Fifty years ago, buying a house was part of the American Dream. But so was working for the same company for 40 years and retiring with a pension. Many Americans today switch jobs every four to five years, fund their own retirement, and may or may not buy a house. So is homeownership still part of the American Dream?
Unfortunately, there’s no right or wrong answer. If you can afford a house that’s for sale in your area, plan to stay awhile and have one or two solid incomes, then yes, it can be part of your American Dream. But it’s not a decision that should be taken lightly. Buying a home is probably the biggest financial decision of your life, so make sure to consider both the financial and emotional aspects of it.
Here’s a checklist to help you decide if you should buy a house:
1. Do you plan to stay in the area at least five years?
Real estate agents will tell you that the primary consideration in real estate is the location. Do you like the area where you plan to buy? Can you afford it? The Case-Shiller Index can help you compare current real estate values to historic highs and lows. Does the area have good schools, low crime and easy access to freeways? Do you plan to stay there for at least five years?
2. Do you have the cash for a down payment?
Lenders traditionally require a 20% down payment to qualify for a mortgage. So on a $200,000 home, you’ll need $40,000 in cash. Sometimes, however, you can qualify for a government program that only requires 3% or 5% down. Keep in mind, though, that the lower the down payment, the higher the monthly mortgage payment. Also with less than 20% down, you’ll have to pay private mortgage insurance.
3. Can you qualify for a mortgage?
In addition to your down payment, lenders often look at your debt-to-income ratio, which is how your mortgage payments and other debts stack up against your income. Conventional lenders often use the so-called 28/36 rule when determining whether to offer you a loan: Your house-related payments (mortgages, taxes, insurance) shouldn’t exceed 28% of your pretax income, and all other combined debts shouldn’t exceed 36% of your monthly pretax income.
4. Have you considered other costs related to owning a home?
In addition to your mortgage payment, taxes and insurance, there may be other costs to consider. You may have to pay homeowner’s association (HOA) dues and higher utility bills. Also, homeowners should have a rainy day fund for unexpected repairs—like a leaky roof, busted water heater or a cooling system that no longer works.
5. Is homeownership a good investment?
Although the price of real estate goes up and down much like the stock market, studies show that homeownership can be an effective way to build wealth over the long-term. When you buy a home with a fixed-rate mortgage, you will have the same monthly payment for 30 years, whereas renters will have to endure increases over the years. But the biggest generator of wealth is paying off the mortgage. If you keep the house until it’s paid off, you can accumulate hundreds of thousands of dollars in equity. Which, combined with other savings, can help you retire with a comfortable nest egg.
Whatever your decision, though, be sure to do your research, speak to real estate agents, lenders and other experts and—most of all—only buy a property that you can truly afford. Then, perhaps, buying a home will be part of your American Dream.
