For a long time, no one even questioned whether a home was good financial decision. It was a known fact that it was. But then the mortgage crisis of 2008 came, and lots of people lost money after buying a home. For them, buying a home was a bad investment.
So what should you do today? Is buying a home a good financial decision once again? Or can buying a home be a bad investment? The answer is that it depends.
Buying vs. renting
If you don’t buy a home, you’ll need to rent … unless you plan to be a permanent couch surfer. So one way to determine whether housing is a good or bad financial decision for you is to determine whether you’d do better renting. Here are some considerations:
Can you afford to make a down payment?
If not, a home is probably a bad financial decision for you. There are many other expenses associated with buying a house besides the down payment, such as closing costs, insurance, property taxes, and repairs. And if you don’t pay your property taxes, it’s a big deal: your lender might pay them for you, but then the lender will bill you.
If you don’t pay the lender back, the lender could foreclose. Once you’ve saved enough to handle all the costs of home ownership, you can then reconsider buying.
How long will you stay in the home?
You typically need to stay at least five years to make the costs of buying worth it, but this time varies based on individual circumstances. For example, you have to pay closing costs every time you buy, which could be a few thousand dollars. That’s one reason you don’t want to buy too often.
Also, when you pay a mortgage, the first few years you pay more toward interest. After about five years, you typically start paying down more of the principal, gaining you more equity that can go toward your new house.
Are you planning to buy in a hot area?
Is the area you’re considering buying in booming, or is it declining? You want to buy in an area where property values are rising or are at least remaining stable.
Your Credit score
If you have a credit score that just barely qualifies you for a mortgage loan, you’ll probably not get the best interest rate. Although interest rates differ based on many factors, here’s a guide to help you compare.
The average rate for a 30-year mortgage at a fixed rate in August 2015 was 4.03%. The rate for a 15-year mortgage at a fixed rate was 3.19%. But the average 30-year fixed rate mortgage in February 2010 was 4.75%, and the 15-year fixed rate mortgage in February 2010 was 4.125%.
An interest interest rate people with bad credit might be offered today would be in the 8% to 10% range. If that happens, your mortgage can turn out to be too expensive to make buying a house a good investment. If your goal is to buy a house, first raise your credit score to help ensure you’ll get a good interest rate.
We mentioned the geographic area as being an important determinant in whether buying is a good investment, but exactly where the property sits can also come into play. You might not mind having your backyard back up to railroad tracks, for example, but most people do, making this property a tough sell later.
If you’re buying next to an empty lot, you better check city plans to see what’s going in there. Commercial development might be undesirable right next door to your house.
If you buy a home that later decreases in value, you lose money if you want to sell because you probably won’t be able to sell it for what you paid for it. If you plan to keep the house forever, maybe by renting it out or passing it down to your children, then you needn’t be as concerned if the house decreases in value.
A Money pit
If you decide buying is right for you, make sure you get the home inspected. If you find after you buy that the home has structural problems, faulty wiring, water damage, or some other big problem, you’ll need to put lots of money into the house, which could make it a bad investment.
Buying a home can be a good financial decision, even today. But you need to be financially ready to buy, be ready to settle in one area for a few years, be sure the area is good, and check that the house is in good shape. If you’re ready, you’ll have a place to call your own where you can put down roots, raise children, and be part of a community.