6 Reasons To Postpone Home Ownership
Homeownership has long been the American dream, but if you are unprepared, that dream can easily become a nightmare. With interest rates still hovering near record lows and the economy picking up steam, many are thinking that now is the right time to buy. After all, there is a real chance the U.S. Federal Reserve will raise interest rates in 2016, increasing the cost of borrowing money to make a home purchase. But home ownership isn't for everyone. From the costs to the maintenance, here are six reasons you may not be ready to buy a home. (Read more in "The Hidden Costs of Home Ownership.")
6. You Would Become House Poor
Far too many first-time home buyers rush into the process without really thinking through whether or not they can afford it. They get a mortgage preapproval for the maximum they are allowed to borrow and then go out shopping for a home at the top of their budget. But there’s more to life than owning a home. If buying the home you want would mean spending all of your money paying mortgage, maintaining the house and paying the utilities, it may not be the right time to make a home purchase. After all, other expenses come up. Also you need some money left over for discretionary spending.
5. You Lack Job Stability
The worst thing that can happen to a homeowner is to lose a job and become unable to make monthly mortgage payments. If you miss enough payments, the lender will foreclose on the home. You'll lose everything you already put into the down payment and mortgage payments and be on the streets as well. If you are unsure about your job situation, your company is downsizing or your boss has it in for you, you may want to put off purchasing a home until you are more stable in your career.
4. Maintaining a Home Isn’t Your Thing
A lot of responsibility comes with homeownership. It goes way beyond paying your mortgage each month and buying homeowners' insurance. You’ll have to take care of the lawn, shovel the sidewalks in the winter and learn to make repairs or hire someone who can do it for you. Some people enjoy these responsibilities while others bristle at the idea of spending a Saturday afternoon raking leaves or grouting the bathroom title. If you fall into the latter category, chances are you would be better off renting and letting your landlord worry about maintenance. (Read more in "11 Hidden Costs of Owning a Home.")
3. You Can Barely Come up with a 20% Down Payment
After the real estate crash of 2008, lenders became much more stringent in how much they require borrowers to put down. Unless you are going with a Federal Housing Authority or FHA-insured loan (a government program to help low-income buyers), most lenders are going to require you put 20% down. If you have less than 20% you will have to pay for additional private mortgage insurance. Instead of pulling the trigger on a home purchase anyway, waiting and saving until you have at least 20% for a cash down payment will lower your costs. (Read more in "Where Should I Keep My Down Payment Savings?")
2. Your Credit Card Score Is Lacking
When it comes to purchasing a home, having a good credit score matters a lot. The higher your credit score, the better your chance of borrowing the amount you need at a low interest rate. If your credit score is not-so-great, then you are going to pay a much higher interest rate on the home loan. There is good news for all those borrowers with less-than-stellar credit scores: you can improve your score. But it takes time. Instead of going ahead and buying a home and paying a high interest rate, you are probably better off spending a few months or a year cleaning up your credit score. As long as interest rates don't go up, you will be able to qualify for a lower-interest mortgage and save yourself a huge amount of money in the long run.
1. You Would Have No Emergency Fund after Buying the Home
The unexpected can happen to anyone--think of family medical emergencies, car problems, long-term illnesses and layoffs, to name but a few. That's why experts recommend saving at least three to 24 months of living expenses in an emergency fund. Home ownership introduces an entirely new class of possible emergencies into your life. A pipe can burst and flood your home, the furnace can go out in the dead of winter, or you may need a new roof before the next snow fall. Home repair emergencies should not be ignored or put off. Doing so can threaten the integrity and value of your home. If you have built up an emergency fund, then you can meet such challenges without going into a panic or debt (or both). But if you clear out your emergency fund to put it into a down payment and then cannot afford to build it up again, you are not ready to buy a home. Even one home emergency could land you in dire financial straits. (Read more in "Why You Absolutely Need To Have An Emergency Fund.")
The Bottom Line
Everyone thinks homeownership is the American way, but owning a home is not always the answer. After all, a host of things can go wrong, particularly if you can’t afford a home to begin with, you don’t have an emergency fund set aside or you are struggling to come up with the down payment. Renting may seem wasteful because you aren’t building any equity, but renting until the time is right can save you from making a costly mistake.