Saving up to buy a home is no easy feat. Here’s what you should take into consideration when planning out a home purchase.
One of the key components of being able to successfully buy a home is having enough cash for a down payment plus closing costs. Generally, you’ll need at least $20,000 to buy a home. The old 20% down rule does mean a low payment, but may or may not make sense for your specific financial situation. As you continue to save your ability to buy a home could be compromised if you are in a rising market such a Sonoma County, CA or other pockets of the country.
Can you get in now? Does it make sense? If you have enough money to buy a home and still meet your other financial obligations, then buying a home with a long term fixed rate mortgage is generally a safe bet.
On the other side, if you’re in a competitive market, buying a home now may mean taking on a payment slightly higher than your expectations to be able to compete. It may mean a higher payment until debt is paid off, you come into some cash, a life event happens or your income rises. All of which may make sense for taking a payment perhaps a bit higher than your preference.
Here is the challenging part…putting off buying a home may cost more in the long run and here’s how that happens
Homes typically move at a faster pace in terms of volume, activity and appreciation than your ability to save. If you are savings 8% of your gross income, but homes are appreciating at 10% for example, you are going backwards. It means your % down will be less as the home inevitably costs more in the future possibly putting you right back to where you are today if you were to buy now.
Rising rates– if this happens for .375 in rate on every 100k borrowed your payment will change by $22 per month. The more home you are trying to buy the more exposure you have to payment volatility based changing rates. This of course ties directly into how much payment you’re looking to handle on a monthly basis in relationship to your purchase price.
Rising home prices or a higher-priced home: this might end up happening if you wait to buy a house in the future. This will depend on homes in your market. For example a $500,000. 1.25% of the purchase price is the calculation for property taxes. For a $500k house that is a $520 property tax obligation a number that could wane on your affordability. If you were to buy a home today for 500,000 or wait a year and that $500k home is a now a $600k, you just missed an opportunity because you were savings when 12 months earlier you could have bought the home and potentially refinanced 12 months later.
If you can buy a home using a fixed rate mortgage, move on it. This way you have two factors at work in your favor; the equity built up by virtue of making your payment each month and your point in the door in something that can help you build wealth. Case in point if you buy that house at $500,000 today and that house becomes $600,000 value in 12 months you can refinance for payment reduction making the home more affordable.
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