“Interest rates are so low. Should I buy a house now?”
Call in FOMO. With mortgage interest rates at historic lows, home sales are robust in much of the country. Low interest rates certainly make a home purchase more affordable, but is that a reason to buy a house?Before you call your real estate agent, the first question to ask yourself is “Was I already planning to buy a home?” Buying a house is so much more than a dollars-and-cents decision. When you pay rent you are paying for freedom — freedom to move about, freedom from the responsibilities of maintenance. Buying is a signal that you are putting down roots in a particular place; is that a commitment you are ready to make? Is it possible that you will want to relocate for your career in the next few years? In most markets, you will need to hold on to that house for at least 5 years, quite possibly more, before it has increased in value enough to compensate you for the upfront cost of purchasing, as well as interest and other expenses.
But if you are emotionally ready to buy a home, what do your finances tell you? Try this 3-part test:
- Do I have an emergency fund equivalent to at least 3 months (and quite possibly more), after accounting for the down payment, closing costs and all of the goodies that you will want for your new home? What would happen if you or a member of your household lost their job?
- Is the all-in cost of the monthly payment (principle, interest, taxes, insurance, condo or HOA fees) affordable, ideally not more than 25% of take-home pay? Could the home become an unmanageable burden, or crowd out other priorities?
- Can I come up with a down payment of at least 10%? Yes, you could certainly put down a smaller down payment, but having saved at least 10% demonstrates that you have the financial wherewithal to meet the increased financial burden of homeownership. And, quite frankly, as the economy weakens lenders are less likely to extend the most favorable terms to buyers who cannot offer a substantial down payment.
I get it. Everyone you know seems to be buying a house and isn’t that the American dream? No, it is not. The dream is to have a safe, stable home that you can afford. Renting is not a compromise; it is a sound choice when home ownership simply does not fit your goals.