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A lot of people are watching the downward slide of the housing market and beginning to wonder if it is a smart decision to buy a house. This is magnified even more with major articles coming out each day stating that the wealthy are giving up their homes to rent instead. There are many reasons against buying a house: less up-front expenses, no maintenance expenses, and the apartment can’t go underwater.

That being said, there is one huge reason to buy a house: your monthly mortgage payment builds equity! However, I will say it is definitely not as easy as a decision. But, by asking yourself a few questions honestly, you will be able to gauge if you are really ready.

Question 1:  Do you have a 20% down payment for the house you want to buy? 

I realize that you can get FHA loans for 3.5% down, but I would not advise any homebuyer to do that. Why, you may ask? Well, simply put: it’s because of PMI, or private mortgage insurance. Why pay an extra monthly expense that can run up to $100 or more PER payment? If you want to give up extra money each year, then pay extra on your mortgage and build your equity faster.

Question 2:  Can you pay the closing costs without using any of your 20% down payment?

Closing costs can run anywhere between 2 and 4 percent. That means they can cost an extra $5,000 to $40,000 depending on your purchase price. Make sure you have an idea of how much they will cost you before you sign off on the purchase. Your Realtor and mortgage broker should be able to let you know a good estimate before you even put in an offer.

Question 3:  Do you have your emergency fund for at least 6 months to 1 year?

You must have something saved for a rainy day. Should you or your spouse lose a job, it’s important to have some money to fall back on while you figure things out.

Question 4:  Are you planning on staying in the home for at least 6 years? 

Look at your life. Are you planning on staying at your current job/location? Are you married or in a long–term relationship? Are you happy where your living? The days of flipping have ended. You may dream of fixing the house up, but selling it quickly may be a different matter. The majority of housing market watchers are warning that we haven’t hit bottom yet. You may lose value on your house in the short time and this is why it is important to focus on building equity and not on making quick money.

Question 5:  Are you prepared to pay for the usual and unforeseen expenses?

This includes hot water tanks, leaks, roofs, accidents, taxes, and furniture.

Question 6:  Do you have the time and energy to be a home owner?

Owning a home takes a lot of time and work. Make sure you are prepared to take care of it. Otherwise, you may find yourself completely overwhelmed.

If you find that you answer “yes” to all the above, you can now begin the conversation of where, when and how much. Make sure you are honest about how much you can afford and how much work you can perform. Buying and owning a house is a great experience when done correctly, but it can also be filled with incredible amounts of stress if done incorrectly.

Anna Domzalski is a staff writer for the Financial Bin. Anna will soon begin her role as Dean of Financial Bin University and will conduct online budgeting classes beginning in February 2012. She can be reached via email at [email protected].
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