Buying a house is a big decision that no one should take lightly. In many cases, though, buying a home makes more sense than renting. If you're on the fence about whether you should buy a home, the following five tips will help you make a decision.
Most people say that you shouldn't buy a house unless you plan to live in it for at least 5 years. While the specific amount of time varies depending on your city and neighborhood, 5 years is a good rule of thumb for at least two financial reasons.
First, when you buy or sell a home, you have to pay closing costs that can quickly add up to thousands of dollars. Spending a lot of money on closing costs doesn't make sense if you don't live in the house for several years. If you move soon, then you will end up paying the closing costs, again. The 5-year rule makes sure that you get your money's worth.
Second, lenders calculate your mortgage interest based on the amount that you owe. At the beginning of your mortgage, most of your money goes toward interest payments. As you pay off your principal, though, your interest payments will go down. If you only live in your home for a few years, you will spend a lot of money on interest payments. Very little of your payments will go toward lowering your principal.
Saving money for a down payment is one of the biggest obstacles to buying a home. If you can't dedicate at least 20% of the home's price to your down payment, then you will have to purchase private mortgage insurance (PMI).
Ideally, you should avoid buying PMI. It can cost hundreds to thousands of dollars per month. Without a 20% down payment, though, lenders will require PMI to protect themselves from defaulting on the loan.
You can buy a house with less than a 20% down payment, but it increases your monthly mortgage payments. If you have a 15% down payment, though, you might want to consider buying a home anyway. As long as you can reach 20% equity within a year or two, PMI won't cost you that much money. Make sure that you can afford to make additional mortgage payments, though, or the PMI could linger for years.
Buying a home gives you several benefits that can lower your overall tax burden. Assuming that you use a mortgage to buy your home, you can use your mortgage interest as a deduction. Since the first few years of repayment include a lot of interest, you can see a significant reduction in how much money you pay the government.
In many states, you can also use your property tax as a deduction. Unfortunately, changes made to the tax code in 2018 only allow you to deduct up to $10,000 of state and local taxes. Unless you live in a place with high state and local taxes, though, this change may not affect you much.
Once you start making payments toward your mortgage principal, you can expect your housing costs to get lower. With each year, your monthly payments should get increasingly affordable because you spend less on interest.
You don't get the same benefit from renting a home. In fact, you can expect your rent to increase every couple of years. Unless you live in a rent-controlled apartment, you should always expect your rent to go up.
Significant rent increases have made it impossible for people in some cities to continue renting their homes. San Francisco offers an extreme example of how unaffordable rentals can become. In January 2011, San Francisco residents could expect to pay an average $2,176 for one-bedroom apartments. In January 2019, the average rent for a one-bedroom apartment reached $3,412. Not many people can afford a 56.8% rent increase over 8 years.
Housing costs can go up, but they rarely increase as much as rent does. Over the years, you might need to pay higher property taxes. Your insurance premium could increase. Neither of those instances, though, will make your mortgage payments increase by 50% or more.
Homeowners insurance gives you an affordable way to protect your property and the things you own. A good policy will even protect you from liability when someone gets injured at your home. If your home gets significantly, homeowners insurance will pay for you to stay in a nearby hotel.
Buying homeowners insurance is one of the most affordable ways that you can protect your physical assets. The price of insurance varies depending on your home's value and the things you store on your property. You may qualify for discounts, though, when you add security devices to your home and don't allow smoking in the building. Couples and first-time homeowners may also qualify for discounts.
Not everyone can afford to buy a home. If you have the resources, though, it often makes sense to purchase a house instead of renting a place to live. Buying a home could even save you a significant amount of money in the long run.