Tradition says to buy a house is to achieve the American dream. No doubt, a house is often the foundation for wealth and can be passed down. Right now home sales are surging on Long Island with the pandemic buying frenzy fueled by people fleeing New York City. Interest rates are around 3% for a 30-year mortgage. Tempting for sure. Should you start looking for that home sweet home?
Your instincts might quickly tell you yes. But truth is, homeownership isn’t for everyone. There are times when buying a home isn’t ideal. Here’s when it might not be.
Prices are exorbitant
When the housing market is so hot that prices are high, renting may be best. "If the goal is just having a place to live, it might make more financial sense to rent. If the real estate market offers, on average, lower monthly rents than monthly mortgage payments, it may not be the right time to buy," says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre.
Burdened by debt and poor credit
Credit scores below 620 might make it hard to qualify for a mortgage or secure other lending with a reasonable interest rate. If you have a high debt ratio, you may not be able to afford your monthly mortgage payments, Zimmelman warns.
Insufficient funds for a down payment
Unless you qualify for a first-time homebuyer program, you’ll need to make a down payment to secure financing. If you haven’t saved up enough, you’re not ready to buy. Take your time. Build not only cash for a down payment, but a cushion.
"You should not buy a home unless you have at least 6 months savings in the bank," says Sissy Lappin, CEO of ListingDoor.com.
You’re unsure about making a long-term commitment
"If you can't plan to stay in the home for at least five years, you should rent," says James McGrath, founder of Yoreevo, a real estate brokerage in Manhattan.
When you buy a house, you are paying mainly interest in the first seven years. This means that when you try to sell your house in 4.5 years, you are going to have minimal equity to work with, explains Shawn Breyer, owner of Atlanta House Buyers.
Five years is a likely break-even point. "You'll pay a few percent on the way in (depending on what kind of property and if you finance) and then 8-9% on the way out (broker commissions, transfer taxes and miscellaneous fees)," McGrath says.
If you don’t like to be still long enough for the grass to grow under your feet, or if your career is such that you need to be ready for possible relocation, you might not be a good candidate for homeownership and fare better with the flexibility renting allows.
You think a home will make you rich
"Interest rates are at an all-time low, but many may not be able to deduct the interest and real estate taxes because the standard deduction is higher. East Hampton is different than Massapequa, but the burbs are hot right now due to COVID. We’re in for a housing bubble," says Jonathan Gassman, CPA and certified financial planner with The Gassman Financial Group in Manhattan. "Don’t look at your home as an investment. You’re lucky if it keeps pace with inflation."
Does homeownership align with what is important to you or are you bowing to societal expectations? Says Lappin, "There is nothing shameful about not owning a home. The ideals of the 1950s are dead. Homeownership is not the ultimate; there are many ways of accruing wealth."