Without a doubt, you’ve noticed how much mortgage rates have dropped. In fact, this year we’ve seen mortgage rates drop to their lowest level in history! And I’m sure you know the question everyone is asking: Should I buy a house now?
It’s a valid question. After all, the market is ripe for the picking! And not even a global pandemic has stopped the surge of home purchases!
However, I can’t help but feel as though some people rushed into buying a home too early. Many people, seeing the low mortgage rates, seized on what they perceived as an opportunity.
Indeed, a recent survey shows that 55% of people regret taking out a mortgage during the pandemic.
This leads me to believe that many weren’t as financially prepared as they thought.
As such, I’ve prepared this simple guide to help you determine whether you should buy a house now or wait a little longer.
First, Some Resources for You!
But before we get into whether or not you should buy a house now, let’s talk about a couple of resources!
Do you find yourself in a ton of debt and don’t know where to turn? Then I wholeheartedly recommend Dave Ramsey’s The Total Money Makeover! Dave’s plan is what I personally use and it has changed my financial world forever!
Want to about how to become a millionaire? Then Chris Hogan’s Everyday Millionaires is the book for you! The research for this book is the largest study ever on American millionaires. Learn about how ordinary people build extraordinary wealth in this classic!
Of course, if you’re looking for a FREE resource, you can check out my 23-page eBook! This FREE eBook is a step-by-step guide on how to seize control of your finances. Just enter your email below and I’ll send it right to you!
Now, let’s talk about whether or not you should buy a house now!
Should I Buy a House Now?
To answer this question, we’ll need to look at a lot more than just low mortgage rates. In fact, we’ll have to look at your financial situation as a whole!
Because there’s the problem with basing your decision on one factor alone. And that problem is there are other factors that can turn your dream into a nightmare.
How Buying a House Now Can Turn Your Dream into a Nightmare
Now, if you’re in a good financial situation, I’m okay with you going ahead and buying a house. But if you only want to buy a house because of the following circumstances, you may want to step back:
- Low Mortgage Rates
- Buyer’s/Seller’s Market
- I Don’t Want to Rent Anymore
- My Parents are Pressuring Me to Buy
Now, I will say that some of the reasons above are good! If you can take advantage of low mortgage rates, then go for it! Or if you want to buy a house as a long-term investment, there’s nothing wrong with that!
However, those things fail to take a look at the whole picture. Let’s take a look at some of these in more detail.
Low Mortgage Rates
Are mortgage rates stupid low right now (as of 2020)? You betcha! In fact, I’ve seen mortgage rates as low as 2.25% for a 15-year fixed-rate!
However, low mortgage rates have caused people to rush into homeownership. People find themselves in mortgages they truly can’t afford just because they want to take advantage of low interest rates.
Just because mortgage rates are low doesn’t mean you can afford a house. When shopping for a home, you have to look at a lot more than just the interest rates on mortgages.
Furthermore, just because mortgage rates are low doesn’t mean house prices have gone down. In fact, you’ll probably find the opposite to be true.
It’s a Buyer’s/Seller’s Martket
Funny enough, I’ve seen people rush into buying a house in both markets. Just so you’re aware, a buyer’s market means homes generally sell for below their market value. That’s because there are more houses on the market than buyers. Therefore, a buyer’s market is the most ideal time to purchase.
A seller’s market means homes generally sell for above their market value. That means there are fewer houses on the market than buyers. Therefore, this market is ideal if you’re wanting to sell your house.
In either market, people feel like they need to hurry to buy a house NOW!!!
Those in buyer’s markets think they’ll miss out on their opportunity to buy at a good price. On the flip side, those in seller’s markets think they won’t have a chance to buy unless they act early.
Truthfully, you can successfully buy a home in either market. Once again, this alone shouldn’t be the sole indicator as to whether or not you should buy a house now.
I Don’t Want to Rent Anymore/Renting is a Waste of Money
I hear this a lot. Many people believe renting to be a total waste of money and time. Why? Because when you rent, you don’t get any return on your investment.
Well, that’s mostly true. When you pay rent, you don’t get any equity in return.
For those of you new to the finance world, equity simply means the amount of ownership you have in a house. For example, let’s say you buy a house worth $200,000. If you put a down payment of $40,000 and took out a loan for $160,000, you have $40,000 in equity.
When you pay rent, you increase the property owner’s equity, not your own.
However, I don’t buy into renting as a total waste of money. Like anything else, you pay for a service. In this case, for housing and maybe even some utilities.
And contrary to popular belief, renting is NOT always cheaper than buying a house. With a house, you are the one responsible for all the maintenance, utilities, lawn care, and everything. This can cost you some serious money over time.
Plus, people often forget that when they look at the cost of a mortgage, they only factor the cost of principle and interest. They forget about the taxes and insurance.
Therefore, I urge you to be patient. Rent for a little while until you can properly afford a house.
My Parents/Family/Friends Are Pressuring Me to Buy
This is a big one for a lot of people. Friends, family, and your local real estate guru all tell you the time to buy is NOW!!!
They’ll even send you articles and updates on the current market, mortgage rates, and more! After all, buying a house is good for your financial future, right? And they tell you the best thing you can do is buy as early as possible.
But here’s the reality: they don’t know your financial state as well as you do. Just because everyone else is rushing to buy doesn’t mean you do.
Also, you should never let anyone pressure you into making an impulsive decision. The only people who get a vote on whether or not to buy a house are you and your spouse (if applicable).
If you don’t feel ready, just gently let them know. Tell them you appreciate their concern, but you’re just not ready.
When You Should Buy a House
Now, I want you to notice something about all of those circumstances we just talked about. They are all external circumstances, meaning they are completely outside your control.
