Are you saving up to buy a home down the road? It makes sense from a personal financial planning perspective, but when it comes to whether it actually helps you get your foot in the door, you may want to reconsider.
Why? In most cases, your ability to save is going to be at a much slower pace than the rate of appreciation of homes around your area. Put simply, if home prices in your area are on the rise, or interest rates go up, you may need to double or even triple how much you save on a monthly basis to keep up. In this case, time is money — the longer you take to save more money, it may just go toward offsetting a higher housing cost when you do finally pull the trigger, rather than lowering housing costs as most might think.
If you have nothing for a down payment at this time, it makes sense to continue to save. However, if you do have the cash now, the numbers may work in your favor. Let's go back in time a bit to see how this works: Say you purchased a home in 2010 in Sonoma County, Calif., with an FHA loan at 3.5% down. The home value/purchase price back then was $275,000 and you put down $9,625 at closing, the minimum FHA contribution needed.
Fast-forward to July 2013. Assuming you took out a 30-year fixed rate mortgage, and diligently paid down your principal and interest each month (since 2010) while the economy gained momentum. At this point you would have accumulated at least 20% equity just by getting your foot in the door. Your mortgage would have been paid down to approximately $255,000 and you would've accumulated enough home equity by virtue of the amortization balance pay-down to have an opportunity to refinance.
Fast-forward to now, 2015. Housing prices have continued to rise based on real demand vs. supply (not an inflated market created by credit products pre-2007), and now you probably have 40% equity or more in your home, giving you a bigger chance to refinance your house — if you didn't back in 2013.
Can you afford to buy a home in 2015?
As the economy continues to improve, driving housing demand, the answer is yes, you can. While there is no crystal ball to say for certain what the future holds, consider that if prices continue to rise, homeowners would benefit by the consistent monthly increase in lendable home equity. This equity can be used to reduce your mortgage payment or switch to a shorter fixed-rate term in an effort to pay off the mortgage faster when refinancing.
If you have at least 3.5% of the purchase price to buy a house — or more conservatively, 5% of the purchase price — you can probably make a good case for buying a home, knowing that you're likely to continue to accumulate equity.
Keep in mind, this scenario assumes house prices continue to go up. It represents what the numbers would look like if you were to buy a house with today's interest rate and housing environment with 5% down, assuming a price of $425,000. Or, if you decide to wait until you're more comfortable with a 10% down payment, assuming housing prices continue their upward momentum and interest rates follow suit by trickling up, housing will cost more. A $425,000 house today could cost you $50,000 in purchase price for that exact same house and $426 per month more in mortgage payment — even by forking over more cash by the time you have it.
■ If the loan amount exceeds $417,000, 10% down is needed for a conventional loan; however, it's still 3.5% for FHA
Even with more skin in the game in the above scenario — notice the change in private mortgage insurance (PMI). The property taxes would also be higher, again pointing to a potential higher future cost of housing.
The point is, if you can afford a mortgage payment with today's home prices and interest rates and you have at least a 5% down payment (or 3.5% FHA), as well as money for closing costs, it might better serve you to purchase a house while you can before the same house in the future costs you more because you're simply electing to put more money in when it might not be necessary. Moreover, if this scenario plays out, you could always refinance your house in the future to take advantage of the additional equity accumulation on a conservative fixed-rate principal and interest mortgage.
Weigh your options, and also consider how much house you can afford — and how much money you could save in the long run. Coming to the table with good or excellent credit can give you access to better interest rates, which will also save you money in the long term. You can get your credit scores for free at Credit.com to see where you stand, and to determine whether you need to work on building your credit beforehand.
Your decision should be based on what works best for your current situation and future plans. But if your budget allows for a larger down payment, it can potentially lead to lower monthly mortgage payments and less interest paid over the life of your loan, providing long-term financial benefits.
Yes. This is the best time to buy a house in California. With the current trend in the CA housing market, you'll find better deals on your dream home during Q2 2024. As per Fannie Mae, mortgage rates may drop more in Q2 of 2024 due to economic changes, inflation, and central bank policy adjustments.
Beyond the purchase price, buying a home comes with closing costs that can run thousands more. So, to justify those one-time transaction costs, it's wise to be reasonably certain that you won't move again anytime soon — or that you'll be financially stable enough to hold on to the property and rent it out.
But if you do get a mortgage, Dave Ramsey recommends following the 25% rule—remember, that means never buying a house with a monthly payment that's more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional mortgage.
For many people, then, saving 20% is simply not realistic. Putting 20% down may also be a bad idea if you don't plan to own the home long. For one, it lowers your rate of return once you sell. On top of this, it puts more of your money at risk should your home's value drop.
If you use an interest-bearing loan, you could spend more paying it off than you would have if you didn't use down payment assistance. You could overextend yourself. Down payment assistance may allow you to purchase a more expensive home, but it could add financial stress down the road. Closing could take longer.
The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025.
The median home-sale price as of February 2024 was $384,500, up 5.7 percent from one year ago, according to NAR data. The nation had a 2.9-month supply of housing inventory as of February, per NAR, which is low enough to be considered a seller's market.
The bottom line. Today's elevated mortgage rate environment isn't preferable for homebuyers, but it doesn't mean that you should refrain from acting, either. If you discover your dream home, can afford the interest rate, find an affordable house, or have an alternative to rent, it can be worth it for you now.
Save for a down payment: You'll typically need at least 3 percent of the purchase price of the home as a down payment. Keep in mind that to avoid having to pay for mortgage insurance, though, you'll likely need to put at least 20 percent down.
This model states your total monthly debt should be 25% or less of your post-tax income. Let's say you earn $5,000 after taxes. To calculate how much you can afford with the 25% post-tax model, multiply $5,000 by 0.25. Using this model, you can spend up to $1,250 on your monthly mortgage payment.
Buying a house gives you ownership, privacy and home equity, but the expensive repairs, taxes, interest and insurance can really get you. Renting a home or apartment is lower maintenance and gives you more flexibility to move. But you may have to deal with rent increases, loud neighbors or a grumpy landlord.
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
One rule of thumb is that the cost of your home should not exceed three times your income. On a salary of $70k, that would be $210,000. This is only one way to estimate your budget, however, and it assumes that you don't have a lot of other debts.
By prioritizing your retirement-savings goals first, you can then decide if any additional savings are best spent on further contributions to your mortgage or on other investments. In fact, you should balance paying down a mortgage against the return prospects of other, non-retirement savings options.
Also, mutual fund and ETF investments give you more liquidity than locking up your money in your home equity. For guaranteed savings and the security of owning your home debt free, paying off your mortgage earlier is a better option than investing your extra cash.
You can often secure better rates with a larger down payment, but you also need to understand how much you can afford. Paying too little for your down payment might cost more over time, while paying too much may drain your savings. A lender will look at your down payment and determine which mortgage is best.
If the trends signal that you should purchase soon, you may want to save for a home. It may make more sense to pay off debts if you're holding off on buying and are worried about the rates a lender may charge. Factors such as your credit score and DTI will influence the mortgage rate and terms a lender offers.
Introduction: My name is Fr. Dewey Fisher, I am a powerful, open, faithful, combative, spotless, faithful, fair person who loves writing and wants to share my knowledge and understanding with you.
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