Your home will likely be your largest investment and there’s much to consider when you buy your first home. Beyond styles, you should know what you can afford, how you’ll finance it, and how you’ll maintain it. Therefore, you want to make well-informed decisions. We’ll cover three topics for you to consider in your 2017 home purchase.
Before we start, know that all real estate markets aren’t alike. National trends may not be reflected locally. In fact, housing markets can be siloed with neighboring regions performing the inverse of each other. Research the market(s) where you want to buy your home to make the best purchasing decisions for you.
Current state of the housing and loan market
Nationally, housing is currently a seller’s market and home prices are increasing. For sellers, this is good. For buyers, this poses a challenge. Home prices are increasing because home inventories are drying up. This is pure supply and demand: The fewer houses on the market, the more expensive houses are.
Competition to buy a home is harder. To increase your chances of getting the home you want, be flexible on amenities, location, and features. Be an easy buyer; don’t burden the seller. With a plethora of buyers and a dearth of sellers, sellers can easily walk away from negotiations to find other prospective buyers.
Be prepared to buy, too. Get pre-approved by your bank; if you’re pre-approved and can close quickly, you’ll be more appealing to sellers.
Mortgage interest rates
Mortgage interest rates are at historic lows. Today’s current mortgage interest rate of 4% is reasonable for a standard 30-year fixed rate with an FHA (Federal Housing Administration) loan.
Many economists put pressure on the Federal Reserve to increase the Federal Funds Rate, which would increase mortgage interest rates. The Fed Funds Rate dictates the interest rate for most loans in the U.S. economy. While there’s no need to rush out and buy a home today, know there’s upward pressure on rates.
The overall housing market is "unhealthy" based on historic standards. First time home buyers currently only account for about one-third of home purchases. Historically, first-time home buyers make up 40% of housing purchases. Another indicator of an unhealthy housing market is that homeownership is at a 50-year low. Expect politicians to try to make buying a home for the first time easier.
President Trump recently cancelled cuts to FHA premiums, eliminating a mortgage deduction announced by the Obama administration in January 2016. However, the cuts weren’t scheduled to go into effect until January 27, 2017, so this won’t actually affect homebuying costs. Such cuts were only estimated to save the average American homeowner between $40 - $80 a month. If your ability to afford a home is contingent on $40 - $80 a month, you probably can’t afford that home.
Funding renovations and maintenance
Most homeowners don’t save enough for planned expenses and are underprepared for unplanned expenses. Even if you don’t want to make renovations to your new home immediately, you’ll eventually want to or need to make repairs.
For emergencies, save between three to six months’ worth of living expenses that includes everything from home maintenance to food to gasoline. Aggressively save $500 to $1,000 fast, then set up regular, automatic payments into that account until you have your three to six months’ worth of savings. This will help you cover most emergencies that affect homeowners.
Home equity lines of credit let homeowners use the equity in their home for loans. Because your home acts as collateral, you can often get lower interest rates than with other kinds of loans.
There are two phases of HELOCs: The draw and the repayment. During the draw, usually between five to 10 years, you can withdraw up to the maximum amount of your loan and your responsibility is only to pay interest on the amount you withdraw. During repayment, also usually between five to 10 years, you must make a combination of principal and interest payments to have your loan paid off by the end of your agreed upon term.
A benefit of HELOCs is that you only pay interest on the amount of money you withdraw, not the entire approved amount. The risk is that because your home acts as collateral, lenders can put you in foreclosure if you miss or stop payments. In extreme cases, lenders can take ownership of your home. Therefore, know how much you can afford and how you’ll pay it back.
If you’re under the age of 59 ½, up to once a year you can withdraw cash from your Roth IRA penalty-free if the exact amount withdrawn is returned within 60 calendar days. Failure to return this money within the required timeframe will cost you your tax rate plus a 10% penalty.
Though it’s not an ideal solution, if you can refund any withdrawn money within 60 calendar days, your Roth IRA can act as an emergency savings account or fund a renovation. It’s important to remember that any amount of time out of the market could adversely affect your long-term investment strategy, but sometimes it’s necessary. It’s also important to have a plan to refund this money within the 60-day requirement to avoid paying taxes and a penalty on your withdrawal.
Introductory credit card offers
Introductory credit card offers include low-interest rates, usually 0%, for a term between six and 18 months. With up to 18 months of 0% interest charges, an introductory credit card offer may fund or supplement more expensive renovations and upgrades.
Note that lenders extend such offers because most Americans carry balances beyond the introductory period when high, non-standard interest rates apply. Also, once a payment is late, introductory offers terminate and issuers charge hefty penalties. Read the fine print of your credit card offer so you don’t forfeit the promotion and your own money.
Every homebuyer wants to contain costs, especially buyers looking to purchase a home in seller’s markets. Buyers mostly haggle on price, which is reasonable. Reducing the purchase price of a home by even $1,000 can save more than $3,000 over the life of a 30-year loan.
It’s also worthwhile for buyers to work on obtaining a low interest rate from their lender. Low interest rates lower month-to-month mortgage payments and, more importantly, net total expenses. A good way to get a low-interest rate is to have a good credit score. The higher your credit score, the lower your interest rate.
Ways to improve your credit score include:
Closing all but your oldest credit cards
Lowering your credit utilization ratio
Waiting a while after applying for any loan before applying for a mortgage
20% down payment
If you can’t put down 20% of the value of your home towards your purchase, you’ll have to get Private Mortgage Insurance (PMI). PMI is a requirement to protect lenders in case you foreclose on your home.
PMI is typically an additional 0.5% to 1% charge on a home’s total purchase price and isn’t always tax deductible. For a $100,000 home, this could mean an additional $1,000 annual expense with no return. Putting a 20% down payment towards your home could save you tens of thousands of dollars over the life of your loan.
With this information, you’re better prepared to make an informed first home purchase decision. Pay attention to local and national housing trends and put yourself in a good financial position. As a homebuyer, these could be some of the best steps you take.