As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
It’s a great time to buy a house. There’s no denying that. Rates are extremely low right now and there are a variety of low down payment options available for both first-time buyers and those on their second or third home.
However, buying a home isn’t for everyone at every stage of life. Don’t get me wrong. It can be an excellent option and a better investment over the long term than paying rent. You just have to make sure you’re ready.
This post will give you an idea of a few of the factors to consider if it’s the right time for you to buy.
Are You Saving Enough?
The first thing you need to think about is whether you have enough savings to buy. It can be helpful to break this into two categories: saving for the house and saving for everything else that comes up.
Saving for the House
When you’re getting ready to buy, there are a variety of things you have to consider in determining how much you might be able to afford beyond the monthly payment.
To start with, let’s consider the down payment. There are a number of loan programs available that aim to make homeownership more affordable by lowering the required down payment to significantly decrease the upfront investment barriers. You can generally get a home with a down payment of as little as 3% – 3.5%. Quicken Loans even offers a 1% down payment option for well-qualified buyers.* Quicken Loans will stop taking new applications for the 1% down payment program on January 31, 2018.
If you’re active-duty military, a veteran or a surviving spouse, it should be noted that no down payment is required for a VA loan.
There are also some good reasons you might consider making a higher down payment. Down payments that are more substantial signal to lenders and investors in your mortgage that you’re a less risky client because they’re not funding as much of the transaction. This could mean you get a lower interest rate. Also, higher down payments will get you lower mortgage insurance rates if they don’t help you avoid mortgage insurance altogether.
Another way to lower your interest rate is to prepay interest upfront in the form of mortgage discount points. By buying mortgage discount points, you buy down the interest rate. One point is equal to 1% of the loan amount and you can get your points in increments down to 0.125.
To determine if buying points is right for you, it helps to do a little back-of-the-napkin math. Let’s say you’re buying a $100,000 house and the loan officer tells you that buying two points will save you $50 per month in payments.
On this loan amount, two points would cost you $2,000 at closing. You simply divide $2,000 by $50 in order to get your breakeven point of 40 months. If you can afford it and plan on staying in the house for at least a little over three years, you can end up saving money on the deal. Otherwise, it may not make sense.
While we’re on closing costs, other things you have to pay for include title insurance, prepaid escrow (taxes and home insurance) and perhaps an origination fee to pay for the loan set up.
You may also pay for the appraisal at close, although some lenders, like Quicken Loans, will cover most or all of your appraisal fee.
Closing costs and charges may vary based on who’s doing your loan. Here’s a post with some of the more common fees.
There are potentially lots of little fees involved in closing, but you may be able to cut down on some of them by taking advantage of seller concessions and lender credits.
Outside of the closing, there are just a couple of other things to consider. You’ll have to set aside an earnest money deposit when you sign the purchase agreement for the house. This is a small percentage of the sale price of the house that shows the seller you’re serious about the transaction. You also pay for a home inspection separately if you want one.
Lastly, investors in your mortgage will need to see that you have a certain amount of reserves in the form of monthly payments in case you lose your job or suffer some other temporary hardship that impacts your income. This way, they know you can handle the short-term issues while staying current on your mortgage. The exact number of months’ savings you need to have depends on the type of loan for which you’re applying.
Saving for Your Other Expenses
Now it’s time to start considering your other bills. How does a mortgage fit in with your other monthly expenses? If an emergency were to happen, could you cover everything and for how many months?
Obviously, figuring this out requires you to take a good, hard look at your situation.
To start with, calculate your monthly fixed expenses. This would include not only your potential mortgage payment, but also things like your cable bill and the car payment, along with food. These are often the easiest to start with because they’re not likely to change all that much.
Next add in variable expenses. Things like your utilities and credit card bill are more likely to change with the seasons and life circumstances. That said, there are financial apps available that can help you track your expenses over time and get a fair idea of monthly averages.
You should also consider how many incomes contribute to the household. A two-income family might be able to save less than a family with only one primary breadwinner because there’s a bit of a built-in safety net.
Since many financial hardships are caused by medical issues, it’s important to save up for the deductible. Many families choose to go with a higher deductible plan in order to save money. There’s nothing inherently wrong with this, but you do have to make sure you have enough savings to cover it. The same rule applies for your car or homeowners insurance.
You also have to factor in your kids. Will you have enough money not only to provide for basic needs, but also some of their extracurricular activities and time with friends? If it’s near the holidays, you’ll want to set aside some money for at least a few presents. Life’s curveballs may hit children hard because they’re not necessarily able to understand what’s going on.
If you have a fair idea you’re ready to buy, but you don’t know exactly how much you can afford, you can get a preapproval in order to have a budget when you go house shopping.
If you’re comfortable with how much you’ve saved, it’s time to move on to commitment questions.
Does Buying a House Make Sense?
It’s important to realize that in addition to being a large financial transaction, buying a house is also a substantial lifestyle decision.
Settle Down or Keep Moving
Are you looking to settle down in one area for a period of time or do you see yourself moving around a lot? If the answer to this question is the latter, it may be best to keep renting.
On the other hand, if you plan on sticking around a while, it may make sense to move that rent money into an investment in your own house where you can build equity and eventually leverage that investment into things like property improvements or a boost to the college fund.
Even if you don’t know how long you’ll be staying, it may still make sense to buy because many of you may find that you’re spending an awful lot of money on rent. Rates are still low and you may find that you can buy with a monthly payment that’s just as cost-effective, if not cheaper, than rent.
Another thing to consider if you’re moving in to your first home after renting is whether you want to deal with the maintenance. After all, it’s nice to be able to have the landlord’s number on speed dial when the hot water tank goes out. If it’s your house, these problems are now your responsibility.
On the flipside, the house is yours to do with it what you will. You can add a deck, build a basement bar or paint the kitchen a combination of lavender and magenta if you want. The last one might kill your resale value, but the point is when you own the house, the world really is your oyster.
If you think you’re ready to begin the home-buying process, check out our purchase page. If you have any questions, leave them in the comments.
*For example, the payment on a $200,000, 30-year fixed-rate loan at 4.375% (5.179% APR) with a LTV of 97% is $998.58. Taxes and insurance not included. Rates shown valid on publication date of 3/02/2016. Restrictions may apply.
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