SHOULD I BUY A HOME? Buying a home is a highly emotional decision that goes far beyond a typical investment. Really, housing is not an investment. Your home is where you live and everyone needs shelter. But, there is a few ways to think through it if you’re in the market for a home.
- Understand what you can afford. The 28/36 debt-to-income rule asserts that you do not want to spend more than 28% of your monthly income on housing-related expenses and no more than 36% total of your income against all debts, including your mortgage. This will help ensure you have enough money left over for other expenses and saving. Nerd Wallet has a great calculator that helps you understand how much house you can afford.
- Have a margin of safety. We’re still in the midst of the COVID19 recession with a lot of uncertainty. Without continued and significant government stimulus, the economy can go south fast. Since the risks are high, having savings that allow you to pay your mortgage and meet your other needs during a crisis is important. If you lose your income source tomorrow, can you still pay your mortgage? How long? And how long do you need to find a new income source before you run out of savings?
- Understand a house is not an investment. Buying a house is a major decision that can provide you peace of mind and a place to live that you love. However, your primary residence is not an investment. Over the last 100 years, average US real estate values gained less than 1% when adjusted for inflation. Yes, you can have serious appreciation over time but this isn’t always guaranteed.
- Recognize you can still potentially save money long term. Rents generally climb over time. According to the US Bureau of Labor Statistics, $1,000 in 1990 has the same “purchasing power” as $2,453.89 in 2020 in terms of rent. When you buy a home, you lock in what you’ll be paying for some time to come and keep up with rent inflation, at the very least.
- You want a home. At some point, most people have a desire to own a place of their own. When you want a home, you can afford the home, you understand your risks, and you’ll be in that home for a minimum of 5 years, you should buy the home instead of waiting for prices to come down (unless, you can afford to wait and truly believe prices may come down in your area… like if you’re in SF or NYC).
- Still worried? Do the math. How much rent will you pay for 5 years? How much will you pay towards your mortgage, property taxes, any tax benefits, and general repairs in that same 5 year period? In my own case, I was worried about an impending recession in mid 2019 but determined that buying a home was still the more profitable decision even if my home value fell by 30% after 5 years. It became a no brainer at that point.
PS REFINANCING YOUR MORTGAGE WILL COST ~$1,400 MORE BEGINNING SEPTEMBER 1ST: Rates are lower than ever before and people have been increasingly refinancing their mortgages for months. Beginning September 1st, the 2 largest mortgages companies that buy or back most home loans in the uS are charging an “adverse market refinance fee” equal to 0.5% of the loan amount. Why? Freddie Mac says its all because of “COVID-19 related economic and market uncertainty.” If you’re in the middle of closing a refinance, get it done ASAP! If you’re still looking to refinance, make sure you use NerdWallet’s Mortgage Refinance Calculator. With rates as low as they are, refinancing is still worthwhile in many cases.
BOTTOM LINE: Buying a home in 2020 is difficult yet life can’t simply stop due to a recession or pandemic. Before making such a large financial decision during an economic crisis, make sure you are well prepared for all the possibilities and build in serious margins of safety. Better safe than sorry!