Making the decision to buy a home is a huge step in your financial life. After all, a home is probably the largest purchase you will ever make in your lifetime. Especially after the recent housing market crash in 2009, you definitely want to make sure you are going into your home-buying decision as a financially wise woman.
To help you decide whether you should rent or buy, follow this two-step plan.
1. Use the 28/36 Percentage Rules
In financial planning, the rule of thumb is that households should spend no more than 28 percent of their gross income on housing costs (including mortgage payments, property taxes, and insurance), and less than 36 percent on total debt (including obligations such as car payments, student loans, credit cards, and medical debt). So, your first step is figuring out what this number is for you, given your financial situation.
This is where a tool like Mortgage Calculator will come in handy to help you calculate your monthly mortgage principal and interest payment. (I like this site because it also includes property taxes and primary mortgage insurance costs, which you will definitely need to factor in!) Plug in the loan amount, interest rate, and loan term, and then calculate. I recommend starting with a 30-year fixed mortgage loan, at a reasonable interest rate (based on current rates). If you can afford the mortgage payment and additional monthly costs for a 30-year fixed loan, then this is a good sign that you are in a solid enough financial situation to consider buying a home.
2. Plan to Have Leftover Savings
Many people fail to plan for what they will do after they buy a home. While real estate is a good investment, if you are “house poor” — meaning that you’re unable to save any more money because you’ve stretched yourself too thin with housing costs — then buying is not a wise move at this time. You still need to be able to save 10 to 20 percent of your income even after you buy a home. Otherwise, you risk not having enough money for an emergency fund, for paying down debts such as credit cards and student loans, or for investing in your retirement accounts. Remember, a home is a long-term investment, so even if it means waiting an additional two to five years to improve your income before you buy a home, it’s worth it so that you’ll have the necessary wiggle room in your monthly budget.
If you do these calculations and find that you just cannot afford a home at this time, that’s OK. You have time — there is no rush. It is much wiser to keep renting a place until you are ready to take on a home purchase. If you are in this situation, ask yourself what you can do to improve your financial situation to make these ratios work for you. Maybe you can work on increasing your income over the next few years, or pay off debts to free up more of your cash flow. You could reach out to an expert who will help you come up with a plan (I offer clients a free 30-minute Discovery phone call, so we can talk through the financial planning services I offer). Even getting financial inspiration on Facebook and Instagram will help you daily!
Of course, the choices are always yours to make, but it is much better to make informed, educated decisions with your money than to fly by the seat of your pants, hoping it all works out. With dedicated effort, you will begin to see your money in a whole new way, and financial planning can help you reach all your goals and dreams, including home ownership.
Brittney Castro is a member of the DailyWorth Connect program. Read more about the program here.