- The homebuying process is complicated, which is why you don’t want to rush to make this purchase.
- It’s more important to be able to afford it rather than locking down the right rate in a hot market.
- Don’t make your homebuying decisions in fear, and consult a financial planner or realtor for help.
- Read more from Personal Finance Insider.
How do you know when it’s the right time to buy a home? No matter if it’s your first or fifth home purchase, the buying process is complicated.
Rushing into this decision before you’re ready can be costly. Much like other areas of your financial life, it’s important to think through all aspects of homebuying before deciding if this is the right time for you.
As a financial planner, I guide clients through each stage of the homebuying process. With more and more people exploring the option of buying versus renting, especially in a remote-friendly working environment, here are the wrong — and right — reasons to buy a home.
1. Your home is a ‘good investment’
Real estate is a great long-term investment. However, thinking of your primary residence as an investment is not a good reason to buy.
You do want to be smart about buying at the right price, but hoping for a big financial gain takes away from your home’s main purpose: to provide you and your family with a long-term home that checks all the boxes for your ideal living situation.
A better reason to buy is if you plan to live there for at least five years
When you first start paying your mortgage, most of the payment is going towards interest and not principal. This means the bank is getting paid on the mortgage loan before you start to build any real equity.
Planning to stay in your home for five or more years is a good rule of thumb for deciding whether it’s the right time to buy.
Not only does this give you time to start building serious equity in your home, but it also helps you recover the upfront costs of realtor commissions and closing costs. The longer you stay in your home before selling, the more you stand to gain.
2. Mortgage rates are rising
Mortgage rates have been historically low for some time. They really have nowhere to go but up.
This might cause you to act out of FOMO and speed up your buying decision to lock in a low rate, but you shouldn’t worry about that. Rates will go up, but at a slow pace.
They likely won’t jump from 3% to 5% in a matter of months, but years. Buying before you’re actually ready just to lock in a low interest rate can be more financially costly when compared to the benefit of having a slightly lower rate.
A better reason to buy is if you’re financially ready to
For most buyers, this will mean having three to six months’ of expenses saved in an emergency fund, having enough for a down payment, closing costs, and moving expenses, and being able to budget for your new mortgage payment.
Chatting with a financial planner before you buy can help you prepare for this huge purchase and avoid costs that are invisible to the untrained eye.
3. The housing market is hot
The housing market in many parts of the U.S. is a seller’s market right now and that’s making it tough to buy. As soon as a listing hits the market, buyers are forced to put in offers, oftentimes above the asking price, just to have a shot at getting the home they want.
This causes a lot of FOMO, especially for first-time homebuyers, who are anxious to buy before prices rise even more. However, buying because you have a fear of missing out is generally never a good idea. It can lead to overpaying or even stretching beyond your budget — all as an act of timing the market.
A better reason to buy is that you did your research
You’ll want to know the area you’re buying in and its historical price trends. Working with a realtor or financial planner can help you understand why home prices are rising so quickly in your preferred location, if that’s the case.
It’s important to be informed about all aspects of your home purchase before making a six or seven figure buying decision. Don’t buy from a place of fear.