When Should I Buy a House?
In order to know when is a good time to buy a house, you need to look into the costs associated with buying and own a home and other factors.
In this post, I will discuss all the factors associated with buying a house and the costs associated with buying and owning a home.
What are the costs associated with buying a home?
The first step to buying a house is to determine how much house you can afford. After that, you need to take into consideration other expenses such as closing costs, down payment, insurance, and taxes before finalizing a mortgage.
It is always a good idea to save money for a down payment. Ideally, in order to avoid private mortgage insurance (PMI), you need to have at least 20% of the down payment saved.
Of note, only a conventional or FHA loan required down payment. For a conventional loan, you can choose to pay as little as 3 percent or as much as 20 percent or higher. With an FHA loan, you can get away with as low as a 3.5 percent down payment.
For example, if you’re a pharmacist with an average salary in 2020 of $136,000, you should aim for a house that cost $272,000 or no more than 2x your annual salary.
With a $272,000 house, you’d need to put $54,400 down payment. You’ll then be looking at a $217,600 mortgage.
Before getting the keys to your home, you’ll need to pay closing costs, these fees ranges from 2 to 5 percent of the loan principal.
These fees ranges from: application fee, appraisal fee, title insurance among others.
Some lenders may offer a no-closing cost mortgage option. If you chose this option, the closing costs will be added to your loan principal or a higher interest rate.
This looks like its saving your money upfront but will cost you more on the long-term.
More than likely, you’ll choose to live in an area that has property taxes. Typically, property taxes will be included in your monthly mortgage payment in the form of an escrow.
The property tax rates is assessed in the county that you live in and will go up as the home values goes up in your area.
There are two types of insurance you have to pay: homeowners insurance and a PMI.
But recall that if you put down a 20 percent down payment or more you can get rid of this insurance.
Homeowners insurance is not required by law but most lenders will require it. This type of insurance will protect you financially from damages to your home such as a natural disaster.
What are the costs of owning a home?
Once you bought your home, just like a car, there are costs associated with owning a home.
Home maintenance and repairs
This is probably the biggest cost to owning a home.
According to MSN Money, maintenance costs includes but not limited to:
- Lawn care (mowing and watering)
- Cleaning costs
- Clearing rain gutters
- Pest control and prevention
- Replacing smoke alarm batteries
- Repainting exterior or replacing siding
- Replace flooring
- Roof replacement
- Air conditioning maintenance
- Plumbing issues
- Replacing fences
- Replacing appliances
According to the same article, replacing the roof alone can cost up to $8,000!
Home Owners Association Fees
If you live in an HOA, then you’ll be assessed HOA fees. Depending on where you live, this fee can range from a few hundred dollars to thousands.
Insurance and Taxes
Don’t forget about the property taxes and homeowner insurance.
The MSN Money article referenced above suggests putting aside 1 percent of the value of your home for maintenance and repairs.
For example, let’s say your house is valued at $200,000, then you need to put aside $2,000 dollars for the purpose of repairs and maintenance.
Ideally, this money can be apart of your emergency fund but housed separately from your checking account preferably in a high-yield savings account.
When Should You Buy a House?
The answer is when you’re ready. How to determine that you’re ready? You first have to do your due diligence by looking at all the factors mentioned above regarding the costs of buying a house and the costs of maintaining one.
After that you make sure these 4 factors is right for you.
Whether you have good credit or bad credit will determine your interest rates. As a rule of thumb, your FICO score has to be at least 740 or higher to get the best interest deal. Why is this important? Mortgages typically last 15 to 30 years. If you secured a lower fixed interest rate over the course of your mortgage repayment then you’re going to be saving a lot of money.
It’s also good to shop around with different financial institutions to see who will give you the best rate. Websites like GoBankingRates and BankRate will give the latest interest rates. As of this writing, you can get a 2.99 percent rate for a 30-year mortgage or a 2.8 percent 15-year mortgage.
A good credit will ensure that you qualify for the lowest rate.
Having a healthy debt-to-income ratio. This ratio is the result of taking all of your monthly liabilities like a car payment, and other obligations divide by your monthly gross income.
For example, if you have a total of $2,000 dollar month debts and your gross monthly income is $10,.000. Your ratio is 0.20 or 20 percent. Lenders will typically lend up to a debt to income ratio of 0.43 or 43 percent. The lower your ratio is the higher chances that your loan will be approved.
Ideally, you should aim for a 30 percent or less debt to income ratio before deciding to buy your house.
This sounds like common sense but makes sure you have in excess of more than 20 percent of the cost of the home before you decide to buy a house.
Steer away from no down payment or low down payment mortgages such as 3.5 percent. You’ll want to put down the minimum required to get rid of that pesky PMI.
In addition to the down payment, you have other things to worry about as mentioned above unless you’re buying a brand new house. You’ll want to save at least 3 to 6 months of living expenses.
Steady Job and Income
This last step is a no-brainer but it’s always good to have a steady stream of income. As a pharmacist, I think you’ll be just fine in this department.
Figure out which housing market you are in? If you live in an area where there is no fluctuation then you don’t have to worry about this. Buy a house when you’re ready and able to do so.
If you live in a volatile housing market such as Los Angeles for example you need to determine if you’re buying when the market is at its high or when it’s at its low point. In other words, is it in a buyer’s or a seller market?
Finally, you need to ask yourself if buying a house is a need or a want? Do you have a growing family? Are you settling down and buying a house is something you wanted to do? Keep in mind that owning a home is expensive so be smart and take a holistic approach and be diligent before you buy your first home rather than be sorry later down the line.