Tuesday, August 9, 2011

Yes it may be a good time to buy, but is it a good time to buy for you?

All over the place, in the media, from friends and family, on the internet, ect... all you hear about is how it is such a good time to buy real estate these days. With interest rates near historic lows and home prices as low as they have been in the last decade, yes it is true it is a good time to buy. However, is it a good time to buy for you? It might not be. If you give in to all the chatter about how it is a good time to buy and you purchase a home when you are not ready to do so, it could spell long term financial ruin for you. If you are thinking about buying a home, here are some things to consider.

First off, how stable is your employment? If you purchase a home, and you are layed off soon after that, how are you going to be able to afford your mortgage payments? This is something to think about, especially with the way that the economy is these days. If you buy a home, lose your job, than lose your home to foreclosure, that foreclosure could linger on your credit report and haunt you for 7 years.

Do you have an adequate emergency fund to hold you over in the event that you do lose your job or for some reason can't make your mortgage payments after you buy your home? Before you decide to purchase a home, it would be a good idea for you to have an emergency fund available that would enable you to pay your bills for 6-12 months without any income.

How long would you plan on living in the home if you plan on buying it? If you don't plan on being in the home for at least 3-5 years (probably closer to 5 years in this market) than you should probably not buy a home. If you live in the home for less time than that, you will probably end up losing money on the home. In addition to the purchase price of the home, there are other expenses associated when you purchase a home. There are also expense as well as when you sell the home. When you purchase the home you have buyer's closing costs that you have to pay for. When you sell the home you have seller's closing costs that you have to pay for. The home will need to appreciate by at least as much as those closing costs in order for you to break even. Home prices are at best bottoming out right now in most markets, so it could very well be 5 years before your home appreciates enough to break even.

Are you able to qualify for the best interest rate on a home loan right now? When you go to get a home loan, the interest rate that you get on your home loan will depend on a few factors. Among those factors are your credit score, how high are your expenses comparted to your income (debt to income ratio), and the total value of all the assets you own. If you have a good credit score, your expenses are not too high compared to your income, and/or you have an adequate amount of assets, than the lender will usually give you the best interest rate available. It may not seem like very much, but even just a one half of one percent increase in your interest rate can cost you big bucks in the long run. To illustrate, let's compare a $150,000 30 year fixed rate loan at a 5% interest rate compared to the same 30 year fixed rate loan with a 4.5% interest rate. With the 4.5% interest rate you will have paid $427,154.71. With the 5% interest rate, you will have paid $520,161.65 at the end of the 30 year period. As you see that additional .5% in the interest rate will cost you an additional $93,006.94 over 30 years. That's money you could have stashed away for retirement. It might be beneficial for you to wait 6 months or a year to buy so you can work on improving your credit score as well make and save more money so that you can qualify for a better interest rate.

Have you factored in the hidden costs of homeownership? In addition to the mortgage payment, you have a list of other costs associated with homeownership as well. Some of these costs include property taxes, homeowners insurance, homeowners association fees if you live in a certain community that charges those fees, regular maintenance and upkeep of the home, and misc. and unforeseen repairs. These other expenses can add up. They can especially add up if you have some big ticket items that you have to spend money on such as a new roof or a new A/C system. Yet it is true that in the long run homeownership is a good investment and is better than renting. However, you usually have to live in the home for a long enough period of time before you can recognize the saving that homeownership has over renting.

Have you evaluated why you are buying and made sure it is for a good reason? Sometimes people buy homes for the wrong reasons. For instance buying a home you really can't afford so that you project a certain level of status. This is a bad idea, and it will probably end up making you house poor. Worst case, you could end up not affording your payments and you could get foreclosed on. Another good example is someone buying an investment property, and they are counting on a certain level of appreciatiation in order to acheive a certain level of return. In this market this would be a bad idea. In this market it is best to count on achieving a certain level of return on a property from rental income and not from estimated appreciation in the value of the home. Of course this is because no one knows how much (if any) homes will appreciate in the next few years. So when you are buying a home, make sure it is for the right reasons.

Homeownership provides a lot of benefits. There is something very nice about living in a place that is your's and not someone else's. Homeownership provides community stability, and it is proven that children of parents who own their homes usually do better in school and are less likely to become teen parents. Homeownership is a great thing. Just make sure that it is the right time for you to become a homeowner.

6 comments:

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