3 Reasons Why You Shouldn’t Wait to Buy a Home
You’ve finally saved enough money for a decent down payment, your credit score is in tiptop shape and you’ve paid off a significant chunk of your debt. You’re finally ready to say goodbye to hefty monthly rent checks and purchase a home.
But once you begin researching and doing your due diligence, you start second-guessing whether you’re actually ready to take this big step in life. Should you wait until average mortgage rates decrease? Will home prices in your area go down if you wait a few more months?
If your doubts are getting the best of you, here are three reasons why you should proceed with the homebuying process and not wait to buy a home.
1. Rising mortgage rates have leveled off (for now).
Mortgage interest rates have steadily increased over the last year, with the biggest changes happening between October 2017 and March 2018. The average interest rate on a 30-year fixed mortgage in the U.S. jumped from 4.15% in September 2017 to 4.77% in September 2018, according the National Association of REALTORS (NAR).
But since March 2018, mortgage rates have remained steady, which is a good sign for homeowners, said Tendayi Kapfidze, chief economist at LendingTree.
“It looks like at least for now, the rate increase is over,” Kapfidze said. The average interest rate in the U.S. on a 30-year fixed mortgage rose only a few basis points each month since March, according to NAR. Earlier in the year, the month-to-month changes were in the double digits.
If you’ve decided to purchase a home during a time in which mortgage rates are increasing, you shouldn’t let rising rates discourage you. In fact, Kapfidze said average market rates rarely affect a buyer’s decision to purchase a home. Once people have decided they want to purchase a home, the interest rate level becomes more of a secondary concern.
“People make a lifestyle decision, and then the rate is really just affecting affordability — how much money they can borrow and how much they can pay, and the price point that they can participate in in the housing market,” Kapfidze said.
By shopping around for a mortgage and comparing rates, you have a better chance at getting a decent rate and saving a significant amount of money in interest over the course of your lifetime.
Remember that even the slightest difference in a mortgage rate can make a world of difference. For example, although it might not seem like a huge amount, a rate that is 0.66 percentage points lower than the average market rate can mean over $30,000 in lifetime savings on a $300,000 loan.
2. Home prices are increasing.
Home prices are steadily increasing in the order of about 6% year over year, according to Kapfidze. “We should see continued upward pressure on home prices,” he said. In fact, the median price of an existing single-family home in the U.S. rose from $241,900 in January 2018 to $276,500 in June 2018, NAR reported. (The average has since declined to $260,500 as of September, the trend upward.)
San Francisco, Seattle and Las Vegas are the U.S. markets with the highest home price increases year over year, according to the S&P Dow Jones Indices. Seattle had a 13.1% year-over-year price increase, while Las Vegas had a 12.7% year-over-year increase and San Francisco had a 10.9% year-over-year increase.
Kapfidze said this increase in home prices is due to low housing inventory and high buyer demand.
“Supply is low, especially in the existing home market,” he said. “And it’s particularly low at lower price points.” Kapfidze said that after the housing crisis, investors bought up many homes, leaving a lack of supply at the lower end.
3. You can begin building equity.
One of the biggest benefits of purchasing a home is that you can begin building equity.
Building equity largely depends on where you live and how long you plan on staying in your home. You can use LendingTree’s rent vs. buy calculator to figure out how long it will take you to gain equity in your area by purchasing a home instead of renting.
Josh Nelson, CFP® and the CEO and founder of Keystone Financial Services in Fort Collins, Colo., said that generally speaking, someone needs to be in a home for five years to build enough equity to make the purchase worthwhile.
“You want to plan on being in that home for at least five years,” said Nelson, who previously worked as a loan officer. “The reason for that is that in any five-year period, you’re likely to have some type of an economic slowdown, regardless of what area of the country it is. Five years gives you time to not only build more equity and make more payments, but also to recover if the housing market needs to come back.”
Reasons why you should wait to buy a home
If any of the following statements applies to you and your financial situation, you might want to put the brakes on purchasing a home.
1. You can’t put down a significant amount upfront.
If you cannot contribute a sizeable down payment, you might want to wait to purchase a home.
Nelson said he always tells prospective buyers to be cautious of first-time homebuyer programs that advertise the ability to purchase a home with a lower down payment, as putting down too little could strain your overall finances. “Even if that is available, I recommend that people try to get at least 10% down on that first home,” Nelson said.
Nelson advises clients not only to look at what can go right with a home investment, but what can go wrong — and what their worst-case scenario would be. “If you put some decent money into [your home], at least 10%, then that gives you more margins if things can get a little bit bad, and you’d still be OK,” he said.
Kristi Sullivan, a CFP in Denver, said she always advises her clients to make sure they have enough set aside for certain expenses that might occur after they purchase their home.
“You should have at least $2,000 or 20% of your down payment, whichever is more, set aside in savings for moving and unexpected repairs when you take possession of the house,” Sullivan said. If you are not able to set this much aside before purchasing your home, you might want to reconsider whether this is the right time to buy for you.
2. Your debt-to-income ratio is tight.
Nelson said that when it comes to your debt-to-income ratio, you shouldn’t just look at whether a bank will approve you or not, but also how close you come to their standards.
Most lenders will require a DTI of no more than 43%.
Even if you get approved for a loan, you should be cautious of coming too close to that ratio, as you might not have enough money left in your income for other expenses in addition to your mortgage and the debt you’re paying off.
“You still have groceries and health insurance and all kinds of other expenses that have to be paid out of that,” Nelson said. “When I see people get into that 30% plus range in debt-to-income ratio, it starts to get scary. It starts to really get uncomfortable for people, and they don’t have as many choices.”
3. It’s not the optimal time of year for a buyer.
Even if you are financially prepared to purchase a home, you might want to wait until a different time of year to make your purchase.
Depending on the market you live in, certain times of year are advantageous for sellers. The most home sales occur from May to August, meaning it could be prudent for buyers to purchase from September through April in order to have better leverage when negotiating. (ATTOM notes that markets like Miami and Phoenix that have warm weather all year don’t necessarily fall into this trend.)
4. You’re getting caught up comparing yourself with others.
It can be tempting to purchase a home when you see your friends who are a similar age doing so. But you should be cautious of comparing yourself to your peers. Just because your Facebook friend who is your age purchased a home doesn’t mean you’re ready to.
“It is tempting to want to get into a house right away because people are seeing their friends get all kinds of appreciation and home equity, and they see the hot housing market,” Nelson said.
Speak with a certified financial planner about your situation to see if it is the right time for you to purchase a home.
“There are a lot more [financial planning] resources for people starting out now than there have ever been,” Nelson said. “I always recommend that people sit down with a certified financial planner that will help them see the bigger picture.”
Whether or not you’re ready to purchase a home depends on myriad factors, from the time of year to your financial preparedness. But what matters most is that you’re properly educated about the homebuying process so that you can get the most out of your home investment.