A Conventional wisdom says that you need to stay in a home a minimum of five years to ensure that you recoup your purchasing costs. But with some markets soaring, this advice doesn't always apply.
It's All About the Market
Market conditions play a huge part in any decision about when to buy. Housing market values have varied widely from region to region in recent years. While the Florida market has seen meteoric rises in home values, Ohio has seen its real estate prices go into negative territory in the last year.
Do not buy high and sell low - if your market is softening or has hit its peak and is heading south, you may want to wait on your purchase.
The magazine Smart Money has created a worksheet to compare the costs of renting vs. buying using market appreciation calculations to determine at what point you come out ahead. Plugging in the price, down payment, your income bracket, interest rate, and current market appreciation rates, the worksheet will break out what you will gain.
For example, say you were to buy a $400,000 house in Boulder, Colorado and you estimate the market will soften from the current 11% appreciation to about 9 percent annually. If you stayed in the house three years, you would recover $88,750 in equity at the end of that period; if you stayed five years, you'd realize $120,360.
It's All About You
The top three reasons people file for bankruptcy are change of job status, divorce, and unforeseen health expenses. If you face any of these challenges and don't have a financial cushion, this may negatively impact your ability to pay a mortgage. Big life events dictate your readiness to buy now or to wait for a little more stability.
Signs you should not buy right now:
- Will you be moving within the next five years?
- Will you be having kids soon?
- Will you be making a job change?
- Have you recently filed for bankruptcy or is your credit score below 630?
If you answered yes to any of these questions, or you are experiencing other life-changing events like illness, marriage, divorce, or breakup, you may want to wait.
Your Financial Future
Aside from life events contributing to your decision, getting your financial house in order before you begin your home search is key. Even with all the programs available for buyers with a low-or-no down payment, if your debts are growing steadily and you don't foresee an increase in your income, you are putting yourself in greater financial risk by taking on a mortgage.
With only a few exceptions, many loans for people who are still repairing their credit or recovering from bankruptcy carry higher rates than those available once your credit is in better shape. So the question comes down to this: Do you buy now, before prices appreciate higher than you can afford, but do so with an expensive loan? Or do you wait and repair your credit, then get a favorable loan, and pay more for your home?
That's the sort of analysis you need to go over with a financial counselor or mortgage broker before you start hitting open houses.
Ways to Cushion the Blow
On the other hand, if you are willing to buy a home that needs a bit of work and, over time, you can afford to get it done, your home could appreciate faster, strengthening your financial position. If you are willing to take on a roommate or renter, you can also soften the expense of a mortgage, which almost always costs more than rent. Buying a home is a risk, and it's worth asking yourself hard questions about what you're willing to do to protect yourself from getting in over your head.
If you answered "no" the life-change questions, and have the down payment or equity from your current home, you still need to look at interest rates and at how buying affects your taxes. You can't time the stock market, but you can time interest rate hikes, as they are a little easier to predict. If they are going up fast, you can jump in before they rise too far; if they are already high, you will have to calculate how refinancing in the future affects your budget.
What to Do First
If you are anxious to get moving, be patient. You have a few things to do first:
- Go to open houses - get the lay of the land
- Talk to a mortgage broker to get pre-approved
- Interview agents (You may want to find an agent at the same time as you look for a mortgage broker - a good agent can recommend reputable brokers and help you make sense of the terms of the loan)
- Review credit report and scores with mortgage broker to determine if any repairs are needed
- Use Zillow.com to find info on neighborhoods that interest you and then use the Home QandA feature to ask current homeowners
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