You Shouldn’t Buy a Home If…
Buying a home has often been held up as the “American dream.” Problem is, the idea that home ownership is a goal that everyone can — and should — aspire to is exactly what got a lot of homeowners in trouble during the housing U.S. mortgage meltdown. In pursuit of the dream to own a home, people threw logic (and basic math) out the window and bought into homes that were not only bigger than they needed, but also more expensive than they could afford. Of course, many lenders were only to too eager to help them get in over their heads. The rest, as they say, is history. (See also: Quiz: Am I Really Ready to Buy a Home?)
The reality is that home ownership isn’t for everyone. And even if it’s right for you, it might not be right for you right now. Whether you’re tired of renting, looking to settle down or just want to put your money toward something bigger, there are a few factors that should serve as a warning against taking the leap. You shouldn’t buy a home if …
You Aren’t Planning to Stay
Whether your job situation is a bit uncertain, you’re in a relationship you’re not sure will last, or you’re longing to make a move to another city in the not-too-distant future, renting is your best bet. That’s because home values tend to fluctuate a bit throughout the year and from year to year. If you are forced to move out in the near future, you may suffer a loss on the sale of your home. That’s why most experts recommend that unless you can stay put for at least five years, you’re better off renting. It’ll take at least that long to make up the costs associated with a home purchase.
You Don’t Have a Down Payment
It’s still possible to buy a home without a down payment, but that doesn’t mean it’s a good idea. The simplest reason is that forgoing a down payment costs you a lot more over the life of the loan. The more money you borrow to buy your house, the more interest you pay.
Unfortunately, that’s not the only extra you’ll be on the hook for. The other major cost you’ll have to pay is Private Mortgage Insurance (PMI), which is typically charged to borrowers who put down less than 20% of the price of the home. On a $300,000 house, PMI will cost you almost $1,000 per year. You’ll keep on paying that insurance every year until you’ve paid down more than 20% of the appraised value of your home. And unlike with a down payment, you don’t get anything for that money — it’s just there to protect the lender in case you default.
Last but not least, having a down payment protects you from going underwater on your loan, or owing more than the house is worth. This can happen when you buy without a down payment and then home values drop. It’s a real bummer if you want to sell.
You Aren’t a Saver
Speaking of a down payment, if you find saving for one to be a challenge, that in itself may be a sign that you aren’t ready to own your own home. When you’re a renter, all you have to worry about is covering your rent. Once you’ve done that, the rest is up to your landlord. When you own your home, the responsibility is all yours. So, whether your problem is a leaky toilet or a broken water pipe, you will have to pay to fix it (and in many cases, it’ll cost you dearly). Without a strong habit of saving, you’ll lack the cash to take care of all the expensive repairs you will face as a homeowner. If you’re already living paycheck to paycheck, the ongoing financial responsibility of owning a home is likely to land you in debt.
You Have a Debt Problem
Another sign that you may not be a good candidate for home ownership is that you’re carrying a lot of debt or you struggle to avoid taking on debt of any kind. Not only will debt keep you from saving for emergencies, but those who can’t resist tapping into available credit may find their home’s equity irresistible. It’s not uncommon for homeowners to be tempted to use their home equity as a piggy bank through a home equity line of credit (HELOC) or home equity loan. This is especially true when home prices are rising (thus creating more equity). According Bloomberg, HELOC lending rose by 30% in 2012, the highest level since the start of the financial crisis in 2008. If you’re not someone who can resist using available credit, steer clear of homeownership; not only will it allow you to dig yourself deeper into debt, but using your house as collateral could also leave you homeless.
You Have Bad Credit
If you have lousy credit, you may be able to find a lender who’s willing to give you a mortgage. That lender isn’t doing you any favors though. Bad credit makes you a high-risk borrower, which means that any lender you can get to give you the loan will charge you considerably higher interest and offer fewer options. This can make it more difficult to pay down your mortgage in a timely way — or at all.
You Think a Home Is an Investment
Real estate can be an investment — and a good one — but your home doesn’t count. In order to really be able to capitalize on any kind of investment, you have to be able to sell it when the time is right. That’s hard to do with the real estate you call home because, after all, you’ll still need somewhere to live. Plus, even if you are able to high-tail it out of your home when it appreciates, chances are you’ll have to plunk that gain right back down into your next house.
You Aren’t Into Maintenance
Whether it’s painting, weatherproofing or general repairs, homes require lots of ongoing maintenance. If you’re the type to put things off, homeownership may not be for you. After all, the longer you leave your rotten porch, the more rotten it’ll get – and the more expensive it’ll be to fix.
Many people feel that they should aspire to home ownership; many are even ashamed to call themselves renters. But while we tend to view a home of our own as a status symbol, we often overlook the fact that it’s a very big — and usually very expensive – responsibility. Owning your own home can be a great experience, but only under the right conditions. If home ownership isn’t a good fit for you and your current financial situation, chances are you’ll be too broke to enjoy it.