Deciding to buy property can feel a lot like deciding to leap into a raging sea. It can be invigorating, and the leap itself feels like flying. There's always that nagging doubt though. Taking the plunge can be scary. What if you end up sinking, or get swept too far out? When it comes to purchasing a home, there are precautions you can take to make sure you don't end up in over your head.
1. Financial considerations
When comparing the cost of renting to the cost of buying, don't only consider what your mortgage payment would look like relative to your rent. A mortgage payment will generally include your property taxes and homeowner's insurance, but there are still other financial variables that should factor into your decision:
- 2. Down payment. Depending on your credit score, your lender may want you to put down up to 20 percent of the purchase price. The benefit of a larger down payment is that it lowers your principal balance and can save you money on interest. Your principal balance is the money you've borrowed and are being charged interest on. If you're concerned about affording your down payment, consider these strategies.
- 3. Utilities and maintenance. When you own a home, you're responsible for all utilities: trash, gas, electric and water. This adds up. In addition, if your refrigerator breaks or your roof leaks, you'll probably be footing the entire bill yourself. A necessary home repair at an inconvenient time can have a large effect on your finances.
- 4.Tax breaks. It isn't all bad. Owning your home could earn you sizable tax benefits. Determining which tax benefits apply depends on your individual situation and you should consult a tax or financial professional when evaluating the potential benefits. As a general matter, though, your biggest break will probably come from deducting the interest on your mortgage. Many home expenses may also be tax deductible, although you usually need to itemize your deductions to take full advantage, which can make completing your taxes more complicated.
- 5. Market conditions. Generally speaking, you'd ideally want to buy a home when the cost is relatively low and the value is increasing. How long it might take for the additional costs of owning to pay off depends on whether average rents are increasing or decreasing and by how much. Like any investment, there is risk involved, so it's good to research housing trends specific to your area.
Trying to understand how all these factors relate to you can be a daunting task. Luckily, there are tools that can help you visualize the way your financial circumstances and other key factors can shape the costs and benefits of purchasing.
In addition to finances, consider your current lifestyle. Just because you can buy a home doesn't mean that it's going to be the best choice for you. Depending on what you want to get out of owning, there may be better options. Here are a few things to consider:
- Your credit. If you're currently in the process of building your credit, buying a home may not be the best option. A low credit score can make it difficult to qualify for a home loan. If you do qualify with low credit, you're likely to have a higher interest rate that will increase the cost of buying.
- Investment Potential. If you are interested in owning a home as an investment, you should also consider the benefits of investing your down payment into other traditional investments, like stocks or bonds, which may have a higher return than property or allow you to diversify your investment risk. Consulting with a financial professional can help you weigh the pros and cons of investing in the housing market or elsewhere.
- Flexibility. The longer that you plan to stay at your residence, the more likely it is that buying will be beneficial for you. Even if the value of your home has increased, selling too soon could take a toll financially once you include realtor fees and the other costs of selling. The general recommendation is that buying makes sense if you're going to keep the home for at least five years, but the best time to sell ultimately depends on many factors like how much the value of your property has changed, your interest rate and the relative cost of renting.
Deciding if you should buy a home can be intimidating. Just like taking a dip into a rough sea, purchasing your home is not a decision you want to enter into lightly. Crunch the numbers and research the market to determine whether you're entering friendly currents, but also look at your personal circumstances. Renting allows you the flexibility to respond easily to a change in your income, or a new employment opportunity out of state. It also provides a degree of simplicity to your life, since you're generally only responsible for paying your rent and bills. But if you're confident that you've settled in your city and your career, and you're comfortable maintaining a property, purchasing a home could further increase that stability and save you money in the long term.
About the author: Laura Ross has been a Member Support Specialist at Credit Karma since December 2013. She can usually be found riding bikes around town late at night, communing with animals and eating sweets.
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