Americans have been begging for one another since the start of the COVID-19 epidemic in 2020 to acquire a key component of the American dream: property. Because individuals have been spending more time at home than ever before, and because the barriers to purchasing have been greatly reduced, this trend is not unexpected. Clients often inquire as to whether now is the best time to purchase a home.
A simple yes or no cannot be given in response to this question. Purchasing a home is a significant financial and emotional commitment that should not be made carelessly.
Rates of Return
Because borrowing rates have been historically low, many prospective homebuyers feel compelled to act immediately. They’re not mistaken, either. Since Freddie Mac started keeping track of 30-year fixed mortgage interest rates in 1971, they’ve been at their lowest levels ever. When it comes to saving money on your mortgage, even a one-percent reduction may make a major difference.
Consider a buyer considering two 30-year fixed-rate mortgages for a loan amount of $500,000, one with a 3.0 percent interest rate and the other with a 4.0 percent interest rate. At first sight, the monthly payments for the 3.0 percent and the 4.0 percent loans are quite similar: $2,108 and $2,387, respectively. It’s not a lot, but it adds up over 30 years. The 3 percent interest rate will cost $258,887 in total throughout the loan’s life. It’ll cost you $359,348 in interest if you choose a loan with a 4.0 percent rate instead. A difference in the interest of nearly $100,000 paid over a period of 30 years!
If you’re wondering how long interest rates will remain low, you’re not alone. There is a sense of urgency among home buyers since most lenders will not enable you to lock in your rate until after your offer has been accepted on the house you want. The Federal Reserve announced a 0.25 percent rate rise on March 16th, 2022, the first since 2018. Additional rate increases are expected in the near future. It’s crucial to remember that the Federal Reserve isn’t obligated to increase interest rates, so don’t jump the gun and purchase a house right away. They might change their mind.
Amount Paid in Advance
When it comes to buying a house, one of the most pressing concerns for many people is how much money they should put down. In the past, most purchasers had a 20 percent down payment aim in mind. As to why this is the case, you may wonder. Lenders warn prospective homeowners against making a down payment of less than 20% since doing so lowers the lender’s exposure in the event the buyer defaults on the loan.
Most lenders impose Private Mortgage Insurance (PMI) on individuals who don’t put down a minimum of 20% of the purchase price in order to encourage purchasers to put down that amount. If the down payment is less than 20%, the annual PMI fee might vary from 0.58 percent to 1.86 percent of the loan amount, depending on the homebuyer’s credit score and loan amount. 2 If a borrower had a $500,000 mortgage and was charged a 1.0% PMI rate, they would pay an extra $417 per month in additional costs.
Despite the fact that PMI is a significant expense, recent years have seen a rise in the number of purchasers who put less than 20% down. 33.6 percent of 30-year mortgages have PMI from 2017 to 2020. This is a significant increase above the 25.5% percentage of mortgages with PMI that existed between 2011 and 2016.
Keep in mind that homeowners are not required to pay PMI for the whole term of their mortgages. In order to avoid paying PMI, a homeowner’s equity in their property must be at least twenty percent before contacting their lender. Ownership of a residence is not only contingent on the price paid. If a buyer paid $500,000 for a house and the home’s worth rose to $550,000, they now own 9% more equity than they did when they bought it.
Taking out a mortgage with PMI has many advantages. Maintaining an adequate amount of funds in an emergency savings account is a primary consideration. Whether it’s an emergency repair or routine maintenance, the buyer is liable for all of it once the sale is finalised. Prioritizing an emergency fund above paying PMI nearly always comes out on top in a situation like this. As a wise financial planner, it’s important to have adequate cash on hand to cover any unforeseen expenses.
You may believe that everyone has purchased a home in the last two years based on what you’ve heard from friends or on the news. A recent study by the U.S. Census Bureau suggests that homebuying peaked in late 2020 and early 2021.
Sales prices have risen as a result of an increase in the number of people purchasing homes. Using data from Redfin, the typical house sold for more than 102% of its asking price in July 2021. 3 Sales-to-list price ratios have been at their highest point since the beginning of 2020 at this time. As recently as January 2022, the typical residence sold for 100.3% of the asking price.
Although this is a positive indicator that competition has decreased, the housing market is still quite competitive. Many purchasers feel the need to make a hasty choice and make an offer beyond the asking price because of this
Buying a house entails more considerations than those listed so far, such as the ones listed below. For how long are you planning to stay in the house? Does your emergency fund have enough money to cover normal and unforeseen repairs? Owning a house entails a lot of responsibilities. If that is not the case, renting a property can be a preferable alternative.