Updated: Mar 22
Times are changing.
People are leaving cities, working remotely, and reevaluating how—and where—they want to live.
Throughout the pandemic, this has made buying a home a hot topic. But are you ready to give up the flexibility that renting brings? And most importantly, are you in a position to purchase a home right now?
Though mortgage rates are at record lows because of COVID-19, it’s undeniably a seller’s market at the moment. Inventory is minimal in most U.S. cities, and while making an offer on your dream home may sound appealing, you’ll want to proceed with caution.
What’s the best way to do that? Following financial expert Sam Dogen’s 30/30/3 rule for buying a home is a solid place to start.
Rule Number 1: Keep your mortgage payments under 30% of your gross income.
Since mortgage rates are super-low right now, you may want to dive in and splurge on a home teetering on the brink of your price range.
This is a valid option, but you should still be careful. This is because when rates are lower, you can enjoy more flexibility so long as you make your spending a percentage of your gross income.
In other words, you want to make sure you have enough of a cushion to cover your basic needs and any emergencies that may pop up.
Here’s the deal: Say you spend 50% of your monthly $70,000 gross income on a mortgage. You’ll still have $35,000 in gross income to work with. However, spending 50% of your monthly $7,000 income wouldn’t give you as much wiggle room.
This is why it’s important to carefully assess how much house you can afford. This first portion of the 30/30/3 rule can help you navigate that. Essentially, the less money you have to work with, the less you’ll want to spend. During these volatile times especially, it’s better to be safe than to be sorry.
Rule Number 2: Save 30% of the total home value in cash or low-risk assets.
Saving 30% of the total home value is important for the same reason as the first portion of the 30/30/3 rule: security.
Basically, you’ll want to save 20% for a down payment, which will help you leverage the lowest mortgage rate and avoid paying private mortgage insurance (PMI).
And then, you’ll want another 10% on hand as a cash buffer—to cover everything from closing costs, to unexpected repairs. (As a homeowner who’s about to fork over close to $10,000 for a new retaining wall this summer, believe me when I say this matters!)
Now, you might be tempted to find a program that’ll allow you to put less money down. These programs are totally valid, and you’re well within your right to consider them. However, given the lack of stability in the world today, a bigger monetary cushion will probably bring you more peace of mind.
Some context: Looking back at the Great Recession, homeowners who struggled the most were those who had minimal down payments. If you’re hoping to buy this next year, why not maximize your chances of success and learn a little something from people who bought homes between 2008 and 2012? You’ll enjoy homeownership significantly more if you stay cautious.
Rule Number 3: Buy a home worth under 3 times your annual income.
Moving on now to the final component of the 30/30/3 rule—buy a home you can afford!
What does this mean? It means you’ll want to purchase a home worth under three times your annual income. This is not only an effective way to screen for potential properties, but it’s an almost surefire strategy for keeping yourself in check.
Do you earn $60,000 per year? Then, per the 30/30/3 rule, you can afford a home worth up to $180,000.
Is your household income $270,000? In that case, an $810,000 home is well within reach.
Again, this rule is simply a recommendation. With mortgage rates plummeting, housing is more affordable nowadays. And while homebuyers could in theory purchase a property worth more than three times their annual income, it’s important to keep in mind that this would lead to more debt, higher property taxes, and greater maintenance costs.
Renting vs. Buying a Home
Still not sure whether you’d like a buy a home this year?
Consider the following benefits of homeownership:
· Tax deductions
· Forced savings
· Opportunity to build equity
Meanwhile, here are some of the benefits of renting:
· No property taxes
· Landlord is responsible for maintenance
· Easier to relocate
· No down payment needed
If you’re still eager to buy property in 2021 but want to break the 30/30/3 rule, then that’s just fine too. Here are some strategies you can use to do so and still stay in a decent financial position:
· Rent out a room or part of your property.
· Build passive income streams to cover homeownership expenses.
· Start a remote side gig to deduct a home office and other relevant expenses (i.e., Wifi, furniture, other supplies).
· Request a raise or search for a new, higher-paying job.
So, what’s the verdict on buying a home in 2021? While inventory is limited and the economy is somewhat volatile, buying today will allow you to secure a lower mortgage rate and reap the benefits of homeownership. Ultimately, as Americans continue to reexamine their lives and priorities in response to the pandemic, now could be the perfect opportunity to become a property owner. But it’s up to you to decide.
Have questions about renting vs. buying a home? Interested in learning more about the security services available at our firm? Please contact us for a free consultation.