A common question which comes up early in one’s career and shortly after escaping the education system is: should I buy my own home, and if so, when can I comfortably do so? The current low interest rate environment and work-from-home protocols have made purchasing a home a more attractive option for many, but there are personal and market variables which may complicate the decision even if affording the down payment is within reach.
In scenarios where a potential homebuyer is not able to commit to staying in one location for more than a few years – or where there is an extreme disparity in home prices over rental rates – it would be prudent to consider renting instead. However, without mitigating circumstances such as these there are several key financial advantages to owning over renting:
Cashflow – In many markets, mortgage payments are less than the cost of renting an equivalent residence. Furthermore, with a fixed mortgage the payment amount remains the same over time, potentially leading to savings in the monthly budget versus rental rates which increase with inflation over the years.
Net Worth – This one is obvious, but by purchasing a home you will be the proud owner of an asset at the end of the day.
Barring a crazy local housing market or a lack of certainty about the future ability to work from home or remain in a particular location for the long haul, it is also vital to consider the less obvious costs of home ownership, such as closing costs, maintenance, insurance, and property taxes. Having a strong emergency fund, manageable level of debt, and risk mitigation strategies are critical to help avoid unpleasant surprises down the road.
With all of these considerations in mind, it is important to have a strong process in place. At its core, the purpose of financial planning is to establish a framework for making intentional financial decisions. It is important to have a plan – not to mention foundational financial security – in place before making the leap into homeownership. Please let us know if you or a friend are considering purchasing a first home. We can help provide an objective assessment of their situation.