It can be difficult for apartment dwellers to resist the siren song of homeownership. After all, the allure is obvious: It’s a place to call your own, it probably offers more space than your current cramped apartment and it represents an escape from stinky and/or loud neighbors.
But a smart decision on whether or not to buy your first home is one influenced not by emotion and desire, but by cold, hard facts. A home purchase is not a decision to be taken lightly. Here are four signs that you may be on the right track for homeownership.
You’ve saved for a down payment
The more your down payment is, the easier it will be to find a home loan with favorable terms. A down payment equal to 20% of your home’s purchase price is a good target. You’ll enjoy smaller monthly payments and pay less interest over the life of the loan. You’ll also be able to avoid private mortgage insurance, or PMI, which is insurance paid by you that protects the lender in the event that you’re no longer able to make house payments. PMI can be canceled around the time that the homeowner reaches 20% equity.
Your debt is under control
When deciding whether or not to offer you a mortgage, lenders take stock of your both your monthly gross income and debts, including credit card balances, student loan payments and car loan payments. This is called the debt-to-income ratio, and if yours exceeds 43% — that is, for every $100 of gross income, you have $43 of debts — you may find it difficult to secure a qualified mortgage. In that event, it makes sense to continue renting while you focus on paying down debts. You’ll put yourself in better financial standing while still working toward the goal of homeownership.
Your life is (somewhat) consistent
Buying a home means putting down roots. In return for your very own abode, you’re also trading away the flexibility that renting provides. So if you’re eyeing a big life change, like a career switch or a cross-country move, it makes sense to continue renting. The many associated costs — including fees, moving expenses and taxes — make buying a home impractical unless you’re planning to spend the foreseeable future there. Also, early in your mortgage, much of what you pay is applied to the loan’s interest, not its principal. This means that with a quick turnaround, you’re trying to sell a house in which you’ve built up very little equity.
Completing the paperwork for your first mortgage may feel like this.
You have an emergency fund
We don’t want to burst your optimistic bubble, but one’s financial obligations don’t end after you sign off on the lengthy home loan paperwork. In fact, they’re just beginning. From moving expenses and paint purchases to appliance breakdowns and roof leaks, it’s important to have an emergency fund in order to cover unforeseen expenses. Assume things will break (spoiler alert: they will) and plan accordingly, so an emergency fix doesn’t sink your financial ship.
What tactics are you using to save for your first home? Tell us below!
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