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How To Buy Your First Home Is It Better To Rent Or Buy
Is it Better to Rent or Buy Your First Home?
Many people see purchasing a home as a necessary step in personal development. The thing is, it might be better to rent in some cases.
Sometimes it makes more financial sense to rent a home. It all depends on your personal situation and how you want to proceed in life. We'll cover all of the factors that you should consider when making a decision, as well as explain how to buy your first home.
Buying vs Renting a Home
Before we dig into finances, let's discuss the personal factors that affect someone's decision to buy or rent.
Are You Ready to Settle Down?
Buying a home is a huge financial commitment. A mortgage holds you down for decades in some cases. While you may feel like buying a home now, think about your hopes and dreams, familial situation, and job security.
Have you always felt like you wanted to travel to Europe or teach English overseas? Do you have dreams of living off the grid, trying to be an artist, or something else? Are you impulsive?
If you're prone to making impulsive decisions at this point in your life, you might not be happy buying a home. Even if you don't have distinct plans to move, you may want the flexibility to make different decisions in the future. In some cases, it may be better to wait.
How do you feel about your current career prospects? Are you content working at your current position for a couple of decades? If not, does the area provide an opportunity to change careers and find employment elsewhere?
Locking yourself into a mortgage can be problematic and constricting if you're unhappy with your current station in life. In many cases, upward mobility and change of career aren't possible to maintain in a small town. Buying a home in or near a city offers a better opportunity for professional flexibility if you're not sure you're doing what you want.
What About the Nitty-Gritty Stuff?
Owning a house can sound like the greatest thing in the world. It's yours, you don't have to worry about landlords, and you'll have it as long as you want to. The thing is, your house will only be nice if you make it that way.
By that, we mean that there's a lot of work that goes into maintaining a house. While it may be spick and span when you move in, a few years down the road, you'll be wishing you would have cleaned those gutters and checked your HVAC system and maintained the water softener and fixed that pipe and...
You get the picture. The point is that there's a lot to keep up on. Usually, it's stuff that you didn't even know you had to do. That being said, it isn't all that difficult to do most of this stuff.
If you keep up on household tasks, it's likely that you'll only have an hour or two a week to do work on your house. That's not too bad when you consider how great it is to have a functioning home.
A thing to consider here is your health-- are you in the shape to climb up n the roof and shovel snow? If not, you might enjoy an apartment or condo where they take care of the hard stuff for you.
Can You Afford the House You Want?
There are a lot of factors that come into play when you're thinking about how to buy your first home.
The first thing to consider is your credit. The interest rate on your mortgage will be highly dependent on the quality of your credit score. If there are some sore spots in your credit history, there may be a lot you can do to try and improve.
Start by trying to take care of all balances that you currently have. Credit card debts and other outstanding payments don't look great when you're trying to buy a home. Lenders might take improvements into consideration when they're considering your rate.
By this, we mean that if you show that you're doing your best to take care of your debts the lenders might take your efforts into consideration. If you have time to improve your credit before that time, it would be wise to take steps to do so.
When the time comes to actually get approved, your rate will also depend on the down payment that you can provide. Lenders typically need somewhere between 3 and 20 percent of the cost of the mortgage. That being said, the more you can put down, the lower your rate will be.
You should shoot for 20 percent, but if you can swing putting more down, that is a great idea.
Renting might be the best option for you until your credit improves. The amount of money that you'll be paying on interest alone might be too much to bear if your rate is high enough. Take a few years to work on your current debts and save a significant down payment.
Doing this can significantly change the quality of home that you'll be able to afford.
Using an online mortgage calculator can help you determine the kind of mortgage that you would be able to afford. You only need to plug in some personal information and the value of the home you'd like, and you'll have a rough estimate of the costs you'd be facing.
Things like interest and principal payments, property taxes, insurance, and other dues. There are a number of costs associated with owning a home as well.
Getting a grasp on those numbers is essential for a couple of reasons. First, it lets you know how much you would conceivably pay for your home. This lets you know if it's a possibility, as well as gives you a good idea of your monthly rates.
Second, understanding the potential costs should pose the question, "do I want to spend that much right now?" Just because you could buy a home doesn't mean you should, or even want to.
It's nice to have a little money left over to treat yourself with.
How to Buy Your First Home
The information above is by no means supposed to scare you out of buying a home. If you can comfortably afford a mortgage payment, buying a home is probably the best option for you.
The fees and dues don't hold as much weight when they don't consume most of your income. When the time comes to buy a home, here's how you should do it.
1. Work on Your Credit
As we mentioned before, getting your credit in check is essential to getting a good interest rate on your mortgage. While the change in interest may not seem significant at first, the amount of money that your rate effects becomes huge over a long period of time.
2. Start Saving a Down Payment
Check out a mortgage calculator and see what kind of home you'll be able to afford. Once you have a ballpark estimate of what you can pay, do your best to save at least 20 percent of that amount for a down payment.
This will lower your monthly payments on the principal and the interest of your mortgage.
3. Get Pre-Approved
Pre-approval is a way for lenders to get an idea of whether or not you'll be able to afford your mortgage. Lenders need to know specific information about your finances in order to ensure that their investment in you isn't a bad one.
The things they look into are largely listed above. Things like debts, credit score, savings, and financial history are all important to these people. An important one is your debt to income ratio.
You can improve that ratio by taking out your credit card debts early. Any other non-essential debts that you have should be chipped away before getting pre-approved as well. There are such things as good debt, too.
Things like car payments, student loans, and other things that give value are considered good debts. Those are things that aren't necessarily going to harm your ability to be approved.
4. Find a House and Get a Mortgage!
If you're pre-approved, you can start looking at houses in your price range. This is a process, though, and you should be careful to understand what you're getting into.
Moves make us feel like we see a home and immediately know it's the one for us. In reality, you should look over the contract carefully, make sure that there are no glaring problems with the house, and look deeply into the community.
You want to make sure that you're going to be happy with the location, and that the decision you're making is the right one.
Need Help Finding a Home?
When you're thinking about how to buy your first home, you're not thinking about the nitty gritty details that real estate agents are paid to understand. You will probably need some help finding the right place for you.
There's a good deal of red tape and industry knowledge that is involved in buying and selling homes, and you shouldn't be responsible for understanding it. If you're interested in finding a new home, contact us and we'd be happy to help.
Kyle is a licensed realtor and co-owner of the Realty Edge Team, brokered by eXp Realty, at 300 1st Ave NW Rochester, MN. He founded the Realty Edge Team in 2011 along with Dan Kingsley. At age 26, he....