With interest rates low, many renters are starting to think about purchasing a home of their own. While simple rental cost vs. mortgage cost comparisons can be very attractive, buying a home is a serious commitment, and there are many factors to consider:
1. How long you plan to live in the home.
The length of time that it will take to cover those costs depends on various economic factors. Average appreciation tends to sit at around 2% per year for single family homes ( source VIREB stats). In this case, you should plan to stay in your home at least 2-3 years to cover buying and selling costs. The real estate market can be particularly volatile however and dramatic swings up and down are not uncommon.
2. How long the home will meet your needs.
What features do you require in a home to satisfy your lifestyle now? Five years from now? People tend to remain in homes longer than they initially intend, primarily due to the work and expense associated with moving. Therefore it is worth considering a home with room to grow. Could the basement be turned into a den and extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you'll need will help you find a home that will satisfy you for years to come.
3. Your financial health - your credit and home affordability.
Is now the right time financially for you to buy a home? Would you rate your financial picture as healthy? Is your credit good? While you can always find a lender to lend you money, people with poor credit tend to pay far more to borrow.
Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries. The other school of thought says you should stretch to buy as much home as you can afford, because with regular pay raises and increased earning potential, the big payment today will seem like less of a payment tomorrow. It is, however, important to stay within your comfort zone. Purchasing a house involves many up-front and ongoing costs, and the stress of worrying about those costs often outweighs the satisfaction that may come from owning a slightly nicer home.
Owning a home costs money. If you decide on a house vs. a condo you will need to be prepared for the costs of eventual repairs as well as replacement costs for things like appliances. For some reason they all seem to go at the same time.
Here's a good rule of thumb: If you consider the 1% rule, on a house with a market value of $500,000, then you would need to put aside $5000. per year for home maintenance.