Should I Buy A House Now or Wait?

Buying a house can be a dream come true or your worst nightmare.

There are many factors to consider before you decide you are ready for homeownership.

Aside from financial considerations, such as mortgage payments, property taxes, insurance, maintenance and increased utility costs, you should decide if you intend to remain in the same home for three or more years and if you are ready to deal with all the responsibilities homeownership entails.

A Home Is An Anchor

If your job requires that you relocate every few years, a home may not be the best investment for your money, unless you find an amazing bargain. It can take months, especially in a sluggish market, to sell a home. If you must sell in a hurry, you may have to sell for less than market value or even your initial purchase price. Financial experts currently recommend that you only buy a home if you plan to live in it for 3 to 5 years because the slow growth in the economy means housing prices will not be increasing leaps and bounds anytime soon.

The 3-year mark is also beneficial because it helps you deduct $250,000 (or $500,000 if married and filing jointly) in capital gains if you live in the property as your primary residence for 3 out of 5 years. However, there is a 2 year waiting period between sales.

The single exception to remaining in a home long term is if you get an exceptional price on a house that needs work and you are willing to put in enough sweat equity to increase the value of the home. Or maybe you just found a great foreclosure deal. Just remember, you will need to invest some money and time to realize a profit. This type of investment is best for those who have some experience getting mortgage loans, construction work and the costs necessary to make repairs and improvements, and an intimate understanding of real estate values in the area.

Are You Financially Ready?

The recent mortgage crisis has demonstrated the dangers of creative financing when buying a home. The gold standard in mortgages is the 30-year fixed rate loan. To get the lowest interest rates, you must be employed at the same job for more than two years and have a sizeable down payment. A 20% down payment is better than 10% (or even 3.5% for FHA) because mortgage lenders do not require PMI (private mortgage insurance) for loans with a down payment of 20% or more. PMI is a type of insurance which pays the bank if you default on your loan. The money you pay for PMI offers no benefit to you and adds to your monthly payments.

Not everyone qualifies for FHA loans since they are intended to make home ownership possible for individuals in lower income brackets. If you are seeking a private mortgage, the lowest interest rates are offered to those with a good credit score of at least 720. A large percentage of the payments go toward interest while a relatively small amount is applied toward reducing the principal of the loan.

Higher interest rates also mean higher payments with most of the money going to the lender as interest. If you plan on staying in your property long term and do not have many other investment opportunities, then maybe paying off your mortgage early is the smart thing to do.

In addition to having a down payment and closing costs, it is important to have savings equal to at least 6 months expenses (mortgage payment, utilities, car loans, car, health and life insurance needs, food, gas, basic living expenses, etc.) before signing a mortgage loan. Tragedies and emergencies happen and if you lose your job due to downsizing, layoffs, an illness or injury, you need this cushion to remain financially stable.

Is Now A Good Time To Buy?

While this is not the deciding factor for most people, current interest rates and real estate values should be a consideration when buying a home. Are real estate prices likely to rise or fall over the next 12 to 18 months? Getting a lower interest rate can save thousands of dollars over the term of a 30-year mortgage. Since there is a lot less risk in the market and housing prices are likely to rise in the near future, buying a house sooner than later would make the most financial sense.

It is important to remember that while a house is a home for you and your family, it is also the biggest investment most Americans make in their lifetime and an essential aspect of financial planning. Getting the best deal with the best interest rate has long term financial implications and can be an important step in achieving financial security for your family’s future.

Photo Credit: Don The Idea Guy Snyder