The Long-Term Financial Implications of Renting and Buying
American Dream Series: Part 3 of 5
When deciding if buying a home is the right move for you, the first step is to figure out if you can afford the mortgage and all of the other associated cost of homeownership. The next, and sometimes overlooked step, is to look down the road and evaluate the implications of homeownership on your future. Consider what your life might look like 2 years, 5 years or 15 years into your mortgage.
Start by looking at your savings. Financial experts recommend having 3 to 6 months worth of expenses set aside in a savings account. If your down payment wipes out your savings, then you will not have a cushion if an unexpected financial emergency arises.
Next, make a list of some of the medium- to long-term goals and responsibilities you have that require money. Will you have kids? Will you be supporting elderly parents at some point? Do you want to retire early or have dreams of extensive travel? All of these have financial implications. Remember that saving for your future is just as much a current expense as a mortgage payment, and your income has to support both.
Speaking of income, will your mortgage payment be so large that it takes two salaries to pay it? If so, consider the possibility that one of those salaries could go away or be reduced in the event of a job loss, change of job or even by choice. If your aforementioned savings is non-existent, then you could find yourself in a position where you are unable to make the mortgage payments without the help of a rich relative.
It’s also critical to value the opportunity cost of the money that you would use to buy a home. Although home prices can appreciate, there is no guarantee, and if you put all your savings into a home that leaves you with nothing to invest elsewhere, you could jeopardize your long-term financial needs.
Lastly, think about your time horizon for staying in the home. Will you be there long enough to recover your closing costs? Remember, the real estate market can be unpredictable, so if you need to sell your home quickly due to unforeseen events, you may be forced to sell your property during a market downturn.
In our next post in this series, we’ll explore lifestyle considerations in the rent vs. buy decision.