If you’re like a lot of renters, the idea that maybe you ought to buy a place has crossed your mind – it might well cross you mind every month, as you sign and mail your rent check to your landlord. “Why am I still throwing money way on rent? Maybe it’s time to buy a place of my own…”
It’s fun to think about never paying rent again. But getting a mortgage to finance a home purchase means rounding up a ton of paperwork, and more importantly, buying a home is a big commitment. How do you know that you’re ready for a mortgage?
The short answer: you could be ready for a mortgage if you are financially stable and if you are planning to stay in the same place for the next several years.
You Are Managing Your Finances Well
Every Thanksgiving, your loud Uncle Jeff wants to talk to you and all of your cousins about real estate. Uncle Jeff insists that owning a home is the only way to build real wealth, and that renting is a total waste of money.
You know, of course, that paying for a place to sleep and store your belongings isn’t exactly throwing your money in the trash can. But you wonder a little bit if maybe he’s right. If you could pay a mortgage for the same amount you’re currently paying in rent, why wouldn’t you choose the option that helps you build equity and puts a roof over your head?
Well, for one thing, homes are expensive, and they’re not entirely risk-free. There are upfront costs, closing costs, and costs to maintain the home once you’ve purchased it.
People do make money when their homes go up in value, but rising home values aren’t guaranteed.
If we’re talking about buying a home, we’re going start with the basic assumption that your personal finances are in good shape. You’ve got some savings and an emergency fund. You’ve got a retirement account or investments somewhere. You pay your bills on time and you haven’t maxed out all of your credit cards. If you’ve got student loans or other debts, you’re making decent progress on getting those paid off.
If your personal finances aren’t in decent shape, then you already know that it’s probably not time to plunk down for a house and a mortgage. And that’s all right. If you want to be a homeowner someday, the first step is to start cleaning up your finances. Check out these tips on saving money and using credit responsibly.
You Are Ready to Put Down Roots
Having a mortgage and owning a home ties you to a very specific geographic place. Homes are not things you can put in your pocket and carry around with you.
Where you live isn’t just an address, after all. Where you choose to live is where you make friends. It’s where your children go to school. Where you work. It’s where you shop and where you eat and where you worship, where you hike or swim or jog or sit and watch the sun set. Having deep ties to a community can be a wonderful thing. Where you live matters.
You should absolutely be excited about the idea of living in a home and community of your own before you decide to get a mortgage.
If you’re not sure your town is the right place for you, if you think you might need to move to a different town for work soon, or if you just don’t like the idea of being committed to living in one place for awhile? Then now is probably not the time for a mortgage.
Even if buying is less expensive in that renting in your community, buying a home costs money upfront. You’ll probably need to put in a sizable down payment. There are closing costs for getting a mortgage. For at least the first few years you own your home, you aren’t building a ton of equity. The biggest chunk of your early mortgage payments go toward interest.
Plus, as far as assets go, homes are what finance types refer to as illiquid assets. Even in hot real estate markets, and even if your home’s value has gone up significantly since you bought it, it’s not exactly easy to turn a home into cash money. You could sell a few stocks or bonds and still keep the bulk of your investment portfolio intact. But you can’t sell your second bathroom and keep the rest of your house.
So think about it, maybe it’s time.