April 19, 2018
As we head into the heart of home buying season I am concerned some of you may be caught up in the “buy now!” frenzy. With home values rising strongly in many regions, a shortage of homes for sale, and mortgage interest rates beginning to inch higher, the headlines abound that now is a “great” or “smart” time to buy. The message is: hey, you don’t want to miss out.
Slow down. Please do not think of renting as “throwing money away.” For some people it can make great sense to rent:
• You aren’t sure where you might want to live three or five years from now. Can you envision maybe wanting to move in a few years—maybe across state, or across the country? For an adventure, or a career move? Well, in that case, I do not recommend buying a home. If you plan to move in five years or so, the cost of selling your home might wipe out any gains you might make.
• You can’t make a sizable down payment. There are widely available mortgages that require a down payment of just 3 or 3.5 percent. I think a low down payment is a dangerous sign that you really aren’t ready to own. Ideally I want you to only buy once you can afford a 20 percent down payment. I will budge a little and say it is okay—though not ideal—if you make a 10 percent down payment. But not any less.
• You can’t handle the extra costs that come with home ownership. Please don’t make the costly mistake of thinking that whatever rent you pay today is what you can afford to pay for a mortgage. When you buy a home you sign on for some major extra costs: you will owe property tax and be responsible for the maintenance of your home. A home insurance policy will also be more than a renter’s policy. My rule of thumb is that these extra costs of home ownership can add 30 percent to your base mortgage amount. So if the mortgage is $1,500 a month, your total housing costs might be around $1,950. Run the numbers before you buy, to make sure you can truly afford the all-in cost of home ownership.
• You don’t really want to own. Please stand in your truth. Ignore the headlines. Ignore what friends and family are telling you to do. Buying a home is the biggest financial move you will likely ever make. You should only take on this responsibility if you want to. Not because you are being told you should.