At MortgageHippo we’re all about having fun and making the mortgage process as enjoyable as possible for you, but making the initial decision to buy a home is some serious business. So when is the right time to buy a home?
The short answer is: whenever you’re ready for it! Let me explain.
Not surprisingly, the typical mortgage “expert” has a pre-prepared piece of advice: “Make sure you take advantage of these low interest rates and affordable home prices! They’re only going to go up in your area!”
Hmmm… maybe, but interest rates and home prices are not the only factors to consider when making your decision. In fact, interest rates and home prices are only useful toward answering the most important question: “How much home can I afford?”
Here are some other factors you should take into account before taking the plunge:
- What are the down payment requirements?
- How much will the closing costs amount to?
- What can I expect to spend on home maintenance?
- How long do I expect to stay in this home?
Nowadays most conventional loan programs require at least a 5% down payment, so make sure you’ve saved enough money for this initial investment—preferably more. With respect to closing costs, you can expect to pay anywhere between 3% and 5% of the loan amount. Maintenance costs will vary significantly depending on the type of home you buy (a condo, for example, is generally cheaper to maintain than a house), but a suggested rule of thumb is 1%-2% of the home purchase price per year.
Finally, the one factor that is often overlooked is your expectation of how long you plan on staying in the home you’ve set your eyes on.
Why is this important? Because selling your home has a cost — mainly the cost of paying a real estate agent to sell the house for you, which is typically around 5% of the price of the home. Add in moving costs and you can see how expenses could easily rack up and surprise you.
Let’s walk through a quick example to illustrate these costs:
Doug is a first-time home buyer looking to buy a $200,000 home with 5% down and closing costs of 4%. In this case, Doug’s required out-of-pocket expenses add up to $17,600 ($10,000 down payment plus $7,600 in closing costs). At an interest rate of 4%, his monthly payment on a 30-year fixed home loan (including principal, interest, property taxes, and insurance) would be approximately $1,300 per month.
Now let’s assume Doug sells his home in 3 years for $220,000 and pays a 5% commission to his real estate agent. That commission comes out to $11,250.
Let’s briefly summarize what he paid over those 3 years:
- $46,800 in total monthly payments ($1,300 * 36)
- $17,600 in upfront expenses
- $11,250 commission to his real estate agent for selling the home.
This comes out to a grand total of $75,650. After taking into account the $8,750 he made from selling the home, the total paid over those 3 years was $66,900, or approximately $1,860 per month.
Now the question you should ask yourself is what the cost of the alternative to buying a home would have been during those 3 years. Most likely the alternative would have been renting. If his rent had been higher than $1,860 per month by a wide enough margin, then he probably would have been better off buying during that time than renting (this assumes nothing about the sanity of any hypothetical landlord).
The point is, buying a home is a great thing, but it’s also an important decision that requires some serious thought…even a little math. In general, the longer you expect to stay in a home, the more it makes sense to buy than to rent. Try running the numbers using a good mortgage calculator and compare for yourself.
What else would you consider in determining whether you’re ready to buy a house? (relationships, job, etc.) Let us know by leaving a comment below.
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