What comes first: the apartment or the car? That’s a question people have probably been asking themselves since the Model T hit the streets. The answer depends on your specific financial situation: since both homes and cars cost a significant chunk of change, you need to carefully consider your options. We asked the experts what factors to consider to make the best, most financially savvy choice for you.
What should I buy first?
Should you buy a car or a house first? To help you decide, here are four factors to look at carefully:
State of the housing and car markets
Interest rates are going up, and that’s true for both mortgages and auto loans. In addition, the stocks of houses and vehicles are low. In other words, it’s not an overly affordable time to buy either. If interest rates fall or inventories rise in either market, it could be a sign to hit that particular category.
For now, though, it can help to think long-term. For example, cars generally decrease in value over the years, while real estate tends to increase in value. “Housing markets move in cycles, but homes will almost always appreciate in value to some degree over time,” said Katie Wishneff, a real estate agent at William Means Real Estate in Charleston, South Carolina.
your purchase schedule
Need to make a purchase soon? Not sure where you will be in the next few years? Buying a car can be faster than buying a house, and unlike a house, your car can take you anywhere.
“Buying a home is complicated,” says Michael Gifford, CEO of Splitero, which helps homeowners access their home equity. “It should start with credit qualification. After the pre-qualification process, buyers can start looking for their home. Potential homebuyers should consider long-term scenarios [like] a change in employment status or income and the resale and rental potential of the property.”
In other words, when you’re buying a home, you really need to think about the big picture. Buying a car doesn’t require the same level of forward thinking.
The question of whether or not you should buy a home is moot if you can’t afford the high cost of home ownership. Consider whether you have enough money saved for a down payment, plus closing costs and monthly mortgage payments, as well as upkeep costs. Bankrate’s New Home Calculator can also help you work out the numbers to determine if home ownership fits your current financial situation. If not, a car is probably the answer for now.
To secure a car loan or mortgage, you need good credit. Generally, buyers need a credit score of at least 620 to buy a home and 600 to buy a car. In both cases, higher is better.
However, creditworthiness is more than a three-digit number. It means looking at your financial situation and determining if you can adequately bear the amount of debt you are about to take on. There’s a common guideline that can help you determine your limits: “People often refer to the 28/36 rule,” says Courtney Klosterman, home insights expert at Hippo Insurance. “With this rule, your housing expenses shouldn’t exceed 28 percent of your annual income, and your total debt shouldn’t exceed 36 percent of your annual income.” Total debt includes car payments as well as housing expenses.
First buy a car
If you need both accommodation and a ride, a car is an easier and cheaper place to start – especially if you’re buying used. You can find more help in deciding whether you should buy a new or used car in our guide on the subject.
“If you need a car, especially for work, my advice would be to drive it first,” says Wishneff. “You can’t build wealth without a job!”
However, does buying a car affect your ability to buy a home? Yes, at least temporarily. You probably can’t go right back and buy a house after a major purchase like a car. Opening the new credit account that is your car loan usually results in a short-term drop in your credit score. It also affects your debt-to-income ratio, or DTI, which lenders consider when you apply for financing. Over the years, if you make your car payments on time, this debt can help you build stronger credit, which will allow you to get a better mortgage rate when the time comes. And when interest rates go back down, refinancing your car loan can be easier and cheaper than refinancing a mortgage.
Buy a house first
If you can comfortably afford the down payment and mortgage that would come with buying a home, and plan on living in the same place for at least the next five years or so, you should first consider buying a home. As long as you can get to work reliably by public transport or some other means, being locked in your home has some great benefits.
“The primary financial benefit of home ownership is that it is viewed as a low-risk investment that has historically increased in value over time,” said Curtis Wood, CEO of Florida-based mortgage app Bee. Additional benefits, he says, may include property tax deductions, exclusions from capital gains and other preferential tax treatments.
“There’s also a huge psychological benefit,” adds Wood. “Property is the basis of almost all accumulation of wealth. Your home is not just your nest egg, it is the emotional foundation for growing your wealth outside the home and expanding into other assets.”
Klosterman agrees: “Buying a home, especially as a first-time buyer, is exciting,” she says. “You can move into a space that is yours, that you can decorate, use and enjoy as you wish. However, with that privilege comes a lot of responsibility. Think of the financial strain, upkeep, and unexpected repairs. Owning a home is hard work, but most of the time it’s worth it.”
Getting a mortgage pre-approved is a good first step in determining how much house you can comfortably afford.
What should I do?
If it’s financially viable for you and you still have reliable transportation to work, most experts recommend buying a house first.
“Real estate tends to appreciate over time and should be preferred to a vehicle whenever possible,” says Gifford. “Vehicles typically lose value the moment they are bought and driven out of the parking lot. If a consumer first decides between buying a car or buying a home, a home is a better investment for them in the long run.”
“Definitely buy a house first,” agrees Wood. “Property tends to be more valued than cars and most vehicles depreciate in value over a long period of time until they become collectibles. Compared to the increase in home value over the same period of time, buying a house or property makes a lot more sense than buying a car.”
“Home ownership can be one of the most formative and impactful experiences of a person’s adult life,” says Klosterman. “Some people see home ownership as a rite of passage, and for many, a home is the most important asset in their financial portfolio.”
Start the home buying process by partnering with a real estate agent you can trust. “Talk to a reputable real estate agent and lender to learn what options are best for you,” says Wishneff. “It’s not a decision to be taken lightly. A knowledgeable and reliable lender and broker will help you with this.”
If you can’t get to work without a car and decide to go that route first, look around for the best car loan rates. The more you can save for a car now, the more you’ll have to spend on your first home in the future.