Buy a home with confidence and peace of mind
Your romantic relationship is moving to the next level and you’re thinking about buying a home together. Naturally, some anxiety kicks in - how much can I afford, what should I put as a down payment, what about interest rates, is it a good time to buy? Securing your shelter (buying a house), should not be stressful. Here is how to approach each of these questions and release any type of pressure you might be feeling. Buy a home with confidence and peace of mind.
How much can I afford?
You want to be sure you are not overspending on a home, so there is money left over for other items - whether that is long term saving, travel or general discretionary spending (fun).
On a high level, try to keep your total housing payment (mortgage, insurance, taxes, utilities, maintenance) at about a third of your net income. For example, if you are bringing in 20k after taxes per month, you can safely spend 6-7k of this on your home.
Of course, we want to take the target above a step further by incorporating your core values and beliefs. For example, if you like to travel or have a lot of hobbies that keep you active and out of the house then maybe you spend closer to a quarter of income on your home. If the opposite is true and you enjoy staying home, playing cards around the dining table with family/friends, barbecuing in the backyard then you can spend closer to half of income.
Ultimately, have an open conversation about what’s important to you and your family. From there, it is fairly easy to tie this to how much to spend on a home.
What about a down payment?
In most cases, 20% is your magic number - not too high, not too low.
High enough to avoid PMI (private mortgage insurance), which is an additional monthly payment - up to 1.5% of the original loan amount. So, if you’re buying a 750k home and put 10% down or 75k. Your loan amount is 675k and PMI is an additional $800 per month, or so.
Low enough to potentially leave money on the table to invest in other areas. On this end, here is how I encourage you to think about things. Not putting more money down on a home is costing you whatever the interest rate is on your mortgage. Though, if you can earn more than this rate, you come out ahead by the difference between the two. For example, let’s say your mortgage rate is 7% and you can earn 10% in the stock market (about the long term average - ultimately dependent on the specific time period you are looking at). In this scenario, you are net positive at 3% per year and therefore benefit by putting 20% down on the home and investing the leftover cash.
Where do interest rates come in?
Quite frankly, you are giving this too much attention.
Yes, your interest rate has a big impact, especially over a 30 year period (most common term for mortgages). Though, here is the thing…you will have the opportunity to refinance at some point in the future. Rates fluctuate based on a variety of factors and there is no way to confidently pinpoint their trajectory. Either way, you are not stuck with whatever rate you “lock in” when you close on the purchase of your home.
With that being said, it is still important to shop interest rates. It is recommended to contact at least 3 lenders - preferably, one in each of the following domains: a local credit union, your primary bank (most likely a national chain) and an online lender. This way you have a rate from different types of lenders and can then use the offers against each other to negotiate a better, lower rate for yourself.
To reiterate - you will have the ability to refinance at some point in your 30 year loan, so do not put unnecessary pressure on this aspect of the buying process.
Is now a good time to buy?
You may not like the answer on this one since there is no secret insight on the current state of the market. In other words, we do not know if prices will go up or down in the near future (sound familiar?).
Real estate is much like the stock market - prices fluctuate and are impacted by many factors - some we know about, others we don’t (think the sub prime lending crises in 2008). As a result, you should not buy a home purely based on price and if you feel like it is a good deal, right now. Instead, consider your values and what’s important to you (a recurring theme). How long do you plan on being in the home? Is it a good fit for your current family size / anticipated growth (having kids) in the future? How do you feel about the neighborhood and school district? How about your current housing situation - is this something you are flexible on or do you need to move/buy a home right away?
Remember, do not buy purely based on price. At the end of the day, this is a big decision that affects the quality of your life and goes beyond the numbers.
Buy a home with confidence
In summary, don’t allow your focus throughout the home buying process to be influenced by stress-inducing headlines (interest rates are rising, home prices come down, competitive markets are pushing out non cash buyers). Instead, focus on what’s important to you - how will buying this house impact your core values and beliefs - do these things align? After digging deep on this end, you can review the numbers and make sure it all makes sense. To see how Benzina can help on both ends, click the link below.