Buying a house can be a smart financial move in some circ*mstances. According to the National Association of Realtors, homeowners have as much as 40 times the wealth of renters, and the forced savings that comes from having to pay a mortgage lender and build equity is one of the reasons why that's the case.
But you do make a huge commitment when you buy a house and agree to pay a mortgage for decades -- and it's not the right choice for everyone to purchase property. In fact, here are four situations when you absolutely would not want to move forward with a home purchase.
1. If you're planning on moving soon
If you are planning on relocating in the near future, it makes no sense to buy a house. That's because of all the transaction costs you end up incurring.
Typically, you have to pay closing costs of around 2% to 5% of the value of your loan when you buy a home. And when you sell a home, you also have to pay closing costs -- which could include a real estate commission of 6% split between the buyer's agent and the seller's agent.
These costs can be huge. Let's say you buy a $400,000 house and sell it a year later for $412,000, which is a reasonable amount to expect your home to appreciate. Here's what that would look like.
| Cost | Amount |
|---|---|
| Closing costs for buying | $8,240 (Assuming 2% closing costs) |
| Real estate commission for selling | $24,720 (Assuming 6% commission) |
| Other closing costs for selling | $4,120 (Assuming 1% closing costs) |
| Total expenses | $37,080 |
Data source: Author's calculations
You would lose around $37,080.00 in the course of selling. That's a lot of money to be out. You don't want this to happen, so it's best to make sure you're going to own your home for at least five years or so. This maximizes the chances it will go up enough in value that you can at least break even and ideally make a little bit of a profit.
2. If it's a stretch to afford the monthly payments
You also don't want to buy a home if covering the monthly costs would be a stretch. If your total housing costs will exceed around 25% to 30% of your income, you should not move forward with buying that property. Otherwise, you could devote so much of your money to housing that you can't afford:
- Retirement savings
- Saving for college for your kids
- Saving for big purchases and vacations
- Maintaining a healthy emergency fund
- Covering routine bills and having money left over for a little fun
3. If you have no emergency savings
If you do not have emergency savings, buying a house is a bad idea. That's the case for a few reasons:
- You could struggle to make your mortgage payments if you lose your job or your income goes down at all. This could mean risking foreclosure.
- You could end up deferring necessary maintenance if you can't afford to fix little issues that creep up at the house.
- You could go into debt for major repairs like a roof or new air conditioner if something big goes wrong.
You should aim to have at least three to six months of emergency savings before buying a house, so you don't find yourself facing a financial crisis.
4. If you aren't ready to take on the responsibilities of upkeep
Finally, you need to know that it takes time to take care of a house. You need to deal with tasks like snow removal (in cold climates), gutter cleaning, storm prep, changing furnace air filters, mowing the lawn, and making any necessary repairs. All of this takes time, money, and effort.
If you spot any of these four signs you shouldn't buy a home in yourself, don't be discouraged. There's nothing wrong with continuing to rent for a while until your life or financial circ*mstances change and you truly become ready to be a homeowner.
