Should I Buy a House? When Homeownership Is Right For You

Buying your first home can be one of the most rewarding investments you make in your lifetime, so it’s important to be financially—and emotionally—prepared. While it can be easy to get caught up in the excitement of finding your dream home, it’s critical to consider whether you’re truly ready for homeownership.

While the downside of renting is making continuous payments without building equity, committing to a mortgage you can’t afford can just as easily set you back. Long before you talk with a lender about your mortgage options, it’s best to get a holistic view of your finances and determine if your lifestyle is suited for homeownership.

Let’s explore whether buying a home is the right choice for you.

Financial Readiness: Can I Afford to Buy a Home?

To determine if you’re truly ready to buy a home, you’ll need to take a close look at the following factors.

Credit Score

A good credit score is always important, but it’s especially essential when preparing for homeownership. A higher score can impact the types of loans you qualify for and may secure you a more favorable interest rate.

When considering buying a home, keep your credit score on track by:

• Getting a free credit report from the major credit bureaus at AnnualCreditReport.com and checking it for accuracy
• Paying down credit card balances to reduce your debt-to-income ratio
• Paying your bills on time

Down Payment

A down payment is the initial amount of money you’ll need to pay toward the purchase of a home before taking out a mortgage for the rest. While 20% is often cited as the standard down payment to avoid mortgage insurance, many loan programs, such as FHA loans, allow for less—even zero down with a VA loan. Remember, regardless of the loan type, a larger down payment reduces the amount you need to borrow and the interest accrued.

Figure out how much you could comfortably afford to put down for a new home. Then, use our mortgage calculator to see how various down payments could affect your monthly payments.

Closing Costs

Closing costs are fees in addition to the home’s purchase price, covering services provided by third parties during the buying process. These costs, which are typically due at the time of closing, usually fall on the buyer and include various fees and expenses, including:

• Application fee
• Attorney fee
• Credit report fee
• Escrow deposit
• Origination fee
• Property appraisal fee
• Title search fee
• Underwriting fee

Emergency Fund

When the car needs work, the roof needs repairs or you have a medical expense, you need to be financially ready. You don’t want to put all your money into your home without having a solid emergency fund in place. Ensure you have easily accessible cash savings that can cover three to six months of expenses.

New Home, New Bills

There are other homeownership costs beyond your monthly mortgage payment. Without careful planning, the new increase in monthly expenses can be challenging. A few new bills you may take on include:

Utilities

Rental payments may cover cable, water, sewer, electricity or garbage collection. But when you own a home, you are responsible for these costs.

If you want to get a good idea of what your new utility bills might look like, you can always ask the current owner of the home you’re interested in what they spend on average for utilities and services. You can also talk to utility companies for budget tips or any potential special discounts.

Home Maintenance and Repair

Paying the bills is one thing; maintaining your home's structural integrity and beauty is another. When you're a homeowner, performing regular home maintenance can help you avoid major repairs down the line.

Plan and budget for routine tasks like cleaning gutters and replacing furnace filters. Additionally, unexpected issues like a burst pipe, faulty wiring or a termite infestation can strain your budget and may require outside help from professionals.

Yard Upkeep

Maintaining your home’s curb appeal is an investment of time and money. If you buy a home with a sizable yard, you’ll need to purchase various yard tools, like lawnmowers or snow blowers, to maintain upkeep. If you’re keeping up your yard on your own is not an option, you may want to consider hiring a landscaping professional who can help. Regardless, the costs should be considered.

Insurance Premiums

Your homeowners insurance policy, which is separate from mortgage insurance, protects one of your biggest investments. Just like auto or health insurance, your homeowners policy is a safeguard for you and your family in the event of unforeseen circumstances.

The cost of your policy depends on a number of risk factors, including:

• Insurance replacement cost estimates
• Property age and location
• Regional geography
• Certain breeds of pets
• Swimming pools, trampolines or other recreation equipment
• Neighborhood
• Home or yard maintenance

Depending on where you live, homeowners insurance can add up. Some lenders may also require you to pay the first year of homeowners insurance upfront.

Property Taxes

Homeowners are required to pay property taxes. Most often, your property taxes will be determined by multiplying your local tax rate by your home’s appraised value. For example, if your home is worth $200,000 and your local tax rate is 1.5%, you’ll pay $3,000 annually.

While you’re paying your mortgage, your lender may collect a monthly payment for your property taxes and homeowners insurance and place them into something called an impound account (AKA “escrow account”). This payment amount is based on an annual estimate and will be paid by your lender on your behalf to the respective agencies when due.

Condominium and HOA Fees

If you purchase a home within a condominium or homeowners association (HOA), you’ll be required to pay a monthly or quarterly fee. Typically, an HOA fee pays for the upkeep of common areas on the condo’s campus or grounds, while an association fee pays for the maintenance within a homeowner’s property (or their individual condo unit).

Association and HOA fees can range from a few hundred to a few thousand dollars each year, depending on the scope of services provided to residents. If your condo has plans for big projects—such as a new roof job or repaving a parking lot—you could be asked to contribute to its expense.

Comparing Renting vs. Buying

Comparing costs and long-term financial benefits is essential when deciding between renting and buying.

