Many Americans are trying to lock in the cost of a home because of high inflation and high anxiety.
With housing prices already at lofty levels and mortgage rates going up, many buyers may be tempted to jump in before they are ready.
Simon Blanchard is an associate professor at Georgetown University who studies consumers and financial decision-making. He said that it can make a necessity feel concrete.
He said it might sound comforting to focus on the present and lock in the budget.
The national median price of existing homes was $375,300 in March, up 15 percent from $326,300 a year earlier, according to the National Association of Realtors. Freddie Mac said the 30-year fixed mortgage rate was 5.10 percent for the week that ended Thursday, up from 2.98 percent a year ago.
With a down payment of 10 percent on the median home, the typical monthly mortgage payment is now $1,834, up 49 percent from $1,235 a year ago, taking both higher prices and rates into account. Property taxes, homeowner's insurance and mortgage insurance are other nonnegotiables that are often required on down payments of less than 20 percent.
With inflation at a 40-year high and the cost of just about everything rising, it's easy to get caught up in the irrationality that has some buyers aggressively bidding up prices and skipping basic precautions, like a home inspection.
Jake Northrup, a financial planner for young families in Bristol, R.I., said there is a scarcity mind-set right now.
The country's chronically low supply of homes is keeping the market competitive, even though some prospective buyers are doing the same. That can lead to bad decisions.
It is time to assess not just what you can spend but what you should spend down the road.
It's important to have a good idea of what you can afford and how different price points would affect your ability to save and spend elsewhere.
Financial experts suggest working backwards, assuming a minimum savings rate of 15 or 20 percent for retirement, college savings and other goals, and account for all other recurring debts and expenses on a spreadsheet. Play around with different home prices to see how they would affect everything else.
The right mortgage amount isn't what you get preapproved for but what you can afford, according to Mr. Northrup.
What is the cost? The answer will be different depending on household, income, family size and other factors.
Spending more than 30 percent of gross income on housing is considered burdensome by government housing authorities. Low-income households were not allowed to pay more than a quarter of their income for public housing, which was lifted to 30 percent in 1981.
A rough starting point is to spend no more than 28 percent of your gross income on all of your housing expenses, including mortgage payments, property taxes, insurance, and repairs and maintenance.
It won't work for everyone, especially in high-cost metropolitan areas where it's hard to find rentals.
Tom Blower, a senior financial adviser with Fiduciary Financial Advisors, said that a client should take all of their monthly expenses into account and decide how much they want to put toward housing. Rules of thumb are guidelines, but not the end-all, be-all.
Many people have had to reduce their prices because of the rise in interest rates. A family earning $125,000 that wanted to put down 20 percent and dedicate no more than 28 percent of its gross income to housing could comfortably afford a $465,000 home when the interest rate was 3 percent. According to Eric Roberge, founder of Beyond Your Hammock in Boston, the figure shrinks to $400,000 at 5 percent. Property taxes, maintenance and insurance were included in his calculation.
He suggests allocating a conservative share of household income to housing, but acknowledges that it is difficult in many places.
There are other considerations. With many Americans moving from cities to larger spaces in the suburbs, you will need to consider how much more it will cost to run andFurnish that home, for example, or how much extra you will need to spend on transportation.
Supply chain problems and other issues are making it harder for people to save money by buying properties in less-than-ideal shape.
"I have clients who have recently tried to partially circumvent the affordability issue by purchasing homes that need significant improvements."
She has had two clients spend more than twice their initial estimate for renovations this year, so she suggests setting aside plenty of cash.
Fixed-rate mortgages can carry a lower rate for a set period. They change on a schedule every year and reset to the prevailing rate after that.
Freddie Mac said the average interest rate for a 5/1 fixed-rate mortgage was 3.78 percent for the week that ended Thursday. It was 2.64 percent last year.
The Mortgage Bankers Association said that the number of mortgage applications for the week that ended April 22, double the share three months ago, was the highest level since 2019.
Kevin Iverson, president of Reed Mortgage in Denver, said that they are not for everyone.
If you know you're going to sell before your mortgage rate goes up, it may be a good idea to take out a loan. The sudden hit of higher rates pushed many borrowers to the brink during the financial crisis of 2008, though today's A.R.M.s are generally safer than products peddled.
Alternative financing such as contract-for-deed arrangements and loans used to buy manufactured homes often lack typical consumer protections.
The cost of getting into a home may be the most painful in the near term, but other expenses later can be just as difficult.
A recent paper by Fannie Mae economists analyzed costs typically incurred over a seven-year homeownership life cycle and found that the biggest contributors include just about everything but the mortgage. The economists found that utilities, property taxes and home improvements make up half of a borrowers costs.
The average first-time home buyer in 2020 was 36 years old with monthly income of $7,453, and bought a home for $291,139 with an 11 percent down payment. 30 percent of the total costs over the seven-year period are contributed by the actual mortgage.
Borrowing is a big part of the cost of owning a home, but that cost often is overshadowed by utilities, property taxes, home repairs and one-time fees paid to various parties to buy and sell a home.
All Rights Reserved © 2024
