My wife and I bought our first house in the summer of 2017. Before that we had always chosen to rent for the simple reason that renting was both a better financial decision and a better fit for our lifestyle.
Simply put, buying a house is not always better than renting, no matter how many times you hear otherwise. It eventually became the right move for us, but there were a number of key variables that had to align before we got there.
Still, most of my clients would eventually like to buy a house if they haven’t done so already. Owning a home feels more settled. It feels like something you can make your own. And the reality is that that feeling matters when you’re raising a family.
But how do you know if buying a house is the right financial decision for you and your family? Here are seven important questions you can ask yourself to figure it out.
1. Can you put 20% down?
There are a few big reasons why a significant down payment is a good idea:
I place a lot of value on flexibility. Circumstances change, goals change, and new opportunities present themselves all of the time. I want to put my family in a financial position where we can take advantage of those opportunities when they arise.
A 20% down payment gives you more flexibility, simply because you’re taking on less debt than what your house is worth.
Let’s say you buy a house for $300,000 and a year later you get a dream job offer in another city. Good for you!
But… now you need to move, which means you need to sell your house. And unfortunately the housing market is in a bit of a slump and your house will only sell for around $270,000.
If you hadn’t put any money down, you’d be stuck. You would still owe close to $300,000 on your mortgage, and the proceeds from selling would only cover $270,000 of that. So you would either have to come up with the other $30,000 yourself, default on the loan, or skip the job offer and stay put.
On the other hand, if you had put 20% down up front, you would only owe $240,000. Which would give you the OPTION of selling your house and using the proceeds to completely pay off your mortgage.
Good financial planning is about enabling you to take advantage of exciting life opportunities. A down payment gives you more flexibility to do just that.
Lower interest rate
The more you put down, the less risky you appear in the eyes of a lender.
That leads to a lower interest rate on your mortgage, which means a lower monthly bill and less money spent over the life of the loan.
If you don’t put at least 20% down, you will likely have to pay for private mortgage insurance (PMI). This insurance would reimburse your lender if you ever defaulted on your loan, which is considered more likely with a smaller down payment.
PMI is simply an extra fee that adds to the long-term cost of owning your home. It’s better to avoid it if you can.
2. Do you have additional savings for maintenance and furnishings?
After you’ve put that 20% down, it’s likely that you’ll want to spend some money to get your new house in the shape you want.
There are almost always at least a few repairs or upgrades to handle. From little things like painting walls and fixing cracked tiles, to bigger things like ripping out carpet and replacing windows.
Then there’s new furniture and new decorations to buy to make that house yours.
And of course, the maintenance doesn’t stop there. There will always be both little and big things needed to keep your house in good shape.
All of that can add up quickly, which makes it a good idea to have the money set aside ahead of time AND to have a plan for handling ongoing repairs.
3. Will you still have a full emergency fund?
After all of that, what will your emergency fund look like? Will it still be as big as it needs to be?
Owning a home increases the importance of an emergency fund, since there are more things that could go wrong that you would be responsible for.
You’ll want to make sure that you have plenty of savings to cover whatever comes your way, even after handling the down payment and maintenance costs.
4. Are your other financial priorities in line?
No financial decision should be made in isolation. Your personal financial plan is a collection of many different pieces, all of which should work together to help you reach your goals.
So it’s a good idea to think about this house purchase in the context of your other financial goals and responsibilities.
For example, do you already have the right insurance in place to protect your family? Insurance is arguably even more important once you own a home because you have more financial assets to protect.
Are you already on track for financial independence? Will you be able to stay on track once you add the house payment to your budget?
What does your debt situation look like? Do you have a plan for paying it back?
What are your other big life goals? How will those be affected by this house purchase?
The big question here is really this: does buying a house help or hurt your ability to reach your biggest personal and financial goals?
5. How long will you live there?
Even if you have the savings to handle everything with ease AND keep your other financial priorities on track, there’s still the question of whether buying a house is actually a better financial decision than renting.
While a house is almost never a good investment, it CAN save you money over the long-term. With the key word there being long-term.
The longer you plan on staying in one place, the more likely it is that buying will be a better financial decision than renting.
You can run the numbers for yourself here to see how it plays out in your specific situation.
6. Will the location save you money?
A good location can not only make your life more enjoyable and less stressful, it can actually save you money.
If you’re close to work, you can save on commuting costs, pay for fewer hours of childcare, spend less time hating traffic, and spend more time on things you actually enjoy.
If you’re close to things like the grocery store, schools, and parks, all of those activities get a lot easier and a lot more enjoyable.
And if you can walk or bike to any of those places, even better!
Knowing the ins and outs of location is a big reason why I think it’s a good idea to rent for at least a little while anytime you move somewhere new. You’ll learn a lot about why you would or wouldn’t want to live in specific neighborhoods by actually being there.
7. Does it NOT have the features you don’t want?
One of the biggest reasons people spend more than they need to on big purchases like a house or a car is the never-ending list of potential features.
There is ALWAYS a long list of cool things you’ve never considered before, but that you NEED to have as soon as the realtor mentions them. And they all cost money.
That’s why it’s so important to make a list ahead of time with both the features you DO care about and the features you DON’T care about. That will make it a lot easier to get what you want without paying for what you don’t.
Buying a house is a BIG financial commitment!
If all of that seems like a lot, well, that’s because it is! Buying a house is, for many people, far and away the biggest financial decision they will ever make.
So it makes sense to make sure that you’re really ready for it. A good buying decision can not only provide a happy place to call home, but save you a lot of money over the years. A bad one can add a lot of stress and make it harder to reach your biggest financial goals.
In our case, we decided to pass on buying for a long time. We simply couldn’t answer “yes” to enough of the questions above for it to make sense.
So don’t worry if you find yourself in the same situation. You’re not throwing your money away by renting, and by being patient and waiting until it’s really the right time, you’re setting yourself up to have a much stronger financial foundation in place when you do eventually buy a house.