Quiz yourself with a series of difficult questions before you decide to buy a home. Your honest answers will give you the guidance on whether buying a home will work for your lifestyle and finances now and in the future.
Here are a few questions to test your readiness:
1. How Is the Real Estate Market?
The first issue a potential home buyer needs to address is whether real estate prices are dropping or if prices have stabilized. Timing the market is difficult, but if you have the nerve to wait until the time is right, you could snag a great deal.
If real estate prices are in a prolonged slide, buying a new home might not be the best idea. But if prices are just starting to tick upward, buying a house while prices are low is the ideal situation.
2. What Is Your Cap Rate?
Capitalization rate, or cap rate, is the rate of return on a real estate investment. It’s calculated from the net income remaining after your loans and interest are paid on the property.
For example, if you paid $100,000 for a house and your net income after expenses comes to $8,000, divide the $8,000 by the purchase price to arrive at the cap rate. This example shows an 8% return. If you have taken out a home loan at 6% interest, it is a nice investment. If you are paying 12% interest, it would be a bad buy.
3. How Long Will You Live in the House?
For a real estate investment to be worthwhile, a first-time homebuyer should have an idea of how long they plan to keep the property. If you plan to live in the home for five to 10 years before selling, it gives the property ample time to appreciate in value.
4. How Secure Are Your Cash Reserves?
Ask yourself whether you have a comfortable cash reserve, equal to about six months’ worth of living expenses. You’ll have to make the mortgage payment each month, and unforeseen expenses can always crop up.
5. Can You Get a Great Mortgage Deal?
Before you decide to buy take a hard look at your credit score, financial statements and job stability. To get the best deal on a mortgage, you’ll need a high credit score, funds to cover the down payment plus extra reserves, and a stable source of income. If you don’t have these factors lined up, you won’t qualify for a good rate and it may be better to wait until your situation changes.
Published by Angela Colley on realtor.com. Updated from an earlier version by Wendy Dickstein.