Owning a home is one of the most effective ways to build intergenerational wealth, and for most people it’s a better long-term financial move than renting. Still, I never would have guessed it was possible in my 20s. Call me naive, but I totally assumed saving for a house meant saving for the whole house, not just the down payment. So especially while living in a high cost of living area and not having any outside financial help, I assumed it was a life move that wouldn’t be in the cards for quite some time.
Female home ownership is a relatively new thing, but it’s gaining traction. While women could own property as early as 1900, we couldn’t get our own mortgage without a male co-signer until the ‘70s. Today, most women who own a home co-own with a boyfriend or husband, but single female ownership is rising, eclipsing even single male ownership. 17% of homeowners are now solo women, compared to 9% solo men. Owning a starter home can be a great way to set up your future family’s finances, but how do you know whether you’re financially (and personally) ready?
Location, Location, Location
Let’s start with the obvious: You should only buy if you know for sure you’ll be able to stick around for a while. This means knowing that your job, relationships, and other plans like school should appear pretty stable in at least the 3-5 year range. This isn’t just because it’s massively inconvenient to re-buy a home every couple years; it’s because any less than that usually means you won’t break even on your mortgage and would have been better off renting. Getting stuck with a property when you end up needing to move for school, a relationship, or because you lost your job and can’t find another one in the same area can be a significant, unnecessary hurdle.
Okay, but what about the actual cost? Here’s where you might find it encouraging: Your down payment might be (a lot) lower than you’re expecting. While it’s not for everyone, you can actually buy a house with as little as 3% down, meaning if your starter home is $250,000, the down payment could be as low as $7,500. The amount you put down does affect your monthly payments though, and down payments under 20% typically require private mortgage insurance (PMI), a small charge that gets added to your monthly payments. Under current interest rates, that would mean that after 3% down, you’d pay about $2,000 a month for your home’s mortgage.
You can buy a house with as little as 3% down.
Hidden Costs To Consider
When financial advisors say that owning a home is a better financial move than renting, they certainly don’t mean that you’re paying less on a monthly basis, at least in the short term. In addition to having enough cash on hand for your down payment, closing costs are no joke. These costs, which include everything from home inspections to realtors’ fees to escrow and title fees, often add up to as much as your down payment.
Mortgage fees also might not be the only thing you’ll end up paying monthly. Many starter homes, especially ones like condos and co-ops, are subject to Home Owner Associations, or HOAs, which can require hundreds in fees every month. These HOAs can come with benefits, and often include amenities like trash, lawn service, or sometimes even community pools or gyms, but should also be factored into your budgeting. All told, most experts recommend that you keep your monthly housing costs (mortgage, HOA, utilities, etc.) under 28% of your monthly income before taxes.
Finally, keep in mind that your house is only part of your monthly budget. You’ll need good credit to get a mortgage, and your credit score can significantly impact the interest rates you’ll be able to get from lenders, which ultimately means that worse credit will land you with worse monthly payments. Consider your other debt and regular payments like your student loans or car payments, which lenders will also look at when assessing how much you can afford.
Getting pre-approved and going to look at homes are pretty commitment-free.
The Good News
Luckily, you don’t have to do any of this alone! A good realtor is usually more than happy to show you the ropes, and lenders can work with you on your finances to help you understand how much you’ll be able to afford and what your monthly payments would look like under different scenarios. At the end of the day, lenders also don’t want you getting in over your head financially and defaulting on your debt, so they have an incentive (these days, at least) to not let you get into financial situations you can’t afford. Getting pre-approved and going to look at homes are also pretty commitment-free, so there’s no harm in getting a lay of the land in your area (besides a credit check for pre-approval).
Depending on where you live, there are likely also state and local first-time home buying programs. These include everything from educational seminars to some major financial benefits like grants and tax credits that can make a huge difference in home affordability.
Home ownership is one of the most effective ways to build intergenerational wealth for yourself and your future family, but it has been declining with every generation since the boomers. While everyone’s financial situation is unique, don’t count yourself out of house hunting just because the process seems daunting. With the right research and realtor, you may be able to start building equity with property ownership sooner than you’d think.
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