy, you can't afford to buy the home you'd hoped for, don't give up before considering these options:
- Buying with someone else. Perhaps a family member or friend might be interested in investing in a home with you. You'd live in it and take care of it, but your co-owner would get a share of any profits when you sell. (This share would depend on what percentage of ownership you agreed on in the beginning; it doesn't have to be 50/50.) Or, you might find a roommate who's ready for something more permanent. Of course, you'd want to make sure you can tolerate living together, and agree on many terms in advance. (Read Cobuying a Home.)
- Buying a home and renting out rooms. Instead of paying the landlord, you can become one. If you have a roommate or roommates you already know and like living with, your living arrangement doesn't have to change significantly, either.
- Borrowing from family or friends. Instead of trying to get a mortgage from a traditional source, like a bank, look into whether you have family members or friends who'd be willing to lend you money. The arrangement can be set up just like a regular mortgage, at market-competitive rates that benefit them as well as you. (Read Borrowing From Family and Friends to Buy a House).
- Buying a condo or townhome. If you're anxious to break into the market, condominiums and townhouses often cost less than single family homes. And the maintenance is less, too. But first, learn about Buying a New Home or One in a Development.
For all the information you need to buy your first home, get Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Ann O'Connell, and Marcia Stewart (Nolo).