Is Now The Time To Buy A Home?
Two magazines arrived in my mailbox last week telling me that NOW is the time to buy a home; the real estate market has bottomed out and prices are starting to go back up. That whole buy low, sell high adage? This is buying low.
If X is less than 15, it’s cheaper to buy than rent. Right now, it’s definitely less than 15 in Chicago, where I live.
Here’s the thing: I’ve been a renter for about fifteen years, and the longest I’ve ever lived in one place was just shy of 3 years. (I’m not counting those 6 months that my name was on the deed of a “dream home” before I realized it wasn’t my dream – that’s a different conversation). Considering my history, it’s safe to say that the thought of committing to one address for an extended period of time kind of scares the crap out of me.
But how can I ignore the hard financial facts that tell me that I could be building equity in a home with each big, fat check that I write for rent instead of it fattening some real estate investor’s wallet? Add in the fact that my lease is up soon and my rent is going up about five percent… it should be a no-brainer, right?
Choosing to invest in a home is about more than just the monthly mortgage payment though. First of all, if you’re not planning to stay for at least three years (some people might say ten years after the recent market crash), don’t bother. If you decide to look into buying, make sure you factor in all the costs like property taxes, condo assessments, homeowners insurance, maintenance and any improvements or changes you’ll be making to the property.
If, after looking at those numbers, you decide to take the plunge, a few questions to answer first:
How much can you afford? Your total monthly housing cost (principal + interest + property taxes + insurance) should not exceed 28% of your monthly gross income (gross = your pay before taxes, insurance, 401k, etc). This ratio applies to rent as well. Anything more and you’ll find yourself “house poor.” Know your total number before you start looking and don’t let your Realtor talk you into going outside your price range.
How much should you put down? The gold standard is 20 percent. This way you’ll avoid having to pay private mortgage interest (PMI) and you’ll get the best interest rate. The more skin you have in the game, the more likely a bank is going to lend you the rest of the money at a lower rate.
What type of mortgage should you obtain? You’ll have several options. Don’t pick based just on monthly payment.
- 30 year traditional: A 30 year mortgage is considered the standard – you’ll have a fixed interest rate and fixed payment; your home will be fully paid for in exactly 30 years. This is your parents’ mortgage.
- 15 year fixed: This type of mortgage is becoming more popular, as people are more debt-averse and want to own their homes sooner. Choosing this option makes your monthly payment considerably higher, but you’ll also pay much less in total interest.
- Adjustable Rate Mortgage (ARM): ARMs usually start at a below-market rate that will adjust with the market after a certain period. These were very popular during the buying boom in the early 2000’s – lots of people took out ARMs, figuring they’d just sell before the 5-year adjustment period. Then the market tanked and they were stuck with a house that was worth less than they owed AND a higher mortgage payment. An ARM is really only appropriate when you won’t be in the property for more than 1-3 years. Trying it for longer is a risk.
What interest rate can you expect to be offered? The rate that lenders offer you will be based on the current mortgage rate environment as well as your credit score. Before you apply, you might want to find out what your FICO score is so you can fix anything that needs fixing before applying.
So tell me in the comments – are you house hunting? Or are you like me, hesitant to put roots down just yet?