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Are You Ready for Home Ownership?

 

While home ownership represents the realization of a lifelong dream for many of us, it’s also a big responsibility; financially, physically, and emotionally. Before you rush out to find your piece of the American Dream, answer these questions to make sure you’re ready.

Lay the groundwork.

  • Find out how much money you have on-hand today and how much you owe to others.
  • Establish a monthly budget that accounts for your take-home pay and your monthly obligations. Be sure to include two line items for savings – the first for emergencies; the second for retirement. Depending on what your budget allows, try to earmark 15% or even 20% of your income to savings.
  • Make the commitment to pay yourself first through savings.

How stable is your income?

Losing your job or dropping from two incomes to one can prove disastrous relative to your ability to make your monthly house payment and cover other household expenses. In turn, late mortgage payments will wreak havoc with your credit history and may result in foreclosure. Assess your current and potential future situations to answer these questions:

  • Are you considering a job change where you might take a pay cut?
  • Are you planning to have children? Will you use daycare or will one parent leave the workforce to stay home?
  • Do you have enough savings to cover all your monthly expenses (for 3 months or more) if you experience a job loss or temporary loss of income?

Can you stay for awhile?

The transaction costs (i.e. loan origination fees, down payments, realtors’ compensation) of buying or selling a house are steep, and if you only stay a short time, the appreciation of your home’s value may not fully offset those transaction expenses. The result? You may very well lose money on your investment. Plus, if you are able to generate a profit from the sale of a home you’ve owned for less than 2 years, you’ll pay capital gains tax on that profit. Unless you’re in a red hot real estate market, a good rule of thumb is to assume that it will take 3 or 4 years to fully recoup your costs. So ask yourself:

  • Is there any chance your current employer will transfer you?
  • Would you consider leaving your job for a new one?
  • Is it probable that family obligations or potential crises might force you to move away?
  • Do you think you might go back to school?

Is there any advantage to renting?

For many, the decision to buy a home versus continuing to rent is driven by comparing the monthly cost of each option. In many instances, when you combine the difference in monthly cost with the potential return on the overall investment, the ‘buy’ option is the clear winner. However, if you live in an area where your cost of renting is at least 30% lower than the total monthly cost of owning (including mortgage, insurance, taxes, and homeowners fees), it may often be smarter to continue renting.

 

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