How to Decide If You're Financially Ready to Buy Your First Home
First came your love, now you've got the marriage. Next up: Maybe a house in the suburbs? Once your wedding is over and the gifts are packed away, it's only natural to turn your attention towards that next step in adulthood. Pamela Capalad, a certified financial planner in New York City, says she sees plenty of couples who sense the pressure. "I think people feel they have to jump into owning a home or having real estate," she says. "People feel they have to do it all."
But just because you were ready to commit to forever doesn't mean you're in a place to commit to a 30-year fixed mortgage. And there's more to consider than if you have the cash for a down payment. Unsure where you stack up? Financial pros share some equations to consider.
How solid is your down payment?
Ideally, you should have 20 percent to put down, says John J. Vento, a certified financial planner and CPA in New York City. While there are some federal and state-run programs that allow you to put down as little as 3.5 percent, he says, "I would be cautious here, since these are the types of programs that allowed homeowners to overextend themselves and get into mortgages they may not be able to afford." Plus, he says, the fact that you were able to save up enough to cover a fifth of your house is a good sign "you will be able to afford to make your mortgage payment going forward."
Have you considered the other costs?
They may be higher than you think. "Typically, there will be an attorney fee to represent you, bank attorney fees, engineer inspection, mortgage recording tax, appraisal fees, application fees, recording fees and so on," notes Vento, author of Financial Independence (Getting to Point X): An Advisor's Guide to Comprehensive Wealth Management. All told, that can add up to two percent of the purchase price of the home, meaning if you buy a $500,000 home, you'll need to cough up an extra $10,000.
Are you laying down roots?
For Capalad, purchasing a home to live in is not really an investment-particularly if there's a chance you'll need to unload it within a short time period. "If you end up having to sell that home in three or five years and the market isn't in a good place," she explains, "then you basically lose money." As with buying a house, there are significant extra costs that come with selling property that you don't recoup. Which is why, says Vento, "My general rule is that you must be committed to staying in the home for a minimum of seven years to justify the added costs of owning versus renting."
Do you understand the new tax laws?
While one of the benefits of home ownership is a tax deduction for your mortgage, that perk diminishes with the newly passed tax law. Starting this past January, says Vento, tax payers are limited to $10,000 as a deduction for state and local income taxes or sale taxes and any real estate taxes on your home. And since the standard deduction has been doubled to $24,000 for married couples, if your itemized deductions-including real estate tax and mortgage interest-don't exceed that, he says, "You may not receive any tax benefit from home ownership."