Over half of renters, 58%, say the Covid-19 pandemic has
spurred their desire to own a home, according to a survey from Lowe’s released
this week. Not only are Americans looking for more space as many spend more
time than ever before at home, but mortgage rates are at historic lows.
But for many Americans, including Boston-based Eryn Schultz,
34, the decision to buy a home is not a simple one. “When I saw a friend get a
mortgage interest rate at 2.65%, I definitely felt FOMO — fear of missing out,”
she tells CNBC Make It. But Schultz says that she’s not quite ready to begin
her home search yet.
But that doesn’t stop Schultz — who had a jam-packed 2020,
during which she started start her own business and got married — from
scrolling through Zillow every now and then. Although she and her husband are
currently based in Boston, they’re planning to move closer to family in Austin,
Texas, when they do eventually buy, as early as later this year.
It’s much more pleasant to look at Texas housing prices than
Boston ones, Schultz says with a laugh. While she would like to buy when
interest rates are still low, she’s willing to wait until there are more options
on the market. The decision to wait is a bit easier because many housing
markets nationwide are extremely competitive right now, causing home prices to
soar, she says.
Ideally, Schultz is looking for a three-bedroom,
two-bathroom house listed under $500,000, but she’s willing to be flexible on
the details in order to keep the price down. “We’re very committed to not
having housing [cost] any more than 35% of our income,” Schultz says.
This year, the couple hopes to make around $200,000
combined, but Schultz says the income from her new business is unpredictable.
Outside their retirement savings, Schultz and her husband have about six
months’ worth of emergency living expenses saved up, as well as about $30,000
set aside for start-up business expenses and a house down payment. “We want to
have more predictable income and to build up some more cash savings so we don’t
have to touch the emergency fund or business savings when we buy,” she says.
That’s the right attitude to have, according to financial planners
CNBC Make It spoke with. Don’t simply jump on great mortgage rates because
you’re worried you’ll end up paying more later.
“Mortgage rates are at an all-time low, but I do not believe
it justifies buying a home before you are ready,” says Leo Marte, a certified
financial planner and founder of North Carolina-based Abundant Advisors.
If you’re considering buying a home right now, here are four
key things to think about, according to financial planners.
1. Evaluate if owning a home is the best option for you
Not everyone is wants or can afford to be a homeowner and
that’s OK, says Jake Northrup, CFP and founder of Experience Your Wealth. To
determine if buying a home is the right choice for you, he recommends asking
yourself a few simple questions:
- What is it about owning a home that you cannot
achieve through renting?
- How is owning a home directly in line with your
core values?
- What would you do with the opportunity cost of
the money you are putting toward the home?
- What other goals do you have that may be
impacted by buying a home?
Depending on your income and financial situation, it may or
may not be be realistic to try and save for a down payment in less than a year,
says Ryan Greiser, a Philadelphia-based CFP and co-founder of Opulus. Even those who can save quickly will need to
take some big steps, he adds.
“It depends on how bad they want it and the sacrifices
they’re willing to make,” Greiser says. If you have the income and you’re not
traveling or dining out or spending as much due to Covid-19, it might work.”
For most potential homebuyers, that means carefully considering how much you
need to save and then setting up automatic deposits on a regular basis to
achieve that goal within the time frame you want.
2. Plan for at least a 20% down payment
Most financial experts recommend saving up at least 20% of
the home’s value for the down payment, which allows you to avoid paying private
mortgage insurance. Starting with at least 20% of the home price as the down payment
also reduces the amount of interest you’ll pay over the duration of the
mortgage.
That said, the recommended 20% down payment is just that: a
recommendation. “If a person finds a home that they love and fits within their
budget but are just short of their down payment goal, they could consider
lowering the down payment goal to take advantage of the lower interest rates
now,” says Eric Simonson, CFP with Minnesota-based Abundo Wealth.
Yet be prepared for the fact that the down payment you’re
anticipating paying may be higher now, especially in hot real estate markets.
If you’re expecting to pay $300,000 for a home in a competitive market, you may
end up spending $350,000 right now. That means the down payment you need will
be more too.
“If the home buyers are dead set on the area, [they should]
be prepared,” Greiser says. You may need to make a higher offer, and you should
have all necessary documents and pre-approvals ready in order to make the
process smoother and faster.
3. Make sure you can afford the total costs of
homeownership
“Even though interest rates are low, don’t buy more home
than you can afford,” says Dan Herron, a California-based CFP and founder of
Elemental Wealth Advisors. That includes more than just the down payment and
monthly mortgage payment.
Most buyers should factor in other fees and ongoing expenses
such as closing costs, homeowners insurance, property taxes, and repairs and
maintenance. All together, these can add up to 1% to 2% of the purchase price
each year. “You’re the landlord now. That means if something breaks, you get to
fix it,” Herron says.
Closing costs, which can include home inspection costs, loan
application and origination fees and even two months’ worth of property taxes,
can also add up. The average closing costs range from about 2% to 5% of the
loan amount, and they’re due at the time of purchase.
You also need to examine the other aspects of your finances
as well. Ask yourself: Will I still be able to afford to save for
retirement? Buying too much house could
hinder this, Herron says.
You should also be able to maintain your emergency savings.
“The last thing I want for my clients is to drain their savings, then something
bad happens and now they are struggling to find cash,” he says.
4. Don’t worry about missing out, lower rates will linger
It’s not worth rushing into buying a home, says Silvia
Manent, CFP and founder of Massachusetts-based Manent Capital. “This is a
long-term and large investment that you may regret later on down the road,” she
adds.
Keep in mind that mortgage rates are set to remain low for
the next two to three years, so there’s no rush to jump on them now. The
National Association of Realtors estimates mortgage rates will average 3.1% in
2021, while the Mortgage Bankers Association predicts rates will average 3.3%
this year.
“Slow down and buy when you are ready,” Marte says. “People
have been buying houses for a long time, even when interest rates were at 17%.
Slow and steady wins the race.”
That’s exactly what Schultz and her husband are aiming for.
Right now, they don’t expect to purchase a house until at least the end of
2021. But perhaps by this time next year, they’ll be settled in a new house in
a new city. “That would be awesome,” Schultz says.
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