Certainly, the best time to trade security deposits for a down payment is different for everyone.
But if you're considering ditching the landlord for a mortgage, here are five things you need to know that'll help you figure out if you're ready to buy a home or keep renting.
Your Down Payment May Not Be the Biggest Hurdle
Let's not beat around the bush: buying a home requires a substantial financial commitment.
There's the down payment, of course. On average, you will want to stow away a minimum of 5% - 7% of the cost of the home that you want to purchase. Then, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.
Tip: Keep in mind if you put down less than 20%, you'll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it's about $50 to $200 a month. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.
A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 -- but the most competitive interest rates will be offered to those with a score of 700 or above. So, if you haven't started practicing those good credit habits yet, it's time to start developing them.
You'll Probably Have to Compromise
One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you're paying out to other lenders. Ideally, a borrower's debt-to-income ratio -- how much you pay toward debt each month divided by your gross monthly income -- should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesn't exceed 43%.) If yours doesn't, think about how you can get that debt needle moving in the right direction. The best way to do this is to pay off unsecured debts such as credit cards and personal loans, keeping them as close to a zero balance as possible.
Be Emotionally Ready for Financial Surprises
When it comes to renting, your are not as emotionally invested in a property as you would be if you were the owner. The rent goes up? You can move. If something breaks, the landlord will send someone over to fix it. Home ownership is more intensive, requiring you to get your hands dirty. If the toilet breaks, it's time to start watching youtube videos. And if property taxes unexpectedly rise, it's on you to appeal or pay up.
Buyer can be faced with rising homeowners associations fees, tax reassessments or unexpected repair bills. Having the financial flexibility to cover these costs is important, but it is equally as important to have the mental and emotional capacity to responsibly deal with issues as they arise. Everything may appear perfect for months, and then a series of maintenance issues may creep in all at the same time, reaking havoc. Stress management and problem solving are key skills to conquering home ownership.
A Mortgage Can Be Cheaper Than Rent
Depending on the home that you select and the location, you may end up paying less for a mortgage than for rent. However, even if you end up paying more per month, there is an immense financial advantage - you are building equity in your home, instead of filling your landlord's pockets.
Your Lifestyle May Call for Buying Instead of Renting
If you're ready to start a family, you will want a few extra rooms, and that can get extremely expensive with rising rental rates. A yard also provides a safe haven for your children to play or for your dog to run. In some circumstances, renters may not be permitted to have a pet or have difficulty finding a place that allows their furry companion. Home ownership can put an end to this stress.
You may be a DIY savant, but renovations may not be in the cards if you are renting. Most landlords will not allow your to make property renovations. If you are itching to put your personal touch on your space, however, you may be ready to branch out and get your own place.
Buying a first home is a huge step, both financially and emotionally. While there may be some inherent challenges that you may face, home ownership can be one of the most rewarding decisions that you can make.