Historically, young adults between the ages of 20 and 30 were the prime age to buy their first home. Nowadays, people between the ages of 25 and 40 are facing their first home purchases. With today’s high prices, is it a wise purchase decision? What planning options should first-time home buyers consider?
Need to catch up?
There’s a trend towards deferred home ownership – 51% of baby boomers owned a home until age 30, 48% of Generation X owned a home until age 30, and 42% of millennials owned a home until age 30 , this can represent “a potential indicator of continued demand for housing.”
However, it is currently not easy to buy a house. Financial and emotional factors play a role. Emotionally, it’s a big part of the American dream; Your home should be your refuge and refuge and where your children grow up, play and sleep. Financially, it’s one of the most expensive purchases you’ll ever make in your life.
Unfortunately, current low inventory conditions, high new construction costs, high home prices, and fierce competition reduce affordability and create limited chances of success for buyers. This leads to hasty decisions, including buying a home with substantial concessions. Is it a good idea to rush to buy?
Before you go to buy a house
Make a budget and be ready to spend money on these expenses:
► Deposit: Traditional loans typically require 20% less, but Federal Housing Administration (FHA) loans can only require 3.5%. But remember, the less you lie down, the more you can pay in the long run.
For example, take a home for $ 400,000 and compare the two 30 year mortgage loans at 3% interest (excluding primary mortgage insurance or PMI). You’re paying about 20% more in accrued interest and you’re missing out on savings of about $ 280,000 (the opportunity cost of higher monthly payments with a 6% return). PMI protects the lender in the event of default, and the cost is determined by the mortgage lending value and creditworthiness. If the PMI premium is 0.5% (of the original loan amount) in the example of a 3.5% down payment, your monthly payment can be increased by an additional $ 160 and continues until equity reaches 20%. A larger down payment can also protect you if you have to sell your home in a hurry. If prices fall more than 10%, you may need to split funds to cover the cost of selling and negative equity.
► Closing costs: This is the cost you pay to complete the financing and purchase transactions. They can be between 2% and 5% of the price or the mortgage amount. Sellers may be willing to pay some of the costs, but you may have less room to negotiate in a hot market.
► Property taxes and insurance: Be prepared to pay taxes and fire insurance premiums up to a year in advance. Taxes depend on location and value, but 1% of property value is an initial estimate. Home insurance can cost $ 1,200 to $ 2,000, depending on property value, location, and risks. Are your life and occupational disability insurances sufficient and is additional umbrella liability insurance recommended?
►Moving in, improvements and maintenance costs: Even if the house is “ready to move in”, costs can arise (e.g. renting a moving van, buying a garden hose and plants for the garden, etc.). You should hire a home inspection company to identify potential problems and expenses from foundation to roof so you can plan ahead. If it’s a fixer-upper, get some guesswork to confirm that it’s not a money pit. If so, I recommend looking for other options.
Choose your first home
The US census estimates the average American will move 11.7 times in their lifetime. A 30-year-old may have five to six moves in his life, a 45-year-old about three moves. Based on that, you may have more opportunities to find and buy the “perfect place”.
Defining and aligning personal and emotional preferences can help you “come close” to your first home. Seek support and advice from people who know you and the homeownership issue, including parents and a qualified real estate agent.
Cut your costs
► Is it better to wait If improved financial stability is needed (e.g., improving your credit score, finding a new job that pays more, saving up for a larger down payment, etc.) it may be worth waiting.
On the other hand, if you wait, are home prices the right price for you? It is emotionally difficult to “buy high” and nobody wants to make a mistake that could seriously affect their financial security. However, the real estate market is not homogeneous – pricing depends on location, supply and demand. What if prices fall or stabilize, but mortgage rates rise? How does affordability change for you if you wait or move to a cheaper area? Don’t mistake your home for just an “investment”. It is a necessity. You need a roof over your head.
► Check assistance programs: Perhaps you qualify for first-time home buyer programs. Check with regional authorities and the US Department of Housing and Urban Development (HUD), Veterans Administration (VA), Federal Housing Administration (FHA), and others.
► Pre-financing inheritance: According to a recent one Report on consumer housing trends from the Zillo Group, Due to rising prices, buyers may need an additional year to save on a down payment. COVID-19 allowed people to be more aggressive with their savings, and low mortgage rates made it more affordable. But what about rising home prices with additional support with your down payment? If family members can help you make a hefty down payment, use them.
Planning to buy your first home has always been a challenge. There are many factors that you need to consider, not to mention that saving up can take many years. However, today’s first-time home buyers have unique opportunities to capitalize in this space. May this wise advice help you make money conscious decisions when buying a home.
Brian Loy, CFA, CFP, is President of Sage Financial Advisors Inc., based in Reno. Contact him at www.sagefinancialadvisors.com.