There can be great satisfaction in making a house your own, but financing a home brings major obligations. Before you take the leap, make sure you're doing it for all the right reasons and that the time is right for your circumstances.
Here are some thoughts to consider when deciding when it makes sense to buy a house—and when it might make more sense to hold off on the purchase.
5 Reasons to Buy a House
The following are some of the reasons buying a house has long been considered a smart financial move and a prudent form of investing in your future.
1. You Want to Own Instead of Rent
Many would-be homeowners would rather put their monthly housing expenses toward acquiring property for themselves than writing a check to a landlord or property manager. In many housing markets, if you can qualify for a mortgage loan (and afford a down payment), it's possible to get monthly payments that compare favorably with home or apartment rents.
2. You Want to Make an Investment
Houses in the U.S. tend to appreciate in value over time, and that makes them an attractive investment vehicle for many individuals.
Annual home appreciation has averaged 4.4% since 1991, and the average market value of a home in the U.S. grew more than 18% from April 2021 to April 2022, setting an all-time record. The stock market, as represented by the Standard & Poor's 500 index, saw an annual return of more than 10% over the same period, but individual stocks and even mutual funds aggregating multiple securities were far more volatile than real estate over that period. For many families and individuals, a home is the single largest asset they possess as they approach retirement age.
As with any investment, real estate comes with no guarantees. Home prices vary by region and neighborhood, and they can go down as well as up. Appreciation also may depend on how well a home is maintained, and on circumstances beyond the owner's control (incurring flood plains or wildfires, hurricanes and other natural disasters, etc.).
3. You'd Like to Capitalize on Tax Advantages
U.S. tax regulations allow you to take mortgage interest and property taxes on your home as deductions from your federal income taxes (if you itemize deductions). The value of this benefit to you will depend on your income, tax bracket and property tax rates, but as an incentive for homeownership enshrined in law, you could consider it money that's there for the taking.
4. You're Looking to Put Down Roots
A house of your own can be a fine base for raising a family. Homeownership also gives you "skin in the game" as a property taxpayer in your community and can spur a greater degree of involvement in schools, local government and civic organizations.
5. You Want to Make Your Personal Stamp
When you own your home, it's yours to decorate and remodel as you see fit, without needing to consult a landlord. The yard is yours to landscape and/or garden, and you can modify the house as you like, within potential constraints of local planning and zoning codes or homeowner association regulations. Even if you must obey certain rules, you'll have greater freedom to make the house your home than you'd ever enjoy with a rental property.
5 Reasons Not to Buy a House
For all the benefits of homeownership, there are also reasons you may forego buying a home at this time, or at all:
1. Interest Rates Are Climbing and Home Prices May Be Stalling
Interest rates have increased quickly, making the cost of financing a home greater than it's been in a couple of decades. Interest rates may climb further, so there's an argument for locking in today's rates before tomorrow's increases. But if you do so and housing prices fall, you could find yourself underwater on your mortgage, owing more on your loan than your home is worth.
As to housing prices, the current situation, fueled by pandemic-related shortages of new home construction, is unique. Growth in home prices has eased in the wake of the 2021-22 pricing surge, but homes in many parts of the country are more expensive than they've ever been. Historically, price declines have followed such conditions, and some buyers who bought homes in peak-pricing conditions had difficulty recouping what they spent.
2. Your Income Is Unreliable
If your household income is unpredictable due to instability in the industry in which you or your spouse works, or if you rely on freelance income and lack a sizable savings cushion to allow for lean months, lenders may decline to issue you a mortgage.
If they do offer you a loan, they may impose hefty interest charges because they consider you at risk of inability to pay your bills. If your household income is unsteady, it may make sense to build up considerable savings or wait until you have more predictable income before you buy a house.
3. You Lack Funds for a Down Payment
The traditional requirement for conventional mortgages is a down payment of 20% of the home's market value. If you haven't managed to save that much, you may still qualify for a loan, but you'll be required to add private mortgage insurance (PMI) premiums of roughly 0.5% to 2% of the home's value to your monthly mortgage payment. If that makes your payments unaffordable, it might be wise to continue banking your cash until you have a larger down payment amount—or consider buying a less expensive home.
4. The House Will Consume All Your Available Cash
New homebuyers often stretch their finances to cover the costs of purchasing a house, but you'll be asking for trouble if you leave yourself utterly cash-strapped as you become a new homeowner. Unless your home is brand-new with warranties to the hilt, there's always a chance that a heater or appliance will fail soon after you move in.
And even if everything at home is perfect, your car could need an emergency repair. Credit cards can help in a pinch, but running up balances just as you're taking on the new costs of homeownership can mean costly interest charges and harm to your credit scores.
Situations such as these are the exact reason you should have an emergency fund—and why you should try to preserve it when you become a homeowner. If you dip into some of those savings to cover home purchase expenses, be sure to replenish it as soon as possible—and even expand it in light of your new obligations as a homeowner.
5. You Hate Home Maintenance
For a home to retain its value and reap the full benefits of appreciation (and for it to be a pleasant place to live), it must be kept in good repair. Chores such as painting, yard work and replacement of aging appliances, roofs and HVAC systems must be performed or paid for as needed. If you're the type of person who'd rather just call the landlord or building super when these tasks are required, you might be more suited to renting than owning a home.
Should You Buy a House?
In light of these pros and cons, it makes sense for you to buy a home soon if:
- You're buying in an area where you're confident home prices will hold steady or increase, or you're prepared to stay in the house for the long haul and to ride out any pricing drops that occur within the next few years.
- You have sufficient savings to make a down payment (and doing so won't leave you without cash for emergencies).
- You have sufficient reliable income to cover your monthly mortgage payments (which typically include property taxes as well as payments against the loan).
- You have a realistic understanding of the tasks involved in maintaining a house and are prepared to perform them (or hire someone else to do them).
Alternatively, you should probably consider holding off on buying a house at this time if any of the following circumstances apply:
- You lack sufficient savings to cover a down payment.
- You can manage a down payment but doing so will leave you without any savings or otherwise stretched to the financial breaking point.
- You're unprepared to take on the chores associated with home maintenance and prefer to leave those duties to a landlord or property manager.
The Bottom Line
Buying a home of your own can be a source of pride and a good investment to boot, but it may not be the right choice for everyone, and the timing may or may not be right for you right now. If you've weighed these decisions and are ready to move forward on a home purchase, it's wise to check your credit reports and credit scores before submitting your mortgage applications to get an idea how lenders will view your credit profile. And even if you decide to hold off on a home purchase for a while, it could be smart to get your credit in shape for a mortgage application, so you put your best foot forward when you eventually do take the plunge.