The American Dream – home ownership. Everybody’s doing it, right? Home ownership, while it can be a great thing for many families, is a downright terrible choice for others. Let’s talk about why that is and establish some rules/guidelines to determine whether renting or buying is right for you.
I’m not one of those people who chides you with something like, “you’re throwing your money away by renting instead of buying.” Some people just don’t want to buy, and that’s just fine. It is their choice! For those who tell you you’re throwing your money away, tell them that’s what they do every time they stay in a hotel. As silly as that may sound, consider it: renting grants you the privilege of having a place to live and keep your stuff – isn’t that worth paying for? When I travel out of town, I don’t balk at paying for a hotel even though all I get for it in return is the (hopefully) good night’s sleep.
It is true that financially, you’re spending money for rent when you could possibly have the opportunity to spend that same money and eventually own the home. I get it – I really do. So when I’m asked about whether someone is ready to buy a house, there are four questions I ask. Let’s consider those:
- Are you willing to live in the same house for at least five years?
- Do you pay your bills on time every month with no exceptions?
- Are you doing a monthly budget that includes saving (short- and long-term)?
- Do you have several thousand dollars saved to put as a down-payment?
Once someone can answer those with four ‘yes’ answers, we can talk about home ownership. If there are any ‘no’ answers in there, it may be a smarter move to continue renting for a while until you can be better prepared for home ownership.
When the time comes around that you’re “ready” to buy a house, I do a MUCH different calculation than the bank to determine how much house you can afford. Here are those steps:
- Determine your exact take-home (net) pay on a “normal” monthly basis. Not a great month; not a bad month – a NORMAL month.
- Multiply that by 0.3. This is how much of a monthly payment I think you can afford on a 15-year, fixed-rate mortgage without feeling too poor. 😉
- Go to the bank or credit union and get pre-qualified for a 15-year, fixed-rate loan with a minimum payment that falls within the monthly payment calculated in step 2. This will tell you your overall budget to go house shopping. Don’t forget closing costs and monthly taxes and insurance that will go along with the principal and interest payments!
What do you think?