You can’t control the amount of your rent, mortgage rates, real estate markets, or the opinions of others. Therefore, it’s foolish to make decisions solely based on circumstances outside your control.
Instead, make your decision based on internal factors. These are things you can usually keep under your control and include your personal finances.
Here’s what I’m getting at: you need to be in a strong financial state before you buy a house. Otherwise, your best case scenario is that you regret your purchase. The worst case is you end up in foreclosure.
Now, I’m going to lay out some criteria. If you meet ALL of the criteria, then you’re ready to buy a house now!
1. Eliminate Your Debt
People will push back on this one, but I still stand by it. Having a large amount of other debt will hinder your ability to get a mortgage. Not only that, but it could leave feeling financially strangled.
Let’s look at a story as an illustration. Joe decides the time is right to buy a house and has a take-home pay of $3,500 a month. However, he pays $400 a month in student loans, $500 for his car, and $300 a month towards his credit card.
Joe already has $1,200 a month going towards debt. When he gets his mortgage, it’s $1,000 a month. Now he has $2,200 a month going towards debt, which leaves him just $1,300 a month for groceries, utilities, insurance, taxes, gas, savings, and other miscellaneous expenses.
Truthfully, it doesn’t leave Joe with very much wiggle room, especially if he doesn’t budget.
But let’s say Joe doesn’t have any debt at all. That $1,000 a month mortgage still leaves him with $2,500 a month for all his needs. He could even build up some decent savings and go out and have a life every now and then!
You see, getting out of debt helps to eliminate most of your financial stress. When you don’t have other payments hovering over your head, you can focus on other financial goals.
2. Have 3-6 Months of Expenses in an Emergency Fund
You’re familiar with Murphy’s Law, right? It states, “Anything that can go wrong, will go wrong.” Emergency funds serve as the buffer between you and Murphy.
Believe me, things WILL go wrong at some point. Just take a look at some things that have gone wrong for me just in the past two years:
- Sprained ankle: $600
- Injured eyes: $400
- Car fuel pump replacement and tow: $1,000
- Furnace repair: $625
But you know what I didn’t have to do for any of those? I didn’t have to go into debt. In fact, because I didn’t have ANY debt besides my mortgages, I didn’t even have to use my emergency fund!
But even if I had to use my emergency fund, it would have been there for me. And I still could have continued to pay my mortgage without any worries.
When the hard times come, you need to protect the essentials. Those include your home, utilities, transportation, and food.
And when it comes to buying a house, you need to protect your largest asset. Therefore, having an emergency fund is NOT OPTIONAL!
3. Make a Down Payment of At Least 10-20%
You’ll see a lot of mortgage products out there that advertise 3-5% down or even 0% down. FHA and VA loans are the biggest offenders. However, these loans don’t have your best interest at heart.
Not only do FHA and VA loans end in foreclosure more often, they also come with higher fees. In the long run, they’ll cost you A LOT more money.
But even if you get a conventional loan, if your down payment is less than 20%, you’ll find yourself paying Private Mortgage Insurance (PMI).
PMI does nothing to protect you. It’s there to protect the lender in case you can’t pay your loan. And guess what? The lender makes YOU pay for this insurance.
On average, PMI will add an extra $200 a month to your mortgage. You continue to pay that until you have 20% equity in the home.
I don’t know about you, but I don’t want extra money flying out of my wallet to literally NOTHING!!!
I’m okay with doing a 10% down payment mostly because it won’t take you too long to get to 20% equity. However, the best thing to do is to save up for a 20% down payment if at all possible.
4. Make Sure Your Mortgage Payment is No More Than 25-30% of Your Take-Home Pay (Taxes and Insurance Included)
Trust me, when your payment is only 25% of your take-home pay, you’ll breathe easier at night.
Now, what do I mean by take-home pay? I’m referring to the actual amount you receive from work after taxes, insurance, retirement, and other deductions.
So, why the restriction? Because otherwise, you’ll end up house poor. House poor is when a good chunk of your money has to go into your house. When you’re house poor, you don’t have much money for other financial goals.
For example, I also recommend investing 15% of your income into retirement. If your house payment keeps you from doing that, you have too much house.
This is also a good time to mention that I recommend a 15-year conventional mortgage. This will help you pay off your house much quicker without keeping your finances in a knot. It will also save you tens-of-thousands of dollars in interest over time.
5. Plan to Stay in the Same Location for At Least 3 Years
You know one of the awesome things about houses? If you’re in a good area, they go up in value! This is good news considering you probably paid $5-6,000 in closing costs!
However, in order to receive this benefit, you have to keep it for a while.
In most cases, you can at least break even after three years. But it’s better to wait even longer if you can.
So, do you find yourself in a situation where you move around a lot? Then you should probably wait until you can stay put before you buy a house. People in the military often find themselves in this situation.
But if you can stay where you are for a little while, you’ll find yourself making a nice profit!
Buying a House is About Your Financial Situation, Not the Market
In conclusion, buying a house isn’t so much about the market conditions. It’s more about your financial situation.
That’s because you can have the lowest interest rate in the world, but still end up with more house than you can afford.
Instead, take a look at the total state of your finances before you rush into buying a house.
Are you debt-free? Do you have an emergency fund? Can you afford a sizeable down payment? Then you might be in a position to buy! And if the market conditions are right, then that’s just the whipped cream on top!
But if you have a ton of debt, if you don’t have an emergency fund, and if you have no down payment, then you might want to hold off.
And not only will you be debt-free, but you’ll have room to become even more generous as well!
I think owning a home is a good thing. I just don’t want your home to own you. Get on a plan, kill your debt, and start living generously!
If you want to learn more about how to do that, check out my FREE 23-page guide on how to get out of debt! Just enter your email below and I’ll send it right to you!
Also, don’t forget about the awesome resources below!