Economic Environment
Buying a home is a goal and dream for many.
Today’s environment of high interest rates, high home prices and high inflation may make the dream of home ownership seem unattainable.
The average rate on a 30-year fixed-rate mortgage has been trending around 7%, more than double the 3.3% at the beginning of 2022. Meanwhile, the median list price for a home in the greater Houston area was $345,000 and $175/sq.ft. in November 2022, according to Realtor.com.
Demand for homes is declining, shifting the environment in favor of the buyer. Home prices are also declining with median home prices coming down from an all-time high in June 2022, according to Realtor.
While it’s impossible to know with certainty where home prices or mortgage rates will be in the coming months and years, there are ways to make sure you’re in the best financial position possible to enter the market as a buyer, whether now or later.
Here are some tips to help you be prepared.
Know How Much Home You Can Afford
One of the most important things to get a handle on is how much home you can afford , especially in today’s economic environment. This means having a good handle on your current financial situation and monthly budget.
What are your current expenses and are you able to cover your expenses without taking on additional debt? Are you factoring in a rainy-day fund to handle those unexpected expenses? What monthly mortgage payment can you handle without putting yourself in a paycheck to paycheck existence?
While the purchase of a house is a one-time event, the affordability is largely about your monthly mortgage payments and taxes.
A common rule of thumb with financial advisors is to spend no more than 25% of your gross monthly income on your payment, including taxes and insurance.
Buying a home also comes with upfront expenses, such as mortgage fees, closing costs, down-payment and other taxes and fees. Those one-time costs can total thousands of dollars.
Once you own a home, there is no landlord to call when your plumbing acts up or your roof needs to be repaired. Factoring in possible unexpected home expenses should be part of your budgeting. A rainy-day fund is an essential part of a solid financial foundation and is key to determining home much home you can afford. Many people who don’t factor in these expenses and how they fit into their overall budget find themselves house rich and cash poor . This can be a stressful situation on any household, as your home essentially holds you hostage as those expenses do not change over the life of your mortgage and ownership.
Your Credit Score
The higher your credit score, the lower the interest rate you can qualify for on a variety of loans, including mortgages. Home buyers with lower credit scores may pay tens of thousands more over the life of a 30-year fixed-rate mortgage than someone with an excellent score.
Before seriously considering purchasing a home, take a look at your credit score and look at ways to boost that number so you qualify for the best rates. A score of 740 or higher generally gives you access to the best rates. Our Smart Financial Relationship Specialists can help you target ways to improve your score and get you in the best position to be a strong buyer. Solid financial habits like paying your bills on time and getting rid of high credit card debt can help your score to increase.
Save for a Down Payment
Another important factor in how much home you can afford is the down payment, which helps determine the size of the loan you need. The less you need to borrow, the less you’ll pay in interest overall, and the smaller your monthly mortgage payments. A bigger down payment can sometimes help you get better mortgage rates as well. Many times a larger down-payment is needed to avoid private mortgage insurance (PMI: insurance that protects the lender from borrower default). A larger down payment signals less risk as the buyer has invested considerable personal resources into the home purchase and is less likely to default and risk losing their investment. A 20% down payment usually eliminates the need for PMI. PMI insurance can generally cost anywhere from 0.58% to 1.86% of the loan’s value, increasing your monthly mortgage payment.
A 20% down payment may not be feasible for some buyers, especially first-time home buyers. First-time homebuyers put an average of 7% down, according to the National Association of Realtors. For repeat buyers, the average down payment is 17%.
Rainy Day Stash
As mentioned above, being prepared for the additional expenses of home ownership and unexpected repairs is an essential part of financial planning. Before buying a house, make sure you’d still have money in savings to cover those surprise costs or any other unexpected hit to your income or budget
Many financial advisors recommend having at least three to six months’ worth of income in a savings account that you can tap into in case of unanticipated expenses.
As a Smart Financial Member, our specialists can help guide you through the home buying process and help you make the right choices for this crucial step in your financial journey!