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You stalk new house listings for sport and daydream of custom closets. But how do you know when you’re ready to buy your first home?
If you can check all or most of the following boxes, it may be time to take the plunge.
- Your income is stable.
- You plan to stay put.
- You have enough saved for a down payment.
- You pay your bills on time.
- You’re prepared for the upkeep of a home.
Here’s a closer look at each one of those factors.
Your income is stable
You can’t commit to a monthly mortgage if you’re not (reasonably) confident that your paycheck will persist.
Armando Sallavanti, a financial professional with MassMutual Greater Philadelphia, said it’s best to avoid new loans if your job security is in question. The same is true if you plan to stop working in the next few years to start your own business or return to school full time, unless you have a spouse or partner who can support you financially.
“Income stability is critical and cannot be ignored,” said Sallavanti, who noted that those with fluctuating income should limit their home purchase price to an amount they can comfortably afford based on their lowest monthly earnings. “Another option might be to keep closer to 12 months of your expenses in savings to accommodate for downturns in your income. Mortgage payments do not stop when your income goes down.”
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You plan to stay put
No one knows with certainty what the future may hold, but it’s good policy to buy a home only if you plan to stay put for at least five years.
Why? It often takes that long to build enough equity in your home (through a combination of principal payments and appreciation) to offset the closing costs that you paid.
Closing costs average $4,243 nationwide, or 1.87 percent of the median home value.1
And the national average annual appreciation rate for residential real estate between from 1987 to 2023 is 5.17 percent.2
You have enough saved for a down payment
If you’ve saved enough for a 20 percent down payment, that’s a good sign that you may be ready for the financial commitment of being a homeowner. (Home down payments in 60 seconds)
Putting 20 percent down yields a number of important benefits:
- You’ll be taking out a smaller loan, so your monthly payment will likely be more manageable.
- You’ll pay less interest over the life of the loan.
- You’ll likely receive a better interest rate.
- You’ll avoid paying private mortgage insurance.
Private mortgage insurance (PMI) is a fee that lenders charge borrowers who come to the closing table with less than 20 percent down, a reflection of the fact that they are statistically a bigger financial risk.
Note that banks typically only charge PMI until the equity in your home reaches 20 percent, which can happen over time through the principal payments on your loan or as your home appreciates in value (or both).
“I always recommend putting down as much as you are comfortable with, but always make sure you have the income to afford the monthly cost,” said Jason Applebaum, a financial professional with Coastal Wealth in West Palm Beach, Florida.
With home prices rising and interest rates up, however, Sallavanti acknowledged that it’s becoming harder for first-time homebuyers to scrape together a full down payment. If you’re ready to buy, there’s no need to wait, he said. Just focus on dumping that PMI as quickly as possible, which could potentially be expedited with creativity.
“When I bought my first home, we purchased a three-unit property with 5 percent down,” said Sallavanti. “We rented the other two units and lived in the main unit. Having these rents covered all of our costs and even made some money on top of them. It may not be ideal, but ‘house hacking,’ as I call it, can be a tremendous strategy for new homeowners to begin building wealth and owning property.”
You pay your bills on time
Homeownership is a big responsibility. And failure to make on-time payments to your lender can not only damage your credit, but also ultimately result in bankruptcy and the loss of your home.
Before you take out a mortgage, consider your payment history. Are you struggling to keep up with your credit card bills? Have you missed payments on your auto or student loans, or find that you often pay late?
If so, that might be a sign that you need to get your financial house in order before taking on more debt. (Learn more: Understanding good debt vs. bad)
Applebaum added that a consistent record of on-time mortgage payments will also help in the event that you choose to refinance in the future.
You’re prepared for the upkeep of a home
When you’re renting, your only housing expense is your monthly rent and utilities. When you own, it’s all on you. The broken boiler. The leaky roof. The property tax and the homeowner’s insurance. It adds up fast.
According to Nerdwallet, which offers a “cost-of-homeownership” calculator, the average American homeowner spends roughly 8 percent of their monthly income on non-mortgage home costs.
And don’t forget about the hours you’ll spend shoveling snow and doing yard work. It’s not all bad, of course. Home improvement jobs may increase the value of your home. And you may find that you enjoy the effort it takes to make your house a home.
“Homeownership is a job in and of itself,” said Sallavanti. “My first year as a home owner, we had to repair our roof, replace plumbing, and more. It wasn’t because we bought a bad property, but life happens and things change. You just never know until you know. As a homeowner, what can go wrong WILL go wrong. So be ready!”
Summary: The pros and cons of homeownership
As you consider whether homeownership is right for you, give careful thought to the financial pros and cons.
On the plus side of the column:
- You may be able to deduct the mortgage interest you pay during the tax year on the first $750,000 of your mortgage.3
- You may be able to claim an annual tax deduction for up to $5,000 ($10,000 for married couples) in state and local property tax.4
- Fixed mortgage payments are a hedge against rent inflation.
- Owning property is a form of forced savings, which may help you accumulate wealth. While residential real estate may appreciate over time, however, financial professionals generally agree that return on investment should not be your primary goal. The purpose of owning a home, after all, is to provide you with a roof over your head.
On the other hand, there are some negatives to being a homeowner:
- Real estate is an illiquid asset (not easily sold in the event that you need cash quickly).
- The carrying costs are high.
- The consequences of falling behind on your payments are great.
Before you meet with a lender, it may be wise to consult a financial professional who can offer guidance on how much house you can comfortably afford and whether now might be the right time to put down roots.
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1 Assurance, “Mapping Out Average Closing Costs Across the U.S.,” Jan. 3, 2024.
2 Case-Shiller, “Composite 20 Home Price Index YoY (I:CCSC20SM),” January 2024.
3 Internal Revenue Service, “Publication 936 (2023), Home Mortgage Interest Deduction,” March 25, 2024.
4 Internal Revenue Service, “Topic no. 503, Deductible taxes,” Jan. 30, 2024.
