Right now, many people wonder if now is the right time to buy a house. In the United States, where I live, there is interest in buying now, before prices completely recover and while interest rates are near record lows. In Canada, there is a little more caution with regard to buying a home, since there are fears — especially in certain markets — that a bubble is involved.
No matter where you live, buying a home is a big commitment, so you shouldn’t enter into the transaction lightly. Additionally, it’s also a very personal decision, so what’s right for you now might not be right for someone else. Here are two things to consider before you buy a home:
Why are You Buying the House?
First, ask yourself why you are buying the house. The decision to buy a home is often rooted in a combination of personal and financial factors. Take a look at your situation and figure out the why behind your decision to buy a home.
Some think that a home makes a good investment. Over time, it’s possible for the home to appreciate in value, and provide a reasonable return. In some cases, it’s not so much the appreciation as it is the tangible nature of the home. It’s much easier for some to repose their faith in a piece of property they can touch.
Others want to buy a house as an income property. If you have the temperament to become a landlord, you can purchase the home and then rent it out, earning money each month. This can be a way to cultivate income now, while waiting for the home to appreciate in the future.
There are those who believe that a home doesn’t make a particularly good financial investment, but that it can be a great emotional/personal investment. Homeownership might have cachet attached to it, or perhaps you just want a place you feel like is truly yours. Buying a home can provide a safe, stable, and personal space that your family can use as a haven.
Perhaps you want to buy a home for a little of all those reasons. Before you buy, though, examine the real reasons that you want to buy. Just buying because everyone else around you thinks you “should” have a home is rarely a good reasons to make such a big financial commitment.
Can You Afford to Buy?
Once you determine why you want to buy a home, it’s time to decide whether or not you can afford to buy the home you plan to purchase. Whether or not you can afford to buy depends, in part, on the reasons behind buying the house. If you are buying a home to serve as an income property, you might be able to afford to spend a little more (assuming you can find a tenant to pay rent regularly) than if you simply plan to move in and raise a family.
When deciding on whether or not you can afford to buy, ask the following questions:
- How much of my income can I part with each month? Remember that a home is a commitment. A portion of your income will go to the home each month. How big do you want that portion? Will it take away from other things you want to spend your money on? You don’t want to end up “house poor.”
- Is most of my consumer credit dealt with? It makes sense to wait to buy until your consumer debt is mostly handled. Adding another debt obligation while you are already struggling with high-interest consumer debt, can burden your finances.
- What happens if I lose some of my income? If losing some of your income would lead to losing the house, you might reconsider its affordability. Do you have other sources of income? An emergency fund? Our home payment is less than 1/5 of our monthly income. This means that losing some of our income wouldn’t devastate our ability to make payments.
- What happens if I have to sell at a loss? Could you absorb a loss if you had to sell an underwater home? Or if market conditions or the need for a fast sale forced you to sell for less than you owe on your mortgage? Earlier this year, we thought we might have to try to sell to move for a job. We realized it would cost us about $10,000 out of pocket to make it happen. Is that something you’re prepared for?
Think about the consequences of buying a home before you take the plunge. W
What other ways can you determine if you are ready to buy a home now?