After saying “I do…” many newlyweds start the home buying process. Owning a home has always been a part of the American Dream and one that many people are willing to work hard for.
This year, first-time homebuyers have a lot to consider when making the decision to rent or buy a home: interest rates are still relatively low, there’s still plenty of housing stock and prices are at or near their lowest in years.
Nonetheless, deciding whether to buy a home or rent an apartment can be a complicated decision. How do you know what’s right for you? Potential buyers should ask themselves several key questions before making this important decision.
1. What will monthly costs be, and can I afford the payments?
Keeping your home-related payments under 30 percent of your monthly income is a good rule of thumb. This includes your mortgage payments as well as principal, interest, taxes, insurance and private mortgage insurance, if required. If you can’t keep mortgage payments below that, you may be better off renting for awhile.
2. What other debt do I have?
Total rent or mortgage payments plus credit obligations (such as car loans, student loans or credit card payments) should not exceed 42 percent of your gross monthly income.
3. What is my credit score? Can I qualify for a good interest rate?
A high credit score indicates strong creditworthiness, and that qualifies you for better interest rates on a mortgage. For example, someone with a credit score of 740 and above is going to have less in closing costs. Lower interest rates also mean lower monthly payments. If your credit score is low, you may want to delay buying a home until you can improve your score.
4. How much will taxes, monthly maintenance, or other fees cost?
Owning a home means you’ll have to pay real estate taxes and other costs like insurance and maintenance. Most lenders will require an escrow account for taxes, insurance and other costs.
5. How many years will I stay here?
Generally, the longer you plan to live in one location, the more it makes sense to buy. You’ll build equity in your house and its value may increase over the years.
These are just a few of the many important questions to consider before deciding to purchase a home. You can also refer to the Rent vs. Buy Calculator developed by the American Bankers Association. The calculator compares the cost of renting versus the real cost of buying a home. If you have additional questions about the home buying process, contact your local banker for more information.