Do You Want to Rent or Own Your Future? 3 Questions to Ask Yourself Before Purchasing a Home

Purchasing a home can be a daunting task, especially for those who have never gone through the process before. Here, we explore three important questions to ask yourself before making the leap to homeownership.

Would you prefer listen to some home-purchasing tips instead? Check out our companion podcast on this topic:

Can I buy a home?

Before purchasing a home, it is always important to consider whether you have enough financial security to take on such a significant responsibility. Keep in mind that the bank will consider other debts when determining how much they are comfortable lending to you. Have a large balance remaining on your student loans? It may make sense to knock some or all of that out before you start house hunting.

You should also ensure that you have emergency savings, ideally equal to 3-6 months of your expenses or even your take-home pay in order to protect yourself from unexpected expenses such as job loss or medical bills. Additionally, it is important to continue contributing to your retirement plan to ensure that you have a financially independent future ahead. You should also have enough money set aside for the extra expenses associated with a home, such as moving costs, furniture, closing costs, repairs, etc.

When it comes to your down payment, it is recommended to aim for an amount that will result in a mortgage payment of no more than 25% of your monthly take-home pay. This will help you to avoid being "house poor" and ensure that you can comfortably afford your new home. If you have the financial stability to make a down payment, contribute to your short- and long-term savings, and cover the additional costs that come with home buying, then purchasing a home may be a good option for you.

Should I buy a home?

One of the main benefits of owning a home is that it provides a sense of stability and security. You can customize your living space to your liking and build equity over time. Additionally, owning a home can be a good investment in the long run. Paying off your mortgage before retirement can significantly reduce your monthly expenses, which can provide you with more financial freedom in your golden years. With one of your largest expenses eliminated, you may be able to explore new hobbies, travel, or simply enjoy a more relaxed lifestyle.

Real estate investing can also be a great option to build your portfolio and generate extra income by renting out some or all of your property. However, there are also downsides to homeownership. For example, if something goes wrong with your home, you are responsible for fixing it. Additionally, if you need to move for any reason, selling your home can be a time-consuming and costly process. Experts generally suggest owning a home for 5-7 years before selling it, so if you can see yourself moving within 5 years of purchasing a home, it may not be the best time to buy just yet.

Even if you’re not at the right point in your life to buy yet, it pays to prepare. If you’re financially able to do so, you should consider putting your projected mortgage amount into your savings every month. This type of “practice” will help you prove that you are capable of home ownership and build up some cushioning for an eventual down payment.

When is the right time to buy a home?

It is important to consider the timing of purchasing a home. One good reason to buy a home is if you are experiencing a big life change, such as a new job, relocation, or marriage. These milestones often coincide with a positive financial outlook, making it easier to secure a mortgage and make payments.

Even though Married couples represent the majority of homebuyers (61%), single females are purchasing almost twice as many homes as single males (17% compared to 9%).

- 2023 Home Buyers and Sellers Generational Trends Report, National Association of Realtors

Recently, many people interested in purchasing a home are hesitant due to rising interest rates. Interest rates have been on the rise, especially compared to the historic lows that we saw in the aftermath of the financial crisis. However, it's important to keep in mind that even with the recent uptick, interest rates are still relatively low by historical standards. So, while the recent increases may seem significant, it's important to keep perspective and remember that rates are still at relatively low levels, and if you plan on owning for a long period of time, interest rates should not necessarily deter you from making the move. It's important to keep in mind that home values tend to increase by at least 4% annually, and sometimes much more than that. Staying in the same home for several years could result in significant appreciation and counteract some of the impact of higher interest rates.

It's important to remember that interest rates are constantly changing and can have a big impact on your monthly mortgage payments. This is where the saying "date the interest rate, marry the home" comes into play. Essentially, it means that you should focus on finding the right home for you and your family rather than being overly worried with current interest rate level. If you find the home you love, can afford, and plan on staying there for a long time, you can always refinance your mortgage down the line to take advantage of lower interest rates. So, focus on finding the perfect home for you and your family, and worry about the interest rates later (given that you can comfortably afford the monthly payment in the meantime)!

In conclusion, purchasing a home is a big decision that should be carefully considered. It is important to evaluate your financial stability, weigh the pros and cons of homeownership, and carefully consider the timing of your purchase. By being proactive, prepared, and patient, you can make an informed decision about whether purchasing a home is the right choice for you. Happy hunting!

Interested in learning more about retirement strategies and real estate investing? Speak to a OneDigital Financial Advisor today.

The information contained here and the statements expressed are a general nature and are not intended to address the circumstances of any particular or individual entity. This podcast and blog article are made available by OneDigital for educational purposes only. Please consult with your local advisory team member for advice specific to your situation.