While a house can be an asset, the decision to purchase a home is both a financial and emotional one. For most Americans, a house is the single biggest purchase they’ll make in a lifetime. However, paying too much for a home can be a big financial setback. That’s why it’s important to know if you’re ready to buy a house. To assess your situation, you’ll need to ask yourself a few crucial questions.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Can I Get a Good Mortgage?
The 30-year fixed mortgage is the standard loan given to most homebuyers. Adjustable-rate mortgages (ARMs) gained notoriety of the wrong kind thanks to Michael Lewis’s housing crisis book/movie The Big Short. However, adjustable-rate mortgages do make sense in certain situations. If you’re young and might need to move for career purposes in the next 5-10 years, an adjustable-rate mortgage might save you money since you won’t be in the house long enough to enjoy the benefits of equity.
Mortgage rates are indeed at historic lows, but that’s been in the case for a few decades now. Mortgage rates have been falling consistently since the 1980s, where rates of 10-12% weren’t unusual. Rates rose slightly during the lead-up to the housing crisis as lenders increased standards, but sub-5% rates have been the norm since around 2011.
In order to reap the benefits of these low mortgage rates, you’ll need to have your credit in good standing. Not only does your FICO score play a role here, but so does your debt/income ratio. According to Investopedia, 28% or less is the ideal range lenders want to see. That’s 28% of your monthly income going toward housing-related costs like mortgage payments and insurance. If you’d be spending more than 28% of your monthly pay on housing, you’re probably biting off more than you can chew.
Do I Need A Down Payment?
Yes, you need a down payment! While you can get a loan through the Federal Housing Authority with less than 5% down, it’s usually wise to pony up at least 20% of the purchase price to avoid highly monthly fees and private mortgage insurance (PMI). Everyone needs homeowners insurance, but PMI is an additional charge that protects the bank’s investment. That’s right, if you don’t have enough for a down payment, the bank will need insurance on you. PMI is paid by the homeowner, but they reap benefits from it.
If you don’t have enough for the 20% down payment, consider downsizing your aspirations or continuing to save for a little bit longer. Don’t let the thought of missing out on a hot housing market cause you to buy more house than you can afford. You’ll need to consider not just the mortgage and insurance, but also taxes, closing costs, and maintenance costs. If the math doesn’t check out, keep saving.
What Does the Future Look Like?
Money is all the same to the bank and realtor, but a home price means something different to different sets of people:
- If you’re single and just starting your career, buying a home might not be a 30-year endeavor, but a way for you to build equity while establishing yourself.
- If you’re married and starting a family, a house could be the place where you create lifelong memories over a period of decades.
- If you’re older and your children have all moved out, buying a home could be a way to downsize and declutter your life.
In these three scenarios, the same house might be suitable for all three parties. But each party will have entirely different goals and needs from the home. Plus, all three parties are likely in very different financial situations.
There’s no easy way to decide when it’s time to buy a house. You’ll need to determine your own goals and future aspirations and consider how buying a home fits in. Buying a house is a huge commitment both financially and personally—it’s not a decision to be made on a whim. If you’re going back and forth on the pros and cons of homeownership, don’t be afraid to consult a financial advisor for an outside opinion.
Work With an Experienced Financial Advisor
Are you ready to buy a house? Reach out to a team member from Good Life Financial Advisors of Mount Pleasant today! We’re happy to assist you.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.