By Lauren Byrne, hellohenrys.com
When we picture the American dream, the majority of us visualize owning a house with a white-picket fence, having 2 kids and playing catch with a Golden Retriever in the front yard. Many of us have this idea painted so vividly in our minds, that we march toward this dream without ever stopping to ask why. Over many conversations with friends and peers, purchasing a home seems to be the biggest priority and financial goal for our generation. But when asked why, most people can’t respond with any more than “I’ve heard they’re a good investment.”
When done correctly and for the right reasons, purchasing a home can, absolutely, be one of the smartest choices a person makes for his or her financial well-being. However, it is not a decision that should be entered into blindly or without a full understanding as to why it makes financial sense. After all, buying a home is the most complicated and significant purchase that you will ever make!
Before you buy a house, you should be an expert on the tricks and common mistakes home buyers make. You should know all common real estate terms and how to push and pull to get the best deal possible. With the popularity of guilty pleasure reality TV shows, such as Fixer Upper, people seem to have irrational visions of six-figure bank accounts and associate yacht vacations with buying a home. Understand that homes are primarily for living in, not for making huge cash gains.
You should buy a house only if it makes financial sense, not just to fulfill the American dream or because you have heard it is a good investment. When I say financial sense, I mean don’t buy something that you can’t afford. Buying more than you can afford will catch up to you at some point. A great first step is to start saving for a down payment.
Once you have a down payment saved, do not approach the purchase of a home thinking, “Well, my rent is $1400 a month, so I could afford a $1400 mortgage payment.” Wrong. Your rent does not include home insurance, property taxes, potential HOA dues or maintenance costs. You can expect to add between 30-40% of your mortgage payment to your monthly housing costs. In this case, your $1400 mortgage payment equates to about $1900 a month in housing costs. Could you afford a $1900/month rent payment? If not, you cannot afford a $1400 monthly mortgage.
- Pro Tip: I LOVE the New York Times Rent vs Buy calculator to help you determine how much you can afford and whether or not it makes more sense to keep renting or to buy.
It is my hope that this blog on Renting vs. Buying will help my peers to understand real estate as an investment, feel confident in their decision to rent or to buy and to begin thinking about a topic crucial to their financial future.
P.S. Have you added a new account titled “Dream House” to save for a down payment yet? If not, now might be the time to start!