After graduating college, some people move back home for a while while others just want to move on out. At this point, many twenty-somethings are at the point where they are thinking about purchasing their first places. But is this the right time financially to buy a home? There are many differing points of view on the matter. If you are a millennial thinking of buying a home, just make sure you fully think it through so you can do so in the best way possible.
Even after living with your parents for a couple of years, it is quite possible to still have student loan debt. If this is the case, you should ask yourself whether this is truly the right time to be a homeowner. Adding mortgage debt to student loan debt can get very overwhelming. Not only can it lead to short-term stress, but it can lead to a long-term budget crunch.
Debt-to-income ratio is something that banks look at when issuing a loan. Just as they look at your credit score, they also check the debt-to-income ratio to figure out if you will be able to repay things on time. To calculate this ratio, add your monthly debts, including credit card, student loan and car expenses as well as the potential mortgage payment. Then, divide this sum by your gross monthly income. If you want your mortgage to be backed by the government, this number cannot exceed 43%.
Buying may seem like an attractive option due to the low mortgage and and high rent, but just make sure that you are willing to stay in this home for long time. According to a recent report from Zillow, the conditions in 70% of housing markets are such that if you intend to live in a home for more than two years, it is more fiscally beneficial to buy your property than to rent it.
After thinking things through, a number of millennials may still want to purchase their own properties. If so, it is important to think about down payment options, which can sometimes be difficult to accommodate when you have student loan debts.
The total cost of a loan on your home is impacted by the size of the down payment. The larger the down payment, the lower the monthly payments, because a big down payment means that you are borrowing less from the bank. This can also lead to a decrease in your loan’s interest rate, thus lowering the amount you will need to pay in interest throughout the duration of the mortgage.
According to Lending Tree, the average down payment on a typical 30-year mortgage in the fourth quarter of 2015 was 17.5%. However, there are other options for down payments that are more affordable short-term. The Federal Housing Administration, for example, backs mortgages that require down payments of as little as 3.5%.
If you put less money down, there are likely to be higher interest rates on the loan. However, given that interest rates are still so low, this might be the perfect time to make the move. Just keep in mind that if you do not put 20% down, the lender is likely to to require private mortgage insurance.
When you’re trying to decide the amount of money to put down, make sure you do not take too much out of your savings account. You will need to keep some extra money in order to cover moving expense, home insurance, closing costs, furniture shopping, and more.
While finances are of course a large part of purchasing a home, the decision should not solely be made based on money. There are also a lot of responsibilities that come with being a homeowner. Make sure that you are ready to tackle any household issues that make come up such as appliances malfunctioning or pests entering your home.
If you are a millennial looking to buy a home, make sure to take everything into account. This includes the down payment, the debt-to-income ratio, and the general responsibility of owning a home.