When Should I Buy a Home? Am I ready for homeownership?

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Many people wonder, “When should I buy a home?” You may have heard the old Chinese proverb: “The best time to plant a tree was 20 years ago. The second-best time is now.” So it is with buying a home—the best time to get started is 30 years or more before you retire. But if that’s not an option, then the best time is right now.

A recent study by the Urban Institute agreed; the best time to buy a home is between the ages of 25 and 34. This gives you a significant financial advantage when it comes to building wealth through homeownership, and it means no house payment or rent in retirement, which protects the wealth one has spent a lifetime building.

That doesn’t mean people 35 and over shouldn’t buy a house—far from it. But if you’re in the 25-34 age range and you’re thinking about buying a home, it’s important to go for it now.

If you’re under 25 and are in a position to become a homeowner, then you shouldn’t wait. But the Urban Institute study linked above found that those who become homeowners at the youngest ages end up with less home equity than those who buy in the 25-34 age range. Why? The youngest buyers tend to buy lower-priced homes, and while those will earn a great return over time, their home values will end up lower than those who start a little bit later. We think it’s good to think of the “property ladder” concept, whereby you plan to move up when you can to something a little more valuable. The house you buy in your early 20’s shouldn’t be the house you stay in until the day you retire 45 years later. Make sure your starter home is actually a starter home, and plan to move up someday.

While our advice is usually going to be “get started now!” when it comes to homeownership, there may be times that are more optimal in the short term. Many people want to time their homeownership to take advantage of the best interest rates.

Interest Rates

Take a look at the historical averages of 30-year fixed rate mortgages. Freddie Mac has all of that data available for you, going back to 1971. As this is being written, they show 4.07% as the average rate. That’s pretty good—the lowest annual average rate we’ve seen in 30 years is 3.65%, in 2016. The highest annual average we’ve seen is 16.63% in 1981. So historically, we’re on the low end right now.
Even looking at it month-by month, the highest average rate we’ve seen in the last 15 months is 4.87, and the lowest is 4.03. Some people might tell you to try to time the interest rates and wait for the current rate of 4.27% to go down a little bit more before you buy. We think this is not worth it.

Consider this: a month ago, the average rate was 4.37%. If you got a $190,000 loan then, you’d end up paying $151,309 in interest over 30 years, with a monthly payment of $1,310 to start. If you waited a month and got today’s 4.27%, you’d pay 147,288.23 over 30 years, with a monthly payment of $1,300. So waiting for a small shift downward in the interest rate would save you $10 per month and $4,021 over a lifetime. That’s not insignificant, but it’s a tremendous risk to take to save $10 a month. What if the rate goes up instead of down? The month before last, rates were 4.46%. If it went up, you’d be paying $1,320 monthly—$10 more. If things go in the wrong direction, you end up spending more or waiting even longer for rates to come down again—and that might never happen.

We think trying to time your purchase to today’s interest rates is like gambling, and you shouldn’t do it. The best thing you can do is work to improve your credit score and get the best rates you can get today, and then get into homeownership and start building wealth now.

Home Prices

Home prices might affect your timing, and can vary throughout the year. Most studies find a significant drop in winter—January is the best month to buy, and June is the worst. The problem is, if you’re not a first-time homebuyer, you’re selling your current home before buying a new one. So if you buy during a low period for home values, you’re getting less for the home you sell, and if you buy during a time of high prices, you’re getting more money for your current home.

So trying to time your home purchase during the year is really better for first-time homebuyers, and for them, buying in winter is the best time. NerdWallet found prices could be as much as 8.45% less in January-February vs. June-August.

Your Situation

Ultimately, the best time to buy a home is right now, but you have to be sure you’re ready. Is your credit score good enough? Do you have your other debts under control? Have you saved up a sufficient down payment?

Also, you need to be ready to stay in one place for at least 5 years. If you think you’re going to be moving before then, it’s probably better to wait before you buy a home.

If you’re interested in homeownership but you’re not sure if you are financially ready, talk to a housing counselor at a HUD-approved housing counseling agency or attend a first-time home buyer education workshop near you.