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Buying a home can be scary. It feels like you’re signing up for a lifetime of mortgage payments and home improvement costs, not to mention the responsibility of taking care of your little piece of the American dream for years, maybe decades.
But remember, it’s not just about buying the house. It’s about owning it. And owning a home — if you can afford it — can be rewarding. For many, it’s a sign of financial success and independence that brings economic and social benefits along with those costs and responsibilities.
Is homeownership right for you? Not surprisingly the answer is, it depends. Here are five questions you should try to answer to help you decide.
- Can you afford it?
- Is it cheaper than renting?
- Are you ready for the responsibility?
- Do you plan to stay put for a while?
- Do you have the right motivations for buying a house?
This first question, a key one, has two parts. Many lenders allow you to finance most of a home’s purchase price. But even so, coming up with thousands of dollars for a down payment and closing costs is no easy task, especially if you’re currently paying rent and other living expenses.
Plus financial experts say it’s not a good idea to use your emergency savings for a down payment. What happens if you lose your job or a major financial crisis hits and you’ve spent your emergency funds?
If buying a home would leave you with no savings, it’s likely better to wait and build separate cash reserves. You should save what you plan to spend on your down payment on top of enough funds to cover at least three to six months of living expenses.
Now for part two. When you own a home, there are a lot of expenses. There are utilities, maintenance costs, repairs, insurance and, in some cases, homeowners association fees. And of course, unless you paid cash for your home, there’s the monthly mortgage bill.
So ask yourself: Can your budget handle all that with enough left over to replace a dead water heater or furnace if you have to?
If your answer’s “no,” take a closer look at homeownership to be sure it’s right for you. Being “house poor” — when you buy a house that’s so expensive you end up spending most of your disposable income on it and are too strapped to afford life’s other expenses — isn’t much fun for most people.
In the nation’s most expensive cities (think New York City, San Francisco or Seattle), home prices are often out of reach for a lot of first-time homebuyers. In these markets, renting can make more sense, even if you plan to stay for years.
In other markets, where home prices are lower, monthly rent can be as much as (or even more than) the monthly cost of owning — and not withstanding rent control, landlords can hike rents.
An online calculator, like the handy New York Times Rent vs. Buy Calculator, can help you decide if owning a home or renting makes more financial sense for you.
Do you want to spend your weekends mowing the lawn, fixing a dripping faucet or cleaning gutters? Can you see an upside to dealing with the stress of a flooded basement or other major problem that will eat into your leisure time and your bank account? Are you excited to participate in community meetings, engage with neighbors and support the local Girl Scouts troop?
If you answer “no” to any of these, think again about this whole buying-a-home idea. If upkeep is the stumbling block, consider whether a community where you pay a homeowners association to provide most home maintenance might be more up your alley than a single-family home where you’re likely to be responsible.
One of the benefits of owning a home is that paying a mortgage month after month for years may help you accumulate savings and build wealth through equity, which is a measure of the share of your property that you own outright. The longer you stay in a home and pay down the mortgage, the more equity you’ll gain if its value stays the same or rises over time.
You don’t make big gains in equity overnight — interest typically eats up the bulk of your mortgage payments in the early years of homeownership. To figure out how much equity you have in your home, you’d subtract your mortgage balance from your home’s (current) market value.
It takes roughly five years to pay off a significant amount of interest, gain some equity and, depending on what you paid, recoup closing costs. But if you live in a hot market with rising home values, have a shorter-term loan or made a large down payment, you may be able to build equity more quickly.
Ask yourself why you want to buy. Is it just to keep up with your friends or because you’re “supposed” to now that you’ve reached a new life stage?
Or is it that you’re financially prepared and want to invest and build equity. Maybe you’ve been renting tight quarters and you want more room, which is great, particularly if you plan to start a family.
Thinking through your reasons for wanting to own a home will help you to figure out if it’s a wise move in your situation and to be sure you’re not doing it just because it’s expected of you.
Buying a house or condominium is a big step, and for those who are ready it can offer financial and social benefits. But owning a home comes with a host of responsibilities, both financial and practical. You should consider carefully whether it makes financial sense for you and if you have the time and motivation to become a homeowner. You may decide to wait a few years until you’re in a better place with your finances or are ready to put down roots — and that’s OK.