Buying a home has long been considered a quintessential part of the American dream. Owning your own home can also be a valuable long-term investment.
But making the transition from renter to homeowner involves more than saving enough money to put an offer on a house. It’s important to do your research and consider all factors before you hire movers.
Here are six questions to ask before transitioning from renting to owning a home.
Before you buy a home, you need to make sure you have enough money saved up. Most people buy their homes with the assistance of mortgages or VA loans. But prospective buyers are also expected to make a down payment.
Down payments can vary depending on the terms of your mortgage or loan, ranging anywhere from 5% to 20%. That means if you’re buying a $200,000 home, you will need to pay anywhere from $10,000 to $40,000 up front as part of your purchase and loan agreement.
In addition to saving for a down payment, you’ll want to ensure you have additional savings set aside for emergency repairs.
Buying a home comes with a number of unexpected costs that you want to make sure you can afford. When renting a property, you typically pay a flat monthly payment for rent as well as utilities, which may or may not be included with your rent.
In comparison, as a homeowner, you are on the hook for a number of expenses that you aren’t accustomed to paying, such as homeowners insurance payments, homeowners association fees, and the costs of repairs. In addition to these expenses, you can likely expect to have higher monthly utility payments, plus spending to furnish your new home.
When considering whether to buy house, do your research to find out how much you can expect to pay in these hidden costs.
It's rare for home buyers to pay in full up front. With most people needing the help of a mortgage to purchase a home, make sure you qualify for a loan you can afford before you start looking at houses.
To prequalify for a mortgage, you can visit a lender’s website and provide basic information about your financial circumstances and your purchasing goals. Within as little as a few minutes, you can find out whether or not your mortgage application is likely to be approved by a lender. You can get even more peace of mind by seeking preapproval. This requires more steps, but it also gives you a stronger offer when you find your dream home.
Depending on where you live, it may make more financial sense to buy or rent your home. To figure out which is best for your area, you can apply the 5% rule to find out where you’ll get your best deal.
To calculate the 5% rule, multiply the value of a property you’re considering by 5%. Then, divide that by 12, which helps you calculate an average monthly payment. Compare that number to the cost of renting a comparable property.
As an example, say you’re looking at a home priced at $200,000. When you apply the 5% rule, the monthly payment is $833. If the cost of rent for a comparable home is $900 a month, buying is likely a better deal. Likewise, if similar properties rent for $700, your market likely favors renting.
While you can build equity by owning a home, renting comes with advantages. In addition to hidden costs, if you have a job that requires you to move frequently, or you aren’t yet ready to set down roots, buying a home for a short period of time could be costly.
There are a couple of reasons for this. First, during your first years as a homeowner, a significant portion of your monthly mortgage payments goes toward paying interest rather than the principal. If home values shift in your area, you could find yourself owing more on your mortgage than your home is worth come sale time.
Selling a home within two years can also leave you in some hot water with your taxes.
Buying a home comes with a number of benefits, such as having more freedom with your property and a sense of autonomy. And while homeownership may come with costs you don’t have as a renter, property values tend to increase over time, making your home a sound investment.
If you think now is the time to buy or to start looking, it helps to work with a top-rated local real estate agent who can fill you in on the details and answer questions about your area's market.
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