Dear Carrie: I’m 35 and would really like to buy my first home. I’ve saved a pretty good chunk for a down payment, but I still worry that I’ll get in over my head. How can I know for sure this is the right move for me? — A Reader
Dear Reader: While recent statistics show that more millennials are getting into the housing market, I get numerous questions from young people who are still worried about making this big commitment. And that’s understandable. Buying a home is one of the biggest financial decisions most people ever make, so there’s a lot to consider. Not only are you laying out a huge chunk of change, you’re also redirecting that money away from other things, which may or may not be even more important to you. It’s enough to make anyone hesitate.
I recently talked to a young couple — good jobs, newly married, baby on the way — who had similar concerns to your own. They wanted to buy and were financially stable, but they were still unsure how much house they could afford. To help them decide, I suggested they look at the big picture and put all their finances in front of them. In effect, do a financial plan.
I realize that the idea of a financial plan can feel a bit daunting, but it doesn’t have to be. In fact, a DIY approach can work for many people. The point is to take a holistic look at your circumstances and finances. Once you’re armed with that information, you’ll be in a position to make an informed and confident decision. Here are some questions I asked them and I suggest you ask yourself.
Is Buying a House One of Your Top Goals?
To know where buying a home fits into your financial picture, you have to look at all your goals and priorities. Think about your desires regarding career, travel, family, education and retirement as well as homeownership.
Looking at the other things that are important to you can help you put your home buying decision in perspective and increase your confidence that you’re making the right move at the right time. Are you married or with a partner? Needless to say, make sure you make the decision together.
Have You Looked at All the Numbers — Not Just the Down Payment?
Having the down payment for a home is important, but it’s only one piece of your financial commitment. You want to be confident that you can also handle the ongoing financial responsibilities of homeownership: not just the mortgage but all the other expenses, such as property taxes, property insurance, maintenance and repairs.
Next, look at your other numbers: how much money comes in each month, how much you need to spend on essentials, how much more you want to spend on extras, whether you’re on track with retirement savings, whether you’re carrying credit card debt, etc. Also make sure you’ve got adequate insurance and that you understand how home ownership will impact your income tax bill.
How Much House Can You Afford?
If the time is right, you also have to be realistic about how much house you can afford — not only in terms of what you can put down today but also what you can handle going forward. I personally believe (and many lenders do as well) that you should follow the 28/36 rule: Total housing costs shouldn’t exceed 28% of your gross monthly income, and total debt shouldn’t exceed 36%.
It’s a tough guideline, I know, especially with many young homebuyers living in expensive real estate markets. But if you can stick close to it, it will increase your confidence in your buying decision.
Are You in a Position to Commit Long-Term?
Buying a house is a commitment of both time as well as money. And whether or not you’re ready to buy can depend on a number of personal factors, so think about the following:
— How stable is your current job?
— Are you willing to take on the commitment of time, money and energy necessary to maintain a house?
— Do you plan to stay in the house for several years?
— Do you now have or plan to have children? How does that responsibility fit in?
Are You Willing to Do the Homework?
Planning is really just doing a bit of homework to answer the other questions. And it just makes sense. The more you know about your finances and how everything works together the more confident you’ll be in making decisions. In fact, according to a recent Schwab survey, people with a written financial plan make better financial decisions overall, and 60% of planners feel financially stable — compared to only 30% of those without a plan.
As I mentioned earlier, don’t let the words “financial plan” turn you off. It doesn’t have to be difficult or cost a lot. There are many ways to go about it. You could do a one-time consultation with a Certified Financial Planner professional. Or you could consult with a financial adviser, such as a broker or banker — provided there is no conflict of interest — or even a knowledgeable friend or family member. If you’re a confident do-it-yourselfer, that can work, too.
No matter how you do it, the important thing is to take a holistic view of where you are and where you want to be and put it on paper. With the numbers in front of you and your plan in hand, you’ll get the confidence to know if you’re finally ready to buy and how much house you can afford.
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” Read more at http://schwab.com/book. You can email Carrie at [email protected]. The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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