Historically, young adults in their 20s and 30s were the best age to buy their first home. These days, people between the ages of 25 and 40 face challenges when it comes to buying a first home. At today’s high prices, is it a wise decision to buy? What Planning Opportunities Should First-Time Home Buyers Consider?
There has been a trend towards deferred home ownership – 51% of baby boomers owned a home by age 30, 48% of Gen X owned a home by age 30, and 42% of millennials owned. a house at 30. According to Zillow Group economist Jeff Tucker, this may represent “a potential indicator of sustainable housing demand to come.”
However, buying a home is not easy at the moment. Financial and emotional factors come into play. Emotionally, this is a big part of the American Dream; your home is meant to be your refuge and sanctuary and where your children grow up, play and sleep. Financially, it is one of the most expensive purchases you will make in your life.
Unfortunately, the current conditions of low inventory, high construction costs, high house prices, and fierce competition reduce affordability and create limited opportunities for buyers to be successful. This leads to hasty decisions including the purchase of houses on sight with large concessions. Is rushing the purchase a good idea?
Before window shopping
Set a budget and be prepared to shell out some cash for these expenses:
► Advance payment: Conventional loans generally require a 20% down payment, but Federal Housing Administration (FHA) loans can require as little as 3.5%. Keep in mind, however, that the less you deposit, the more you can pay more in the long run.
For example, take a $ 400,000 house and compare the two loans using 30-year mortgages at 3% interest (excluding primary mortgage insurance, or PMI). You’ll pay about 20% more in accrued interest and miss out on about $ 280,000 in savings (the opportunity cost of higher monthly payments assuming a 6% return). PMI protects the lender in the event of default and the cost is determined by the loan-to-value ratio and the credit score. If the PMI premium is 0.5% (of the original loan amount) on the 3.5% down payment example, your monthly payment may increase by an additional $ 160 and continue until equity. reach 20%. Plus, a larger down payment can protect you if you have to sell your home in a rush. If prices drop more than 10%, you may need to fork out funds to cover selling costs and negative equity.
► Closing costs: These are the fees you pay to complete finance and purchase transactions. They can run between 2% and 5% of the price or amount of the mortgage. Sellers may be willing to cover some expenses, but you may have less leeway to trade in a dynamic market.
► Property taxes and insurance: Be prepared to prepay up to a year of taxes and fire insurance premiums. Taxes depend on location and value, but 1% of property value is a starting estimate. Home insurance can cost anywhere from $ 1,200 to $ 2,000 depending on the value of the property, location and risk. Are your life and disability insurance policies sufficient and is additional liability coverage recommended?
►Moving in, fittings and maintenance costs: You may have expenses even if the house is “ready to move in” (eg, renting a moving truck, purchasing a garden hose and yard plants, etc.). You should hire a home inspection company to identify potential issues and expenses, from the foundation to the roof, so you can plan ahead. If it’s a redevelopment, get estimates to confirm that it won’t be a money pit. If so, I recommend looking at other options.
Choose your first home
The US Census estimates that the average American will move 11.7 times in their lifetime. A 30-year-old may have five to six movements left in their lifetime, and a 45-year-old will have about three additional movements. Based on this, you may have more opportunities to find and buy the “perfect place”.
Defining and aligning your personal and emotional preferences can help bring you “closer” to your first home. Seek support and advice from people who know you and about homeownership, including parents and a qualified real estate agent.
Reduce your costs
► Is it better to wait? If better financial stability is needed (eg improving your credit score, finding a new higher paying job, saving for a larger down payment, etc.), it may be a good idea to wait.
On the other hand, will house prices be the right price for you if you wait? It is emotionally difficult to “buy high” and no one wants to make a mistake that could have a huge impact on their financial security. However, the real estate market is not homogeneous: prices depend 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? Finally, don’t confuse your home with a simple “investment”. It is a necessity. You need a roof over your head.
► Consult the assistance programs: You may be eligible for homeownership programs for the first time. Check regional agencies and the US Department of Housing and Urban Development (HUD), Veterans Administration (VA), Federal Housing Administration (FHA) and others.
► Inheritance pre-financing: According to a recent Zillow Group Consumer Housing Trends report, buyers may need an extra year to save for a down payment due to rising prices. COVID-19 has made people more aggressive with their savings, and low mortgage rates have improved affordability. However, with house prices soaring, what about some extra help with your down payment? If there are family members who can help you make a large down payment, use them.
Planning to buy your first home has always been a challenge. There are many factors to consider, not to mention that saving can take many years. However, today’s first-time buyers have unique opportunities to capitalize in this area. May these wise tips help you make sound money-saving decisions in your home buying efforts.
Brian Loy, CFA, CFP, is President of Sage Financial Advisors Inc. of Reno. Contact him at www.sagefinancialadvisors.com.