Is Now the Best Time to Buy a Home?

in Buying a Home, First Person: Our Blog, Interest Rates, Mortgage, Personal Finance

Going from renter to homeowner is a huge step in your financial life. It’s a long-term commitment, kind of like going from dating to marriage. And after the housing meltdown during the Great Recession, many first-time home buyers are understandably skittish about taking the leap.

While rents are rising because there is more demand for rentals and fewer units available, this may be the year for first-timers to consider buying a home. Experts say mortgage interest rates — near historic lows — may increase and housing prices will likely stabilize in 2016. As you consider whether now is the best time to buy a home, here are four factors to help you decide.

Do the math

Use a rent-versus-buy calculator to see how many years it will take for you to break even. Most calculators take into account the down payment, closing costs, property taxes, length of time you plan to live in the home, and other factors of homeownership to help you make a good decision.

Save for your down payment

One of the biggest hurdles to homeownership is the down payment. Most lenders want to a home buyer to put down about 20% of the purchase price. For a young adult with student loan debt or a couple just starting a family, saving that much money is difficult. You can still get a loan if your down payment is less than 20%, but you’ll have to get private mortgage insurance, which protects the lender if you default on the loan. PMI will add to your monthly payment, but you’ll still be able to buy a home. And PMI doesn’t have to last for the entire loan: Once you have enough equity in your home, you can cancel it.

Find the best interest rate

Mortgage interest rates have been at their lowest in history within the past five years. According to mortgage giant Freddie Mac, the average rate for a 30-year fixed-rate mortgage in 2015 was 3.85%. Compare that to the rate in 2000: 8.05%. The Federal Reserve recently raised interest rates for the first time since the recession began, and economists predict mortgage rates will also rise. So now may be the right time to buy.

Your search for the best mortgage should include big banks, community banks and online banks, like First Internet Bank. An online bank without branches has low overhead, so its interest rates are often lower than those at the big banks. And online banks will lend across the country, not only in a specific area.

Owning a home helps your tax situation

One of the most enticing reasons to own a home is that the interest you pay on a home loan is deductible on your taxes. For example, if you have a $150,000 mortgage with a 30-year fixed rate of 4%, you’ll deduct more than $107,000 over the life of the loan.

As you pay your mortgage each month, you’re building equity in your home. After you’ve owned your home for a few years, you might take out a home equity loan or line of credit to remodel the kitchen, for example. That interest would also be tax-deductible.

Consider all of these aspects of owning a home before taking the plunge. Ultimately, the decision should come down to your lifestyle and the type of home you want to have.

Ellen Cannon, guest author, NerdWallet
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