One of the most important decisions for a newlywed couple, a family in transition, or anyone who relocates to a new city is whether to buy or rent a home. People often say that they want to buy a home to begin building equity. However, there are many expenses outside of a mortgage payment that come with home ownership. You could be putting yourself in a bad situation if you don’t first take care of any outstanding debt you have, as well as build an emergency fund for any unexpected events. In addition, here are some other points to consider:
- While it’s nice to build equity from buying a home, it might make more sense to rent if it allows you to be in a more desirable part of town, or closer to work.
- You should also consider how long you intend to stay in the home and whether the current housing situation is more favorable for buyers or renters. If you are going to buy, you should make sure that you intend to live in the home long enough (typically at least 1-2 years) to recoup the closing costs and other fees that you pay when you purchase a home.
- And finally, make sure to take emotions out of your decision as much as possible. Of course everyone wants to own a home! Unfortunately, as the record number of foreclosures the last 2 years has shown, not everyone should buy a home. A good online calculator to help make your decision can be found on this New York Times website.
If you’ve decided that it makes more sense to buy, the next step is to determine how much you can afford. This is another area where a lot of people can get into trouble. Just because you are “pre-qualified” for a certain mortgage loan amount doesn’t mean that you can afford the full amount. In addition to the monthly principal and interest payment on the mortgage, you need to take into account other expenses such as maintenance and repairs, property taxes, higher insurance, and any other costs you make take on. As a general rule of thumb, your monthly housing costs shouldn’t exceed 28% of your monthly gross income. Of course, everyone’s situation is different, so this number may be higher or lower for you. Married couples will also want to make sure that they are able to continue paying the mortgage with just one spouse’s income in the event one of them were to lose their job.
After you’ve determined how much you can afford to spend on a home, it’s time to start your search. As my wife can testify, the odds of finding exactly everything you want (location, number of bedrooms, type of flooring, paint color, etc.) are about as good as winning the lottery. I recommend making a list of everything it is that you want, and then prioritize what you absolutely have to have versus what are just some nice things to have.
If you would like to discuss your current situation, or have any questions, please give me a call at 913.693.7918, or email me at [email protected], to schedule your free consultation.
John P. Chladek, MBA, CFP® is the President and Founder of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.