Dear Carrie,
My husband and I are in our mid 30s and fairly well established in our careers. We've been happily renting for a few years, but at the same time, we've been saving for a down payment on a home until the time is right to buy. How can we know when that time comes?—A Reader
Dear Reader,
You seem to be right on trend with your question. According to a 2017 report by the National Association of Realtors, people age 36 and younger represent the highest percentage of homebuyers. Zillow also reported half of homebuyers in the U.S. are Millennials, often looking to buy single-family homes in the suburbs despite demographic reports suggesting that this age group prefers a more urban lifestyle.
Statistics aside, there's no definitive answer to the question of whether it's better to buy or rent and when to make the switch. With real estate—like so much else in the financial world—the future is uncertain. On top of that, buying a home is an emotional decision. So to decide what's best for you, you and your husband should thoughtfully consider your feelings as well as your finances.
Start with your personal reasons for buying
While home prices have generally risen over time, that's not a reason to jump in. When deciding if the time is right, you need to look beyond the numbers at your personal reasons for wanting to own a home. Is it security and stability? A sense of achievement? Or a place to raise a family?
For many people, owning and caring for a home is highly satisfying, and gives them a sense of freedom in knowing they can make their own lifestyle decisions. But for others, it can be a burden both financially and in the loss of flexibility. So think carefully about what it will mean to you. Consider your job stability, your desire to remain in a particular location, and your willingness to spend the time, money and energy it takes to maintain a home.
Think about the ongoing financial obligations
If you decide that the time is right for you emotionally as well as economically, then run the numbers. And not just the initial numbers that will get you into a home—down payment, closing cost, fees and assessments—but also the ongoing financial obligations.
First comes your mortgage. Be sure you're not stretching yourself to the limit. If a mortgage means you'll have to compromise in other areas, you may be getting in over your head. And your mortgage is just the beginning of your cost analysis. There are also property taxes, insurance, maintenance, repairs, possible renovations—all should be factored in from the start. Granted, currently mortgage interest and property taxes are tax deductible to the extent that they exceed your standard deduction, but there's no guarantee this will continue.
Before you commit to buying, take an honest look at your total financial picture. What's your overall debt? Do you have an emergency fund to cover at least three to six month's essential expenses including your mortgage as well as money to cover ongoing maintenance and unexpected repairs? Are you saving adequately for retirement—and will you be able to continue to save once you're a homeowner? (Here is an online tool that can help.)
Do a rent vs. buy comparison for your area
Use an online calculator to help you estimate the overall cost of buying vs. renting in your area. So much depends on location. In fact, costs can vary significantly not only from city to city, but in different parts of the same city. And you may be surprised to discover that, with current home prices, it's often cheaper on a monthly basis to rent than to buy.
But you also want to remember that it's about more than the monthlies. If you stay in your home long enough, there usually comes a point where buying makes more economic sense. A real estate rule of thumb suggests that five to seven years is the number to make buying work in your favor.
Don't think of it as an investment
One thing I strongly advise is to not to think of your home as an investment. If its value increases, that's great. But you can't count on that, especially in the short term. As we recently experienced, prices started to decline in 2006, then took a huge dip in 2008 in many parts of the country. In some parts of the country, they haven't fully recovered. Even if you live in an area where prices have appreciated, there's no guarantee that trend will continue. And even in the long-term, prices can certainly dip. So if you were looking at buying a home as a moneymaker, I'd say it's best to look at other investment opportunities.
Get pre-approved
If you're serious about buying, be sure to get pre-approved for a mortgage. With your down payment at the ready (ideally a minimum of 20 percent so you can avoid mortgage insurance) and a clear idea of how much house you can really afford, you'll be in a much better buying position. Of course, just because you’re pre-approved for a certain amount doesn’t mean that you should spend that much.
Now about that down payment…
It's great you've been saving for a down payment and whether or not you decide to buy in the near future, be sure to keep this money secure and easily accessible. Money that you think you'll need in the next four or five years, including your down payment, probably shouldn't be in the stock market. It may be better to keep it in something like a shorter-term CD or even a high-yield savings account. You won't make much interest, but at least you'll have access to the money when you finally find your dream house.
Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article.
For more updates, follow Carrie on LinkedIn and Twitter. This article originally appeared on Schwab.com. You can e-mail Carrie at askcarrie@schwab.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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