If you’ve had enough of your roommate eating your leftover take-out, your absentee landlord hiking the rent year after year even though the heat barely works, or your mom asking what time you — a full-grown adult the last time you checked — will be home, you might be dreaming about buying your own place, and doing it sooner rather than later.
But how do you know if you’re ready to buy a home, and whether it’s a good idea? There are various rent vs. buy calculators out there (this one, from the New York Times, is probably the best) that can tell you whether, in general, buying a home makes more financial sense than renting in your area. But none of them can really make this huge decision for you.
And it is a life-changing decision. Owning a home has historically helped middle-class families build long-term wealth: The net worth of the median homeowner is an astounding 90 times that of the median renter. So why wouldn’t you want to jump on board that train as soon as possible?
Hold on, Tiger. Buying a home can just as easily wreak financial havoc on your life. Millions of families lost their homes to foreclosure during the Great Recession. Five million homeowners in the U.S. are still underwater on their mortgages, meaning they owe more to the bank than their home is worth, even after a five-year increase in housing prices.
The fact is, homeownership isn’t so much an investment as it is a forced savings vehicle. And despite the house flipping shows on HGTV, it is certainly not a get-rich-quick scheme. Here are some ways to gauge whether you’re really ready to buy — and keep — a home.
There’s a reason buying a home is often associated with “settling down.” You don’t need to be married or even in a relationship to buy a home, but it does help if you’ve hit a plateau of stability in your life. If you’re planning to buy a home with a partner, make sure your relationship is on solid footing. If you’re still itching to spend a year living abroad, maybe get that out of the way first. And if you (like most of us) couldn’t afford a mortgage without your current paycheck, fairly assess your likelihood of getting transferred or laid off, and whether you could easily find another job in your area if that were to happen.
Ask yourself: Am I in a relationship that is ready for this level of commitment?
“I wouldn’t want anyone to think you have to be married before you buy a house,” says Marie Presti, a owner/broker of the Presti Groupin Newton, Mass. “If you’re in a solid relationship, buying a property can be great because you’ll learn to work together with your finances and make decisions as a team. But you really don’t want to buy a property with another person if your relationship isn’t stable enough, because it’s a stressful process.”
You need to be prepared to stay in the home for five to seven years or more. Selling a home is crazy expensive – realtor commissions alone eat up about 5% of the sales price. And if the housing market tanks, as it’s wont to do from time to time, you don’t want to be forced to sell into a crisis — you want to be able to ride it out until prices recover.
So if you want to walk away with any money after a sale, you should plan on staying put for a while – or at least be confident that you could cover most or all of the mortgage by renting out the property should you be forced to move before then. “You don’t want to buy a property if you don’t plan to be there for five to seven years,” Presti says.
Owning a home may come with some lifestyle changes as well – especially if the homes you can afford will require some work. “Some buyers I know love taking two or three vacations a year or going away every weekend all summer, and they’re not quite ready yet to spend a lot of their free time working on their primary residence. And if that’s the case they maybe aren’t ready for a fixer-upper,” Presti says. “I know many new homeowners who take the time and money they would have spent on a vacation and put it into the new house instead, and that’s a smart long-term financial decision. But are you ready to give up a year or two of vacations?”
Ask yourself: Am I ready to stay in one place for five years or more? Is my career stable enough that I won’t need to move around for work opportunities?
Remember that inertia is a powerful force, and as you put down roots — making neighborhood friends, sending kids to local schools, getting involved in the community – you may find it harder to pick up and leave later on. If you can’t see yourself living in a place five years from now, think hard about whether buying is the right move.