When should I buy a house? 6 things to guide you
WHEN SHOULD I BUY A PLACE?!?!?
That question is popping up more and more frequently in my inbox as it is one of the top questions on many people's minds. I am not an expert in every local market, and I certainly can't know everything with regards to each person's individual financial situation. Yes, there are tons of good deals and special situations out there. What I am going to do is give some solid advice that will help guide most people who are looking to buy their primary residence. Again, everybody has a different situation, but I think the 6 things below are a good place to start, and will keep most people out of trouble. That said, here is my quick and dirty opinion on things.
1. You have done your own homework. Sit down with your friend named "google" and do some research on your own. Plenty of info on the net about mortgages, and plenty of places to get property info like ziprealty.com and realtor.com. If you do your homework, you will be able to better spot the 'red flags' that might pop up if you are dealing with 'overzealous' or less-than-honest salespeople. By doing your homework, you will less likely to be taken advantage of. Also, just because a friend, or a friend of a friend and is going to "hook you up", doesn't mean you are excused from doing your own homework.
2. You realize that the market performance of the last 5-8 years...it is NOT an indication of future results. Just because somebody you know made 100k in a year by buying a condo, doesn't mean the same will happen to you.
3. You have an absolute minimum of 3 months of ALL living expenses in your savings acount if you are single, or 6 month minimum if you have a family. This money is seperate from any money used for downpayment or closing costs. Yes, it can be in a money market or other 'liquid' account. No, its not glamorous or sexy, but the fundamentals never are.
4. Have some sort of money to put down. Preferably 10% or more, but even 3-5% will do. I know that it is hard for people to save up for the large downpayments that would required in many high value areas today. I know that "no money down" and "use the bank's money, not your own" have been popular mantras the past few years, but I'm talking about buying the house you plan to live in. I'm not writing this from the standpoint of advising 'sophisticated' people who understand leverage. I'm writing this for the people who want to buy their primary residence. See this post for more info on leverage.
5. You can get a fixed rate loan with a payment you can afford! Even though rates are up some, they are still near historical lows. If the only way you can 'afford' to get a house is with I/O or neg-am, you should probably wait. Even if you have to do an 80/10 or 80/15 loan, make sure the 80% is at a fixed rate, and try to get a fixed rate 2nd. When you have extra money, pay down the 2nd as fast as possible.
6. Find a place that you like and where plan to stay there for a while. Realize that homes don't always go up, and you very well could be upside down for a few years. As bad as that might seem, if you have a fixed rate payment that you can afford, you still have your job, and you are not forced to move, then you will be fine. Bringing cash to the table when you sell your place is not the best feeling from what I have heard. Make sure you have a realistic time frame for the amount of time you plan on living in the house.
So there you have it. I'll sum it up right here:
Do your homework, forget past results, have some savings, put some money down, get a fixed rate loan you can afford, and finally, find the house that you plan on making a home for a while.
I think that if you do those things, the odds are in your favor that you will be a successful homeowner.
I want to add a few quick things as well. I'm not anti-housing by any means. I think housing is overpriced in many areas and people are using creative "credit" as a means to not be priced out "forever". I'm not here to debate the value of a particular house. If you can do the things above, and realize that the value might go down, and you are ok with it, go ahead and buy. I'm not here to tell people what to do, just help give them some information so they can make an informed decision.
About the other 'creative' loan products out there. They all have their place for responsible, financially savvy borrowers that understand the risks, and have the finances to handle those risks. The problem is that most of the people getting these loans, are not that type of person. There are a million situations where these loans can be used correctly and effectively. There are many situations where I could recommend some of the "exotic" loans for people, but for the average person looking to buy a house, I would say stick with the basics above.
Enjoy the long weekend...and as always, I look forward to the comments and e-mails on this one!