It’s true that for most people, a house is the biggest single purchase they will make in their lifetime. Deciding when, where, and if to buy a house at all can be very stressful, especially in the aftermath of the housing market collapse. Is this the best time to buy? The worst? Are you better off renting? Here are some things to consider when you make that decision.
Buy or Rent: What do your personal finances look like?
First, you need to be realistic about the health of your financial life and – regardless of the current state of the housing market – if this is the right time to buy for you. Gone are the days where you simply sign your name and find yourself the owner of a brand new house. Loans aren’t as easy to come by, and lenders want to know you’re secure and stable. Ask yourself the following questions:
Do I have good credit? Lenders want to see that you have a steady income, have a long credit history, and pay your bills on time. Take some time to improve your credit before applying for a mortgage and you’ll end up with lower rates (and save yourself money in the process).
What is my debt-to-income ratio? Lenders also want to see that the debt you carry is lower than the income you make. Your debt-to-income ratio should be around 30% or less. Higher than that, and it’s going to be tough to get a mortgage.
Can I afford the house I want? Don’t expect to simply replace the monthly rent check with a monthly mortgage check. The cost of home ownership is higher than the mortgage payment alone due to things like insurance and property taxes. A good rule of thumb is to add 30% on to the mortgage payment to see what you’ll be paying every month. And don’t forget that you’ll need money for the down payment, closing costs, and commissions as well.
Buy or Rent: What does the market looks like?
If your finances are in order and you believe you’d qualify for a loan, the next thing to do is consider the market. As the economy continues to recover from 2008’s economic crisis, the issue of whether to rent or buy is tougher than ever to figure out.
Rates are at near-historic lows. Rates on fixed mortgages are the lowest they’ve been in over 30 years, currently hovering around 3.5%. The Federal Reserve says it will keep rates low at least through 2014, which gives you some time to take advantage of them.
Buyer’s market, seller’s market – does it matter? The market bottomed-out last year and in most places in the U.S., we’re looking at a seller’s market. Where just a year or two ago a house would have sat unsold for many months, it’s now being snapped up. You won’t have the buying power you would have had a year or two ago, and you probably won’t get the first house you want.
But all is not lost. Yes, the market has turned, but the cost of homes are still some of the lowest they’ve been in over a decade. Combine that with the great rates, and this still makes it a good time to buy.
We could be headed for another bubble. In part due to the low rates, some people think we’ve got a burgeoning housing bubble on our hands. When the finally rates go up, as they inevitably will, housing prices will likely go down again. If you plan on living in your house for a while, this may not affect you. If you think you might move within the next 5 years, renting is the better option. You could find yourself underwater on your mortgage, and no one wants to go into foreclosure.
Figure out what’s right for you and your family at this time and be prudent. Don’t buy a big house just because you qualify for it. Buy the house you need, the house that fits into your finances, and you’ll be fine.
1 comment
Steve
Very interesting article.