For young professionals, there are rarely any bigger financial decisions you may make than buying your first home. Prior to buying a home, the biggest financial decisions we make are buying your first car and figuring out how to pay for college. Now, with hundreds of thousands of dollars on the line, should you keep renting or buy your first home?
Can You Afford It?
Before you start looking and undertake the task of finding a great real estate agent, you need to look at your monthly budget, your savings, and the cost of a home in your market.
Search around using your favorite real estate app and find the average price of the style and location you want in a home. Whether you want a downtown condo or a house in the suburbs, it is important to set realistic expectations for the cost of where you want to live.
As a general rule, you should have 20% of the value of your home saved before you buy. That allows for a big enough mortgage to avoid paying PMI, a mandatory mortgage insurance for borrowers with less than 20% equity. Having those savings also helps show the lender that you are responsible with money and can really afford the home you want to buy.
When you rent a home, your monthly costs are easy to estimate and fairly static. You know what the rent will be each month and if anything breaks, the repair falls on your landlord, not you.
When you own a home that all changes. Your monthly payment is based on the mortgage loan you choose, homeowner insurance costs, and your local property taxes. In addition, you are now responsible for repairs, maintenance, all of the utilities, and maybe even a monthly HOA fee.
When I bought my first condo, my monthly cost stayed about the same as renting. Sometimes your cost will go up, sometimes it will go down. What is most important is that you know what to expect and are prepared for different expenses when you buy.
Your Five-Year Plan
Buying a home is a very expensive transaction, for most people, it’s their most expensive transaction. Not only are you buying a home, but you also have to pay title company fees, loan origination fees, inspection costs, and your agent’s commission. That can quickly add up to many thousands of dollars.
As a general rule, you should not buy your first home until you find one you can plan to live in for at least 5 years. If you only plan to live there for a couple of years, the closing costs may wipe out any property value increase and can easily cost more than a year or two of renting in a modestly priced rental.
When you find a place that you feel comfortable calling home for a long while, you are in a much better position to buy than if you may have to move for work or any other reason in the near future.
Everyone Has a Different Situation
When you are deciding whether to rent or buy, throw “conventional wisdom” out the window. Some people say you should buy a home as soon as possible to avoid paying rent. Others would never want to be tied down to a property and like the idea of mobility.
There is no right or wrong answer, just the one that is best for you.