As you can imagine, the topic of buying a house comes up often! This could be the first house you’ve ever owned. Or perhaps you wish to return to homeownership after a period of renting, now that you’ve learned the new area you moved to. This blog won’t address whether the payments are affordable for your circumstances or whether they’re a wise decision (that’s another topic in and of itself). Rather, it will address the foundation that should be built before considering homeownership.
You Need an Emergency Fund
You need an adequate emergency fund. This is in addition to a down payment, any closing costs you pay out of pocket, and moving expenses. Your emergency fund should typically be between three and six months of expenses. And ideally, it needs to reflect an estimate of your new expenses after the home purchase.
Owning a house is expensive and the costs are commonly underestimated. For example, your water bill will typically increase because you’ll need to water your lawn. You’ll need a lawnmower (or lawncare services). If you’re moving into a larger space, electricity may increase. Pest control may be needed depending on your location – because who wants critters or insects in their kitchen?! Also, don’t forget about any house projects you may wish to undertake, new furniture for the new space, and décor. I haven’t mentioned everything but you get the idea!
Housing costs are also more unpredictable because unexpected expenses come up. Things break and at the worst.possible.time! Sometimes your homeowner’s policy will cover large expenses but a deductible will still need to be paid. Many times, insurance won’t come into play – like when an air conditioning unit or furnace needs to be replaced. A common rule of thumb is that annual maintenance costs will be approximately 1% of the fair market value of your house at minimum. In some areas or depending on the age of your house, it’s closer to 4%. You won’t spend this every year but it will average out because in some years, you’ll spend much more.
So plan on the fact that your expenses will adjust when you buy a house. If a true emergency happens, you’ll want to be able to rely on an emergency fund so you don’t rack up credit card debt.
Pay Off Credit Card Debt First
Credit card debt is expensive. What I mean is that the interest rates on credit cards are very high and carrying a balance from month to month is costly. Using credit cards for rewards and convenience is completely fine but the balance should be paid in full month to month. Now I understand that this isn’t always realistic. Life happens. But if you’re in a position where you can’t pay the credit card off, it’s probably not the best time to purchase a house. Credit card debt (that isn’t fully paid each month) is usually an indication that there is a cash flow issue. Again, I understand that life happens and you’re doing your best. But a house is a big commitment and ideally, your cash flow should be under control and expenses shouldn’t be more than your income when entering into this kind of commitment.
You Have Stable Income
This one sounds obvious but it has to be said. You may be thinking that having a stable income is important when renting as well (and you’re correct). But keep in mind that a foreclosure on a house is a bigger deal than breaking a lease to move to a cheaper apartment. Note that having a stable income doesn’t mean you need to have the same job forever. It’s fine if you change companies but be sure you can earn similar pay if your mortgage payments (and other costs as mentioned above) are relying on your income.
You Can Stay in the Same Location for a Few Years
Ideally, plan to stay in the same location for at least a few years. This is because you can lose money by selling a house right after you buy it. There are exceptions to this and in the current housing market, this may seem less important. But it’s still possible to lose money when selling your house – even today. Closing costs are expensive and at the beginning of a mortgage, monthly payments pay more interest than principal. The traditional rule of thumb is to stay in the same house for about five years before selling so you have time to recoup these costs. Depending on your area, the time frame may be shorter (because housing prices are skyrocketing) but remember that we may not be in this environment forever (remember 2008?). Also, moving can be incredibly expensive and should be recognized as an additional cost. The takeaway here is just to be aware that if you buy and sell your house in a short time period, you’re more likely to lose money.
You Actually Want to Own a House and Experience Everything That Comes Along With It
This one’s more controversial because you’ve probably been told that buying a house is a good investment (which isn’t always true! – tune in for another blog on this very topic). Buying a house can feel like a cultural norm but is it actually what you want right now? Don’t feel pressured to purchase a house just because you reach a certain age or because of outside influence. More and more people are intentionally choosing to rent because they don’t want the responsibilities associated with home ownership and they prefer the ease of renting. That’s ok! Owning a house is expensive and maintenance and upkeep can be inconvenient. If you prefer to rent, then that may be the best decision for you.
Owning a home can be a wonderful experience and when the time is right, buying a house will be a fun, new chapter in your life. However, when rushed it could lead to financial challenges. If someone hasn’t already said it, it’s ok to wait. And if you aren’t financially ready, waiting is a good idea. If you have any questions about the best choice for your circumstances, feel free to contact me.