Is Now a Good Time to Buy a Home? Ask Yourself These Questions First
With mortgage interest rates at nearly historical lows, many potential homebuyers think that now might be a good time to buy their dream home (or refinance their current home) — and they have good reason to. After all, low interest rates mean lower monthly mortgage payments.
However, interest rates aren’t the only thing to consider when it comes to buying a home. Housing market price trends and competitiveness are other factors to consider, too. Right now, most housing markets in the Southwest and Southeast report rising home sale prices and a shortage of quality homes for sale.
So, while interest rates may be down, housing prices are up — meaning that these two factors have the potential to cancel each other out.
Does this mean that now is a good time for you to buy? It depends. Read advice from Nick Marascia, Chief Retail Mortgage Officer, Senior Vice President at Origin Bank, and ask yourself the following questions before you make a move:
1. Do I qualify for a home loan? Today’s guidelines for most mortgages require at least four things of a potential lendee. Check to see if you have the following things when you’re ready to apply for a home loan:
a) Sufficient, verified available funds for the required down payment and closing costs.
b) Solid credit history and record.
c) Stable employment history and income verifications.
d) A debt-to-income ratio of 43% or less. This means that the monthly payments on all of your debt, including your potential new home, do not exceed 43% of your gross monthly income. Unless you plan on increasing your income levels significantly in the next few years, most lenders recommend a DTI closer to 35%.
“The last thing you want to be is ‘house poor’ after you buy a new home. Do your homework beforehand to make sure your home ownership experience is life enriching, not financially draining.”
2. What is my timeline and backup plan? Many current homeowners cannot afford to buy a new home until they sell their current home — and, naturally, they want to make sure that they have a place to live before they’re forced to move out. However, given that many housing markets in the South have more buyers than sellers right now, most sellers are unwilling to place their home under a contract subject to the sale of the buyer’s current home. This creates uncertainty and stress for many homeowners. If you plan to buy a new home and sell your current one at the same time, make sure you have a timeline in mind and a backup plan ready in case you need to move out sooner than expected.
3. How long do I plan on living in my new home? The housing market changes almost daily, meaning that most homeowners view their house as a long-term investment. Historically, low home prices have typically rebounded and risen back to their previous levels — if not higher — over time. Therefore, the longer you plan to stay in your home, the less exposure to risk you have as a seller in the future. If you plan on living in your new home for years or decades to come, now might be a good time to buy.
“For most of us, our homes are primarily for shelter and enjoyment. If you can comfortably afford the home you buy, think about how long you’ll be able to live there.”
4. What is the long-term value of my home? Because houses are typically considered long-term investments, the lasting qualities of a house become important features to consider as a buyer. For example, you’ll want to evaluate the quality of your home’s construction and its location, both of which will have a long-term impact on its overall value and future price. Also consider the amount you’ll need to spend on maintenance and repairs over the years.
5. What level of risk am I comfortable with? The size of your down payment directly impacts your exposure to risk. Larger down payments make you more secure in case of a downturn in the real estate market; smaller down payments reduce your immediate financial burden and free up money for other investments. Assess your investment goals and personal comfort level with risk, and then decide what size down payment makes the most sense for you.
“For many people, low interest rates and confidence that housing prices will continue to rise present a compelling case to buy now. For others, high home prices and anticipation of downturn in the housing market or employment can cause them to be more cautious.”
6. What are my remaining liquid reserves? After you’ve covered the closing costs and down payment on a new home, it’s a good idea to have remaining liquid reserves for additional costs and/or emergencies. A good rule of thumb is to have at least 3-6 months’ worth of your mortgage payment available as liquid reserves. If you don’t have sufficient liquid reserves right now, it might be best to wait on a mortgage and save up until you’re more financially secure.
Have more questions? Check out our home loan calculators and resource center to learn more, and contact us to get in touch with one of our mortgage team members.
