Housing is the biggest expense for most American families, typically devouring a third of their budget. Are those dollars getting spent wisely? Here are 10 questions to ask yourself:
1. Should you buy? If you play around with the mortgage calculator at Bankrate.com, you can figure out how big a mortgage you could support with your monthly rent payments. That will give you a sense for whether homeownership is within reach. Even if it is, don’t buy unless you can see staying put for at least five years, and preferably seven years or longer.
2. Should you wait to buy? While purchasing a home early in adult life can be a great idea, because you lock in your housing costs and start to build home equity, there’s a potential downside: You may not currently have the wherewithal to buy the sort of house you really want. That means you could quickly find yourself trading up to a larger, better place and incurring the hefty cost of selling one home and purchasing another—an expense you might have avoided if you’d continued renting for a year or two.
3. Will you appear creditworthy to mortgage lenders? A few months before you start searching for homes, check your credit reports and credit score to make sure there’s nothing that’ll scare off lenders.
4. Are you remodeling for the right reasons? Home improvements are typically money losers, so remodeling projects should be motivated by the desire for a nicer home—and not by some wrongheaded notion that the upgrades will be a good investment.
5. Should you refinance? Even if you can lower your monthly mortgage payment, it may not make sense, depending on how much it’ll cost to refinance—and if the lower payments are driven largely by adding extra years to the length of your loan.
6. Is your home fit to be sold? With the need to clear out clutter, touch up the paint, spruce up the yard and more, it can take many months to get a home ready for sale. Want to put your house on the market by year-end? You should probably start the prep work now.
7. Should you make extra-principal payments? By adding a little money to each monthly check, you can pay off your mortgage years earlier—and earn a pretax return equal to your mortgage rate.
8. Are you on track to pay off your mortgage by retirement? Making that final mortgage payment can sharply reduce your cost of living, making retirement more affordable.
9. Are there rooms in your house, besides any bedroom set aside for guests, that you rarely or never use? That may be a sign you own more house than you really need—and perhaps you ought to trade down.
10. Should you tap into your home’s equity to pay for retirement? To turn home equity into spending money, you might downsize, remortgage your home or take out a reverse mortgage.
This column was published with the permission of HumbleDollar.com.
Jonathan Clements is the editor of HumbleDollar.com and author of ‘How to Think About Money’. Jonathan spent almost 20 years at The Wall Street Journal, where he was the personal finance columnist.