Why You Shouldn’t Rush to Buy a House Right Now
Super low mortgage rates alone aren’t a good reason to buy a home. Before you jump into the housing market, carefully consider these five factors.
With mortgage interest rates at an all-time low, the temptation to buy is now higher than ever and may make sense for some. To put it in perspective, a 30-year $250K mortgage with a 5% interest rate would have once cost you $1,342; now, with a lower 3% rate, that same mortgage can cost you $1,054. At $288/month, the difference may seem negligible, but it adds up significantly over time — for someone making $3,000 per month, it represents almost 10% of their monthly income.
Although the math might be in your favor, there are several factors you should consider before pulling the trigger.
1. The amount and type of debt you have.
Lenders typically don't want you paying out more than 43% of your income on debt. They weigh your credit card minimums, auto/student loan payments and any other debts you might have against your gross income. If you’re struggling to keep up with your payments, you might want to delay committing to a 15- or 30-year mortgage.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For a lot of us, that’s longer than anything we’ve committed to in the past. And unlike some types of debt, mortgages are typically recourse debts, meaning you’re personally liable for the loan. That loan may harm you if you foreclose and the lender decides to come after your other assets.
2. How much you have left to spend every month.
As a homeowner, you'll want to prepare for additional expenses. Whether it's an appliance that needs replacing, a plumbing emergency or a broken washer, you'll want to have the funds on hand to cover these emergencies. If you are used to running a tight budget, you may find yourself unintentionally taking on debt to cover these surprise expenses.
When budgeting, aim to keep all your bills to no more than 50% of your income, including the new mortgage. A healthy bill/income ratio ensures you have enough money left to spend and save every month.
3. Down payment funds.
Some lenders may lure you in with the promise of a small down payment. If you qualify, VA (Veterans Affairs) loans can even lend you money with a 0% down payment. However, expenses such as closing costs, escrow bills and legal fees can quickly add up, requiring you to have more than the required down payment for the house. You can also be at a disadvantage when negotiating without the necessary funds to buy down your interest rate or increase your down payment.
Keep in mind, any down payment lower than 20% may require you to purchase Private Mortgage Insurance (PMI). Depending on the size of the mortgage, this may cost you 0.5%-1% of your loan and adds to your monthly payment.
4. Your current credit score.
Similar to a low down payment, some lenders may make an exception for a low credit score. The catch is that lenders typically charge a higher interest rate to compensate for the risk of a lower down payment. Since mortgages charge interest differently, the tiniest difference in your interest rate can cost you thousands of dollars over the life of your mortgage.
Put into perspective, for a 30-year $250K mortgage, the difference between a 3% and 3.50% rate over the life of the mortgage is $24,697. Holding off for a few months and working on tackling your debt-to-income/credit score will improve your position in the long run.
5. A tight housing market.
Although it can be nerve-racking to watch a small number of houses fly off the market, the last thing you want is to rush into such a big decision and find yourself in the middle of a bidding war. Not only would purchasing a more expensive house lead to a higher payment, but you may risk having a loan worth more than your house in the event of a market downturn.
Overall, think of homeownership as an investment before anything else. Like any investment, ensure you're well off and able to handle the risks first. From there, your financial adviser can help you evaluate your options. You'll be surprised how often renting in a hot market and investing additional funds elsewhere may be the better option!
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
Daniel Demian is a senior financial advice expert at Albert. Having worked in institutional finance and private equity as an analyst, Daniel found that his passion falls with explaining and utilizing complex financial strategies in simple ways for everyday people. Daniel earned his bachelor's in Business Commerce from York University and is a Chartered Financial Analyst Level 3 Candidate.
-
Is a Phased Retirement Right for You?
Want to keep working, just not as hard? A phased retirement may just be the answer.
By Kimberly Lankford Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Four Tips to Make Your Sales Presentation a Winner
Being prepared and not being boring can go a long way toward persuading a potential customer to buy into what you’re offering.
By H. Dennis Beaver, Esq. Published
-
Pros and Cons of Waiting Until 70 to Claim Social Security
Waiting until 70 to file for Social Security benefits comes with a higher check, but there could be financial consequences to consider for you and your family.
By Patrick M. Simasko, J.D. Published
-
Now Could Be Time for Private Investors to Make Their Mark
The venture capital crunch may be easing, but it isn't over yet. That means there could be direct investment opportunities for private deal investors.
By Thomas Ruggie, ChFC®, CFP® Published
-
How to Stop Boredom From Ruining Your Happy Retirement
Retirees who explore new interests and have an active social life are more likely to find joy — and even greatness — in the newfound freedom of retirement.
By Richard P. Himmer, PhD Published
-
The Life-or-Death Answers We Owe Our Loved Ones
How our life ends isn’t always up to us, but that question too often must be answered by loved ones and health care workers who don’t know what we would want.
By Joel Theisen, RN Published
-
Hot Tips for Home Buyers and Sellers Right Now
Real estate looks to be especially hopping this spring, thanks to pent-up demand and buyers adjusting to higher mortgage rates. Here’s how you can prepare.
By Pam Krueger Published
-
Is 100 the New 70?
Eating well, exercising, getting plenty of sleep and managing chronic stress can help make you a SuperAger. Funding that long life requires longevity literacy.
By Phil Wright, Certified Fund Specialist Published
-
Nine Lessons to Be Learned From the Hilton Family Trust Contest
Disclaimers, good communication, post-marital agreements and more could help avoid conflict in a family after the owners of a wealthy estate pass away.
By John M. Goralka Published