Owning your home is fantastic — if you are financially ready. Here’s a quick checklist to help you determine if you can afford to be a home owner.
The first home purchase is not only a major life milestone, but it’s also a big financial commitment, a decision you should not take lightly. There’s a lot more to buying a house than just the price of it. Other items to factor in include mortgage origination fees, closing costs, interest, homeowner’s insurance and property taxes, which can fluctuate depending on the yearly assessed value of your property.
And then there’s the regular, everyday stuff, like the cost of utilities (especially if you upgrade to a larger space) and maintenance. This is definitely not meant to be a downer, but a reminder of the financial realities of home ownership before you jump in.
How do you know when you’re ready to buy a home? Check off this list first.
- Your other financial goals are on track. This means you have retirement accounts and contribute to them regularly. You should also have your consumer debt under control — or, ideally, you don’t have consumer debt at all.
- You have a full emergency fund. The general rule of thumb says you need three to six months’ worth of expenses. If you plan to buy a home, you may want to boost your cash savings or create a new fund for house-specific costs (like regular maintenance and repairs).
- Your credit score is good or excellent. You need great credit to secure a low interest rate. This is crucial. With something as big as a home mortgage, a higher interest rate means an additional hundred thousand dollars or more over the lifetime of the loan.
- You have job security. It’s difficult to say you’re 100% certain your position at work isn’t going anywhere – but if your work is highly unstable, that might be a red flag. Don’t get into a home you can only afford if you always make your current income or more.
- You calculate out how much a home would cost you a month. Your total living expenses with your new home should not exceed about 25% of your current budget.
- You plan to live in this house for more than five years. Buying and selling a property within five years is typically a losing proposition. The home hasn’t had enough time to increase in value.
- You have a down payment. You need to have at least 20% of the home’s purchase price saved for the down payment. Any less and your mortgage lender require you to buy PMI, or private mortgage insurance, which adds an additional monthly fee on top of everything else that makes up your mortgage payment.
If you can check these items off the list, congratulations! It’s time to start thinking about how you prepare to purchase your first home. And if you’re not quite there yet, that’s okay. Keep looking for new ways to increase your savings and get your finances in order.
(Our next article looks at saving for your down payment.)
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Written by Mary Beth Storjohann, CFP, who is the founder of Workable Wealth, an RIA in San Diego. She is a writer, speaker and financial coach who is passionate about working with individuals and couples in their 20s and 30s to help them organize and gain confidence in their financial lives. She has been quoted or featured in various industry publications on the local and national level. You can find her on Twitter at @marybstorj.
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