Buying your first home is a huge investment, but that doesn’t mean it’s a purely financial decision. You may be seeking more space for your growing family, or craving the community aspect of living in a suburb. Or maybe you’re just feeling ready to achieve that major milestone of being a homeowner.
Buying your first home
That said, it helps to start with an objective framework that will help you answer the question, “Am I financially ready to buy?” before factoring in the emotional reasons. (Because, for example, you already know you’re ready for your own backyard, or any of those other dreamy aspects of owning.)
Taking a look at the financial commitment involved is a great place to start as you make the decision to either continue renting or officially take the leap to buy your own home.
So, are you financially prepared to buy a home? Here are five signs the answer may be yes:
1. Your budget is big enough to cover the expenses.
These expenses include the down payment, mortgage payments, and associated homeownership costs, including property taxes and maintenance fees. This is one you’ll have to calculate first. Take a look at the average amount each of these cost in the area where you plan to buy a home to get a sense of how home-related expenses will impact your finances in the larger picture.
Other costs to keep in mind include renovation expenses. Get an idea of how much your home repair or improvement costs will be with SoFi’s Home Improvement Cost Calculator.
2. You plan on staying put for a while, giving your home a chance to appreciate in value.
Take your career trajectory and family planning into account when thinking about this one. You’ll want to know for sure there isn’t a chance you’ll be moving any time soon. Undergoing house renovations may also help your home increase in value. Check out this Home Project Value Estimator to find out the resale value of your next project.
3. You itemize your tax deductions and are likely to benefit from writing off mortgage interest.
This is an upside that can only exist once you take on a mortgage. Though there will be other tax-related implications when it comes to owning, ones like these have a positive impact on your finances.
4. You have good credit, which can help you get a lower mortgage interest rate.
The credit you’ve spent years building will definitely pay off once you make the move to own—and a lower mortgage rate is especially where you’ll reap the rewards. (Plus, a good credit score is an advantage that’s of little use to you if you’re renting.)
5. Rents in your area are high relative to home prices.
This is true of a lot of major metropolitan areas in the states, and means, over time, it could be a smarter move to invest your money toward ownership over rent.
From this list, the two most important factors are: 1) How long you plan to stay in your home and; 2) The ratio of home prices to rents. So, how do you know how long is long enough? A rent vs. buy calculator can help you estimate the breakeven point where it might make sense to invest in a home.
For example, let’s say you’re a San Francisco renter paying $4,500/month on a 2-bedroom apartment, and you’re considering upgrading to a $1,000,000 3-bedroom home in Oakland and staying for at least seven years.
At a 25% income tax rate, 3.7% mortgage rate and 3.3% annual capital appreciation rate, the calculator estimates that buying would be 37% cheaper than renting. But, if you’re staying for only two years, renting would still be 30% cheaper than buying. (This is why, if you’re in the market to buy a home, it’s important to know if you plan to stay put.)
Of course, it’s important to take these calculations with a grain of salt. Make sure to adjust the calculator settings to fit your situation, and remember that no one can predict the future of housing prices, rents, and taxes. But estimating your breakeven time frame can be a useful data point when answering the question of whether you can afford to buy a home.
After you’ve assessed these factors above, you hopefully have a better idea of whether buying a home makes sense from a financial perspective.
And now, if the financials make sense for you, you can consider the emotional perspective. For example, do you crave the autonomy of owning your own place? Are you dying to have control over paint colors and tile choices? And are you willing to live without your landlord (and his midnight visits to fix your broken heater)?
If all signs point to yes, download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.
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SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.