Spending

5 questions to ask yourself before buying a home, even if you can afford a down payment

Alizah Salario@alirosa
Twenty/20

Homeownership has long been considered a central part of the American dream. To achieve that dream, some millennials are doing whatever it takes to scrap together a down payment, including dipping into their retirement accounts, according to a recent poll from Bankrate.

Given that first-time homebuyers can sometimes get approved for loans with just 3% down, it's easy to confuse being able to afford a down payment with being able to afford a home. That's simply not the case, according to financial experts.

"By and large, homeownership has long been touted as the way you build wealth," Deborah Kearns, a mortgage analyst at Bankrate, told Grow this summer. "While that's still true to some extent, you can't overextend yourself to make that happen."

Before you buy, make sure you can answer the questions below. If not, you might want to put off making a down payment on that dream home, even if you can scrape it together.

Is your situation stable?

Kevin O'Leary, investor on ABC's "Shark Tank," cautions against buying unless you can pass this two-question test: Are you married? Do you have kids? If the answer to either of those questions is no, he says, then you're probably better off renting until you're more settled.

Experts also say you probably don't want to take on a mortgage if you plan on moving within five years, for example, or if you're already struggling to pay off debt. "I think the key to life, particularly when you're young, is to stay out of debt," O'Leary told CNBC Make It last year.

VIDEO4:1404:14
How to make your home-buying dream a reality

Can you buy without draining your savings?

If you have to tap into retirement savings or an emergency fund to cover upfront homebuying costs of the down payment and closing costs alone, then you may very well find yourself in a tough financial spot when your monthly mortgage payments arrives. Plus, you may actually be putting your future at risk.

Let's say you decide to take $10,000 out of your retirement account to put toward a first-home purchase, and you're 32, the average age of first-time buyers. If you instead left that money in the account and it saw average returns of 8% over the next 33 years until you retire at 65, those funds would have grown to more than $126,700.

If you have to rent for a few more years and put off buying a house, that's OK. For some people, it's even a better choice: One recent study found that about half of millennial homebuyers ended up with regrets. The No. 1 reason for regret: mortgage payments that are too high.

If you run the numbers, like me, you might discover that for where you live it actually makes no financial sense to buy.
Ramit Sethi
Author, 'I Will Teach You To Be Rich'

Will you end up house-poor?

Before you buy, figure out how much of your financial "pie" you want to go toward housing, says Mark La Spisa, a certified financial planner and president of Vermillion Financial Advisors in South Barrington, Illinois. "Mortgage, taxes, [and] insurance shouldn't exceed 25% of your gross income," says La Spisa.

Some experts use the "28/36 rule," which suggests that you should spend no more than 28% of your gross monthly income on housing costs and no more than 36% on total debt, including housing and other debt.

Once you start putting more than 28% of your income toward housing, you're limiting your cash flow, which can have a major impact on your quality of life. "A lender isn't looking at your child-care bill, your grocery bill," adds Kearns. "They're not looking at all the lifestyle things you want to do to be happy."

Are you buying for the right reasons?

People are still inclined to view buying as as a good investment: In a 2019 Bankrate survey of 1,000 Americans on what they consider the best way to invest money they won't need for 10 or more years, the most popular response (31%) was real estate.

In practice, real estate simply is not always the best or easiest way to grow wealth.

"Generally, we can assume that over the long term, if we invest in a low-cost diversified index fund, we get about 7% annualized returns," Sethi told CNBC Make It. "Can you beat that in your area, over time, with real estate appreciation?"

A lender isn't looking at your child-care bill, your grocery bill. They're not looking at all the lifestyle things you want to do to be happy.
Deborah Kearns
Bankrate mortgage analyst

Buying a home can be a good way to build equity in an appreciating asset, but it isn't always. If you're buying a home as an investment, consider that the return on investment in residential housing isn't as good a bet as the stock market usually is.

"If you run the numbers, like me, you might discover that for where you live it actually makes no financial sense to buy," Ramit Sethi, author of "I Will Teach You To Be Rich," told CNBC's Make It in an interview last year.

Sethi suggests using one of the many "Buy vs. Rent" calculators offered by real estate and personal finance websites to see whether it makes sense for you.

Have you budgeted for related expenses?

As a homeowner, you'll have to account for a lot of ongoing expenses, starting with annual property taxes and homeowner's insurance. Plus, if you put down less than 20%, you may be required to purchase private mortgage insurance.

Owning a home also requires upkeep. Kearns suggests putting 1% of the home's purchase price into a separate fund that's dedicated to repairs and maintenance. "When a furnace goes out, that's a one-time expense that's thousands of dollars that really hurts the budget," she says.

Use a mortgage and housing cost calculator to factor in all these expenses and help you determine whether or not it still makes sense for you to buy.

More from Grow:

Get the Grow Newsletter Every Week
Weekly money news and advice to grow your wealth, delivered straight to your inbox.
Weekly money news and advice to grow your wealth, delivered straight to your inbox.
 

acorns+cnbcacorns cnbc

Join Acorns

GET STARTED

About Us

Learn More

Follow Us

All investments involve risk, including loss of principal. The contents presented herein are provided for general investment education and informational purposes only and do not constitute an offer to sell or a solicitation to buy any specific securities or engage in any particular investment strategy. Acorns is not engaged in rendering any tax, legal, or accounting advice. Please consult with a qualified professional for this type of advice.

Any references to past performance, regarding financial markets or otherwise, do not indicate or guarantee future results. Forward-looking statements, including without limitations investment outcomes and projections, are hypothetical and educational in nature. The results of any hypothetical projections can and may differ from actual investment results had the strategies been deployed in actual securities accounts. It is not possible to invest directly in an index.

Advisory services offered by Acorns Advisers, LLC (“Acorns Advisers”), an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Brokerage and custody services are provided to clients of Acorns Advisers by Acorns Securities, LLC (“Acorns Securities”), a broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Acorns Pay, LLC (“Acorns Pay”) manages Acorns’s demand deposit and other banking products in partnership with Lincoln Savings Bank, a bank chartered under the laws of Iowa and member FDIC. Acorns Advisers, Acorns Securities, and Acorns Pay are subsidiaries of Acorns Grow Incorporated (collectively “Acorns”). “Acorns,” the Acorns logo and “Invest the Change” are registered trademarks of Acorns Grow Incorporated. Copyright © 2019 Acorns and/or its affiliates.

NBC Universal and Comcast Ventures are investors in Acorns Grow Incorporated.