Your 20s represents a significant transitional period, as entering the workforce results in financial changes that raise several questions, such as whether you should buy a home. Renting is a convenient option for those in their 20s working in or around a city, but apartment living never compares to homes in terms of privacy, flexibility and investment potential.
When contemplating whether to purchase a home in your 20s, consider the aspects below:
The Downsides to Consider
While purchasing a home has an ample array of benefits, it's a massive investment that will significantly impact anyone - especially someone in their 20s. As such, it's important to be aware of the downsides to buying, which include:
Less Free Time
When you purchase a home, there isn't a landlord ready to take on any repair or issue. As a result, be prepared to spend time on nights or weekends maintaining and improving your home. Plus, any specialists that you'd call - like plumbers or exterminators - will be on your dime, not a landlord's.
You Have to Stay Put
With apartment living you just have to wait until the end of a lease to move. With a home, you will lose money if you aren't there at least three years or so. By that time it's realistic to have recouped the initial home cost - approximately 2-5 percent of the purchasing price. Also, with the unpredictability of real estate, you may have to wait even longer. When you purchase a home, make sure it's in an area you wouldn't mind living in for at least the next half-decade.
Unexpected Costs
As a first-time homebuyer, it's extremely unlikely you'll consider every cost imaginable with a home, as there's a lot. This includes property taxes, insurance, repair and maintenance costs, potential municipal fees and others. There are many costs to a home well beyond the mortgage.
Additionally, if your investment requires a lot of urgent and initial maintenance, you might be more susceptible to untrustworthy vendors or contractors. Before committing to any contract, check out sites like Angie's List or reference industry resources to determine the quality and price-point you should be expecting with each job.
While these downsides are all to be considered, the benefits of purchasing a home - like the ability to customize your space, receive tax benefits, cash in on value and not have a mortgage payment - are often alluring enough.
Can You Afford the Purchase?
It's the most important question a prospective homebuyer can ask themselves. Buying a home isn't a fit for everyone, since it's a time- and individual-specific endeavor. For instance, if you're someone who plans to go back to school, anticipates a rapidly growing household, can't afford the location or have an overly demanding job, then it is probably prudent to wait until the situation is better.
If your situation is ripe for purchasing a home, however, then the next step is to decide whether you can afford it.
Project Your Earnings the Next Decade
Obviously you won't be able to do this to an exact science, but you should be able to map out a reasonable projection of what you would theoretically have in your bank account in 5-10 years. Consider your current salary, potential career growth and potential recurring costs like student loans.
The main reason to do this is because a home mortgage is a very long-term commitment that typically spreads throughout 30 years. Having a firm grasp of financial projections - assuming all goes to plan - can give you a clearer picture of how feasible it will be to afford the mortgage without stress.
Consider Worst-Case Scenarios
Medical emergencies and job terminations aren't fun to think about, but when purchasing a home you need to consider various worst-case scenarios that may arise while you're in the midst of paying off your mortgage. Weighing areas like how quickly you'd be able to find another job, your spouse's level of financial support and the involvement of other bills will help you best evaluate whether you're ready to purchase a home.
This type of forward-thinking prudence will help you identify which mortgage type is best for you: a fixed rate mortgage or adjustable rate. A fixed rate stays the same for entire loan's life, while an adjustable rate is tied to a formula that's typically related to economic fluctuation. If you plan to sell a home within a decade, then adjustable rate mortgages are typically preferred.
By considering the downsides to buying a home, as well as evaluating whether you're financially prepared to make the purchase with forward-thinking analysis, someone in their 20s can make the decision to purchase a home with confidence and savvy.