Planning matters

Ready to Buy a House?

Determining whether to buy a house or stick to renting is a major decision. While there are many personal factors, a number of indicators can help determine when you’re ready to buy.

  • Putting Down Roots – How long do you plan to stay in the home? As a general rule, a buyer should plan on staying five or more years in a home. Why? The transaction costs associated with buying. For example, closing costs – a one-time expense you pay to close on your loan, are generally 3% – 6% of your total loan value. By staying in your home longer, you spread these costs over more years and increase the likelihood of building equity (the value of your home less the amount you owe), which will result in making more money when you sell.
  • Adequate Savings & Monthly Income: Does your monthly income exceed expenses, and have you established an emergency fund covering 3-6 months of expenses? The true cost of homeownership goes far beyond your monthly payment. You need to be prepared for these planned and unplanned expenses. Some of these costs include:
    • Insurance: The average homeowner pays a little more than $100 a month for homeowners’ insurance.
    • Property taxes: You must pay property taxes no matter where you live. The more your home is worth, the more you’ll pay.
    • Utilities
    • Maintenance & Repairs
  • Credit Score Is On The Rise: Did you know your credit score plays a major role in your ability to get a home loan? As you pay down debt and prove yourself to be a dependable borrower over time, your credit score will go up. Most mortgage loans require a credit score of 660 or higher.
  • Money For A Down Payment: While it’s possible to buy a home with as little as 3% down (some specialized loans even allow for 0%), it’s prudent to have a 20% down payment, which will allow you to avoid paying for private mortgage insurance (PMI). This will save thousands of dollars in insurance costs.
  • A Reliable Source Of Income: This is crucial to making monthly payments on your mortgage. Also, lenders will consider your regular income when deciding how much they may be willing to loan you. One factor looked at is your debt-to-income ratio (DTI), which lenders use to determine whether borrowers are reasonably able to take on more debt. Lenders typically prefer borrowers with a DTI under 50%.

2021 Considerations

Slim Pickings & Bidding Wars: 2021 is most definitely a seller’s market, meaning there are more buyers than sellers, and as such, the demand for housing is driving up the cost of homes. Bidding wars are starting to feel common, and it’s not unheard of for homes being sold for a significant amount more than the listing price. It’s especially important in this type of market to decide before you start looking how much you can afford and to stick to this no matter the pressure.

Super Low Interest Rates: Interest rates are still near record low. This can mean significant savings over the life of the loan, but shouldn’t be the only reason to buy now if you aren’t financially in a good place to do so.

If you’re thinking of buying a home, there are many factors to consider both personally and when looking at the current market conditions. This, or any other major financial decision, is a great reason to reach out to your financial planner, who can help you make a good decision that fits with your overall goals.