Monthly Rent vs. Mortgage Payments

Renters typically spend a greater percentage of their monthly income on rent than homeowners. But while homeownership can lead to lower monthly payments, you must also consider factors like property taxes, maintenance and insurance.

Price-to-Rent Ratio

The Price-to-Rent ratio is a helpful tool to determine whether to buy or rent. This simple calculation provides a ballpark figure that can help determine which route makes the most financial sense.

The Price-to-Rent ratio compares the cost of renting vs. buying by dividing the asking price of a home by the average annual rent cost of a similar property:

Asking Price of the House ÷ Your Annual Rent = The Price-to-Rent ratio

The calculation takes into account all of the costs associated with buying a home, including closing costs, taxes, insurance, and other home expenses.

An industry rule of thumb is if the ratio is below 15, the housing market benefits buyers. However, if the ratio is above 20, the housing market favors renters.

For example, let’s imagine there are two condo units in the same building. One is for sale for $150,000, while the second unit is available for rent at $12,000 a year. After dividing the price of the condo for sale by the annual costs of the condo for rent, your resulting ratio is 12.5, indicating it may be the right time to buy.

You can also use our Am I Better Off Renting? calculator. Input the costs of renting and buying a home and compare the numbers.

Long-Term Financial Benefits

People often criticize the financial decision to rent. When you buy a home, each mortgage payment goes toward building your personal wealth rather than your landlord’s wallet. A few financial benefits of homeownership include:

• Home equity
• Tax reductions*
• Establishing credit
• Access to loans

When you have home equity, it’s almost like having a built-in savings account. You can tap into equity to gain access to money through a home equity loan or cash-out refinance, which can help you start a new business, pay for college tuition or finance a home renovation.

By the time you’ve paid off your mortgage, you will have built a nice nest egg, which you can apply toward investments or retirement. You can also turn your home into a rental property to create a passive income stream.

Maintenance and Repair Responsibilities

If you’re renting and your heating or AC breaks down, you typically call your landlord, who will handle the repairs. As a homeowner, you will be responsible for all maintenance and repair issues and related expenses. You will need to ensure that you have funds available for both routine upkeep and unforeseen repairs.

Market Conditions: Is It the Right Time to Buy?

The housing market can significantly impact the right time to buy a home. Here’s what to evaluate as you weigh the pros and cons of renting vs. owning.

Is it a Buyer’s or Seller’s Market?

• Buyer’s market: In a buyer’s market, you’ll find many homes for sale. Homebuyers often have more negotiating power, potentially leading to better prices and favorable terms.
• Seller’s market: In a seller’s market, housing demand outpaces supply. Competition may be fierce, with sellers receiving multiple offers, driving up home prices and reducing buyers' leverage.

Interest Rates

Mortgage interest rates play a big role in determining your monthly payments, overall loan affordability and your homebuying budget. Lower rates can increase your buying power, while higher rates may limit your budget and lead to higher long-term costs.

Rent Prices

When rent prices rise to comparable levels of a mortgage payment, homeownership can be a more appealing option and may make more sense.

Local Market Conditions

Real estate trends can vary by area; housing prices and competition can differ between cities and neighborhoods. Understanding trends in your desired area can help guide your home-buying decision.

Economic Factors

Factors like job growth, population shifts and new developments can boost property values and demand. Economic downturns may potentially slow the market.

Lifestyle Considerations as a Homeowner

Your current lifestyle and future plans are other factors to think about as you decide whether to purchase a home. Let’s break down some more things to consider.

Stability vs. Flexibility

Do you plan to stay in the same place for several years? If you’re a renter, you can move with a moment’s notice—with few strings attached. The same is not necessarily true when you are a homeowner. In fact, you could end up losing money if you choose to leave too soon.

Typically, mortgage experts suggest a person lives in their home for at least six years. The reason has less to do with convenience and more with allowing you to reap a return on your investment.

When you buy a home, you may owe various closing costs — which could range anywhere from 3-5% of your home’s value or more. In addition, staying in your home longer gives you the chance to start paying down your principal balance, which ultimately makes your mortgage payment a better deal than paying rent.

Ultimately, you'll want to do your own calculations. Compare the total cost of the mortgage (including closing costs) against the cost of renting in your area to determine how long you would benefit from staying in your home.

Career and Job Stability

Buying may be a good investment if you plan to stay in your current job or area long-term. If relocation is likely, renting for now might be a better option.

Family Plans

Think about whether you’ll need room to grow in the future. Owning a home provides stability for raising a family, while renting offers the flexibility to move as your needs change. However, as a renter, you can’t always modify your space to fit your lifestyle. Homeownership, on the other hand, allows you to adapt over time—whether by adding a room, renovating or making the space more family-friendly.

Neighborhood and Community

A home is a long-term commitment, so you need to be certain about your location before settling down. Consider factors like:

• Your job and commute
• Schools
• Proximity to shopping, highways, public transportation and recreational facilities
• Safety
• Property value trends
• Future developments that could impact your quality of life

Start Your Home Buying Journey Today

Owning a home has several advantages – it also comes with a lot of financial responsibility. Before you begin your home search, take the time to assess your budget and determine whether homeownership is right for you. Still not sure? Our Pennymac Loan Experts are always here to answer your questions and guide you through a happy home-buying experience.

*Consult a tax advisor for further information regarding the deductibility of interest and charges.

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