Even though home ownership is considered part of the “American Dream,” and thought of as a major financial milestone, the reality is that buying a home isn’t meant for everyone.
Choosing to buy a home requires a great deal of thought, and you need to make sure that you are ready to take on the responsibility of a mortgage. Since you probably can’t pay for a $200,000 home with cash, you will need to borrow in order to buy. A mortgage is a huge financial obligation, usually spanning decades.
While you might be anxious to purchase a home, it’s always a good idea to examine the pros and cons first. Here are 3 signs that you’re not ready for a mortgage:
1. Too Much Consumer Debt
If you have a large amount of consumer debt, it might be hard for you to afford a mortgage. While mortgage debt is different than other types of debt, it still requires a monthly payment and the consequences of missing a payment are significant. If you already have high interest debt – or really any kind of consumer debt with substantial monthly payments, you run the risk of biting off more than you can chew. A mortgage might push your combined monthly payments into a range that is more risky than you’d like.
That doesn’t mean you should not ever get a mortgage. Just think it through carefully and consider paying down some or all of your consumer debt before making the leap and applying for a mortgage. By waiting, you will likely be able to secure a lower interest rate on your mortgage and you’ll reduce the risk of defaulting on one of your obligations if it turns out you can’t handle the mortgage payments on top of your other debt payments.
While I don’t think you have to be completely free of all consumer debt in order to be ready for a mortgage, if you are struggling to pay your bills as it is, that would definitely be a sign that you’re not ready for a mortgage.
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2. Difficulty Paying the Rent
In some cases, a mortgage payment could cost you more than your rent payment. Even if it didn’t, you’d still have to figure in repair and maintenance costs that are unavoidable when you own a home. In many cases, buying a home means moving from a rented apartment into a bigger place to live, and that means higher utilities. There are other costs, too, which you might realize at first, including insurance and property taxes.
If you have a hard time making your rent payment each month, are you in a position to make a mortgage payment? My guess is that you probably aren’t. The only exception would be if you live in an area where houses are currently cheap relative to rents. Try the following exercise to see whether or not you can handle a mortgage payment:
- Add your costs of homeownership, including utilities, maintenance, possible repairs, taxes, insurance, and other costs to the monthly mortgage estimate.
- Find the difference between your costs now as a renter and your costs as a homeowner. If you pay $800 a month in rent, but your homeownership costs will run you $1,100 a month, that’s a $300 difference.
- Take the difference and put it into a separate high yield account for six months.
If you find yourself constantly dipping into the “extra” funds to make ends meet, you aren’t ready for a mortgage. If you can easily afford the extra payment each month, then you might be ready to buy a house. (This calculator can also help you decide)
3. You’re Not Sure How Long You’ll Stay
Ask yourself why you want to buy a house. Do you really want to stick around for a few years and put down roots in the community? Will you be there long enough that your home has time to build equity so that you can sell it a little easier down the road? If you think that you will only be in the house for a year or two, and you have no plans to rent it out and use it as an income property later, there isn’t much reason to buy.
Buying a home isn’t for everyone. It ties you down to a spot, and it can be difficult to get back what you put into the house. Carefully think about your reasons for buying a home, and think about whether or not you really are ready for a mortgage. If you’re not, don’t force it. There are plenty of other things you can do with your money to help you reach your goals.
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