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It’s one of life’s toughest questions, is it not?  Trying to decide if you should still keep renting or if you’re ready to buy a home is a very difficult thing to do, and if you make the wrong choice you could be headed for the worst financial nightmare of your life.

Of course, this isn’t meant to scare you away from home ownership.  Owning a home is a wonderful step in life, and it’s also a great investment.  Deciding when to start down that path, however, is one of the biggest decisions you’ll ever make.  So, let’s jump in so you know which path is right for you.

If you’re reading this article then you’re probably already renting, so we won’t go into too much detail about why renting is good.  A few nice things are that you can move when you want, costs are lower than owning a home, and you don’t have to worry when your furnace breaks down.  Renting can also help you save up for a home if you’re thinking about buying one.  Yep, those are some pretty nice perks. 

On the downside, however, you’re paying money to a landlord each month.  You’ll never see that money again.  Most places won’t let you modify your house or apartment to suit your own style, and if you do you’ll never see a financial return on all your hard work.  Your landlord will.  So, those are the drawbacks.

Owning a home is nothing like renting, and all new homeowners will tell you the same thing.  Let’s look at why.

First of all, owning a home is more expensive than renting, and there are a lot of hidden costs that people don’t account for when they’re house shopping.  If you’re currently paying $1,000 a month in rent, then it stands to reason that you should look for a home where you can pay a $1,000 mortgage right?  Of course.  But make sure you account for ALL the costs that go into that payment.  Yes, you pay a mortgage on your home, but you also have to pay property taxes each month.  Most homes have a yearly property tax of $2,500 (if you live in a town or city), and this is rolled into mortgage payment and adds about $200 every month.  You’re now at $1,200. 

You also have pay homeowner’s insurance, which is also rolled in.  Depending on your credit, this can be anywhere from $50 to $75 a month.  You’re now at $1,250. 

If you couldn’t afford to make a 20% down payment, you’re stuck with paying PMI (private mortgage insurance), which all banks require.  If you take out a $200,000 loan and put 10% down, you’re going to have a PMI monthly payment of about $100.  You’re now up to $1,350.

And don’t forget extra money for repairs.  If the furnace goes out this winter then you’re the one stuck paying for it.  It’s vital you set aside money each month for repairs.  Minimal allowances should be at around $150 to be safe.

So, our $1,000 mortgage payment has jumped to a whopping $1,500 without us blinking an eye.

Now, let’s talk just a moment about your down payment.  Plenty of people out there will offer you a “zero down” mortgage, and there are thousands that have already jumped on this bandwagon.  Want to know what has happened?  Right now, there are more foreclosures than there were during the Great Depression and that number is climbing higher every month. Bankruptcy is at an all-time high.  If you can’t manage to save $15,000 for a down payment, then you shouldn’t buy a house.  Yes, $15,000 is a lot of money, but so is a $200,000 house.  If you can’t hit the mark, then you’re not ready yet.

Financial guru Suze Orman has this great tip to help you figure out if you’re ready or not.  First, figure out how much you think you can afford to buy.  We just used an example of an average mortgage payment of $1,500.  If you’re currently renting an apartment for $1,000 a month, that’s $500 more than you’re paying right now.  Go to your bank and open up a savings account.

Next month when you make your $1,000 rent payment, write yourself a check for $500 and put it in your savings account.  Do this religiously for at least six months and see how hard it is for you to keep making that payment.  If you find you’re stressed out and have a hard time coming up with that extra $500, then you’re probably not ready for home ownership yet.  If, however, you’re easily able to put that extra money in the bank then you’re probably ready to take the next step.  Another bonus is that now you’ve got an extra $3,000 to put towards your down payment.

As you can see, there are plenty of hidden costs to owning a home.  Do your research before you even start looking, and think long and hard about whether you’re ready or not.  It’s a big decision, and one that could spell disaster if you make the wrong choice.  Of course, owning a home is a wonderful endeavor, and if you’re not ready now it doesn’t mean you won’t ever be.  If you are ready, then learn your way around Home Depot.  You’ll be there a lot.