The answer to the question when to buy a house always depends on your personal situation. It includes where you are career-wise, family-wise, financially, location etc. in your life at that time. Sometimes people just feel the peer pressure, sometimes its just the norm after graduating you buy a house. The general advice that’s prevalent on most blogs, social media is buying a house is the best decision you can make for you future. Could be true, could be wrong, completely depends on your situation. However, I can have no say in when you decide to buy a house. It just is a very big personal decision and needs to be taken by the person or family only.
Factors you should consider/remember when you plan to buy a house
1. Buying a house ties you down
It’s a very big financial transaction in every way. You have big monthly payments, unplanned maintenance, taxes, closing costs etc. You are basically tied down to your house, location/city, job. If you ever notice in first few years of your home ownership most of your monthly payments goes towards interest. Then there is cost like commission fees on selling which is around 6%. These costs eventually may not make buying a home as sure shot investment if you plan to stay only for 5-8 years in that house. You might be selling it at barely break even or loss if you do it in that time. So be sure about having a stable job/relationship/family and are sure that you will spend more than 8-10 years here.
2. More job opportunities and pay rise early in the career
Segueing of the previous point, you need to be very flexible early in your career. It’s easy to hire and train a young mind. Companies are perennially looking for young fresh blood. They want people who can learn new things fast and are unburdened by other issues in life. Early in your career you will get plenty of opportunities to move to new roles or new companies. These will come with big increase in compensation and better benefits usually. Now if you already have a house when you are 25ish you are tied to it. These opportunities may arise in different cities, may require you to move, you would be hesitant to take it. Moreover, it would not just make any sense financially to own a house for less than 5-10 years and selling it to move. What I am saying is you have and will get more opportunities in your twenties and thirties than in your forties and fifties. So, do keep this in mind when you decide to buy a house.
3. Renting not always throwing away money
Many articles around the web point out that its better to pay money towards your mortgage than paying it towards rent. Idea is that by renting you pay something monthly but do not build equity in the house. This is mostly true. But renting has other advantages. Renting allows you flexibility. You might get a new job offer with 30% raise in a new city. Renting allows you to pack up and join the new position any time. Sometimes renting works out cheaper. I can find a nice 1 bed place to rent in my city for 800$ but would need to shell out more than 1600-1800$ in insurance, mortgage alone for a 2-bedroom house in my city. This doesn’t even include any maintenance, HOA I may have etc. Renting allows one to be free from maintenance, taxes and other issues that might take your time if you own a house.
4. Retirement planning earlier helps in compounding later
By now you probably know compound interest is the 8th wonder of the world. If not check out my article on how investing money for retirement early and consistently works out way better by age of 65. However, if you buy a house when you are in your twenties, you wont have money to put aside to invest. Its possible some people might and that’s well and great for you. For most people paying mortgage, other bills monthly might not leave much for 401k’s. There is a big chance you will miss out on really good compounded returns. You might decide to contribute to 401k’s later in your life. Who knows what more responsibilities you have later in your life. For e.g. kid’s education, maybe taking care of parents etc. Maybe then your extra income goes towards those causes. The original plan to contribute towards retirement later just gets delayed further. But without a doubt contributing as early as possible to your retirement accounts allows you to enjoy life later.
5. Risk of losing value/bankruptcy
There are significant upfront costs when you buy a house. Huge down payment, PMI, renovation costs, furnishing costs, closing costs etc. Sometimes people decide to only put 1-5% down to cover for other costs. This compounded with an economic downturn which potentially costs you your job is a disaster. You might find yourself not able to pay the mortgage. You might have to sell the house. Its easily possible the house will fetch lesser value than what you bought for. However, the loan amount will be more than that and will result in bankruptcy. So its very very important to plan for such scenarios, have some extra money on the sidelines to make sure you can cover mortgage in such situations. You need to make sure you have emergency savings just for this.
Not only does having a good location impact the house value in future. But it also is important to make sure you don’t have to commute too much to and from work. A much longer commute can easily increase your gas and auto expenses like insurance and auto maintenance. There have been lots of studies that prove people who commute more end up growing un- healthy. This just makes sense. You spend more time commuting and being grumpy because of the traffic and get less time to work out. So make sure that the location of the house works out for your advantage.
I am not here to tell anyone to not buy a house. I only suggest people plan for the factors above and have a good contingency in case anything happens. In essence, you must make sure you are ready to own a home. You have a stable job, stable income stream, stable family/relationship. You must try and see yourself sticking to the same house for more than 8-10 years. It hopefully is even your forever home! Home ownership is a good investment, but only when you hold it long term. In short term it can go up or down. But in long term it almost always will go up. Happy house hunting!