- If current market conditions haven’t dissuaded you from owning a home, financial planners have a few tips.
- Get ready for a long road – see lots of houses and don’t get drawn into bidding wars.
- Make sure you have plenty of money set aside beyond your down payment and don’t give up on an inspection.
- Read more stories from Personal Finance Insider.
It’s no secret that the housing market has been on fire lately. Increased demand colliding with slightly increased but still limited housing supply, says the National Association of Realtors pushed the median US home price to $ 363,300 in June.
That’s 23.4% more than the median price buyers expected to pay last year, which helps illustrate why you need to understand the dos and don’ts of entering a market. also intense real estate if you want to buy now.
Do: Know your numbers ahead of time and be prepared for a long search
Jason Dall’Acqua, Financial Planner at Crest Wealth Advisors, recognizes the reality of the current real estate landscape. “It’s a competitive market,” he says, “but don’t let that influence your numbers.”
He says buyers need to understand how much they’re getting for a down payment and what kinds of monthly costs can reasonably fit into their budget. before start looking for houses. “Stick to those numbers and don’t be tempted to go over them just because there are other offers on a property,” he advises.
Once you understand your home buying budget, take your home search seriously. “One thing I tell all of my clients is to watch a parcel houses, ”says Steve Zakelj, financial planner at Flatirons Wealth Management. “The more houses you see, the more you will understand that things that you thought were important are not necessarily important, and things that you had not even considered, you can see them in a house and realize that they would be. actually quite nice to have. “
Don’ts: Use cash from emergency funds or retirement accounts
Dall’Acqua says your calculations should take into account both the unforeseen and ongoing costs of homeownership. This could include annual maintenance and HOA dues, but it could also mean factoring in the cost of moving, buying new furniture, or renovating you need to do as soon as possible.
The money you save before buying a home should cover not only the down payment, but those other expenses as well. And you should always leave a cushion of cash in your accounts somewhere. “You don’t want to end up with a rich, cashless house with no emergency savings to lean on,” says Dall’Acqua.
This means avoiding tapping into those reserves to find the necessary financing for a home. The same goes for your retirement accounts; you shouldn’t be looking to use money that needs to stay invested for the long term to support yourself in the future.
Do: Explore Your Financing Options
Even with the increase in cash offers in some real estate markets, most people still use some form of financing to complete the purchase of a new home. The conventional 30-year fixed rate mortgage is still a popular choice, but it’s not the only option you have.
In fact, it might not even make sense to go this route if you are buying in an area where average home prices are much higher than the median price in the United States.
Noah Damsky, Financial Advisor at Marina Heritage Advisors in Los Angeles, encourages clients to at least explore financing options that may come with higher loan-to-value limits or lower down payment requirements. He says that makes sense in the current environment, given the low interest rates.
“Potential homeowners can buy with as little as a 5% down payment without the hassle and unfavorable terms that come with FHA loans,” he explains. “These loans come with mortgage insurance, but these fees are relatively low compared to the benefit of a lower down payment.”
Damsky cautions that this strategy works best for buyers who are comfortable with a larger mortgage balance, which is not the right choice for everyone. But this is just a specific example; the broader tips for exploring options so that you understand your choices before choosing a type of home loan apply to everyone.
Don’ts: Get caught up in a bidding war or forgo a home inspection
John C. Pak, a financial planner with Otium Advisory Group, urges buyers who may find themselves competing with many others to buy a particular home to be cautious.
He says bidding wars can drive up the price of a home by 10-20%, which can make the end price incredibly high in a market where the average home price is already up 13%. compared to the previous year.
The problem can worsen when buyers forgo home inspections as well. “Buyers can use this powerful tool to cancel or negotiate the price of the home,” he points out. An inspection can cost you around $ 500, but it can reveal critical flaws or potential issues that need to be addressed, saving you exponentially over time.
Pak also notes one last important don’ts: don’t be discouraged!
Pak says buyers can blame supply and demand for the high home prices we’re seeing now, but the trend is not permanent. “Inventories will gradually increase as we come out of this pandemic and more existing homes will become available on the market, combined with new construction,” he said.
In the meantime, he encourages people who want to buy to continue to focus on strengthening their financial situation so that they are ready when the time comes. Continue to allocate money to build your down payment, pay off existing debts or avoid new ones, and don’t rush into a real estate decision you might regret later.