So you’ve reached that stage in your life when you are considering buying your first home. Maybe you just got married, or are ready to have kids, or have enough stability in your life where it makes sense to put down roots in a particular neighborhood.
Then there are the financial considerations. If done sensibly, purchasing a home can be a great way to strengthen your financial health while providing shelter and stability for you and your family. It’s also a way of eliminating rental payments, which generate no long-term financial value. Long-term, your home can become an important part of your retirement planning strategy.
However, buying a condo, house, or trailer doesn’t make sense for everyone. If local housing prices and/or interest rates are high, the monthly outlay for a mortgage, real estate taxes, and other costs associated with home ownership may simply be too expensive.
The New York Times has an online calculator that lets you determine whether it makes more sense to rent or buy, based on the following criteria:
- Home price
- Number of years you will inhabit the property
- Mortgage rate/term
- Home price growth rate
- Growth in rental rates
- Property and marginal tax rates
- Maintenance/renovation costs
- Utilities/common fees
Plug in all of the variables and the calculator will spit out a price that shows whether buying a home makes sense.
However, the calculator does not take into account other factors and intangibles, such as local school quality, location of the home relative to your place of work, environmental conditions, and whether or not there’s a decent bar or barbecue joint in the neighborhood. These things really matter, and sometimes are very hard to quantify.
Regardless, when the time comes to purchase a home, you’ll need to understand some of the basics (mortgages, fees, etc.) and be aware of some other considerations.
This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 2, by Ian Lamont. All rights reserved.