4 Things to Consider Before Buying a Home Because Rates Are Historically Low
According to a survey from Lowe's earlier this week, 58 percent of renters stated the COVID-19 pandemic has led to an interest in home buying. Americans are trying to take advantage of historically low-interest rates and looking for more space. However, deciding to buy a home isn't a simple decision.
"When I saw a friend get a mortgage interest rate at 2.65%, I definitely felt FOMO — fear of missing out,” said Eryn Schultz a 34-year-old woman from Boston. Schultz determined that she isn't ready to buy a home yet, but still browses homes for sale.
Financial planners came up with these four things to think about if you are considering becoming a home owner.
1. Evaluate if owning a home is the best option for you
Take some time to understand what being a homeowner entails. Jake Northrup, CFP and founder of Experience Your Wealth came up with the following questions to ask yourself before buying a home.
- What is it about owning a home that you cannot achieve through renting?
- How is owning a home directly in line with your core values?
- What would you do with the opportunity cost of the money you are putting toward the home?
- What other goals do you have that may be impacted by buying a home?
“It depends on how bad they want it and the sacrifices they’re willing to make,” Ryan Greiser, a Philadelphia-based CFP and co-founder of Opulus. If you have the income and you’re not traveling or dining out or spending as much due to Covid-19, it might work.” For most potential homebuyers, that means carefully considering how much you need to save and then setting up automatic deposits on a regular basis to achieve that goal within the time frame you want.
2. Plan for at least a 20% down payment
Financial planners recommend this amount because it allows individuals to avoid private mortgage insurance, which increases the cost. Furthermore, saving this much leads to decreased interest throughout the mortgage for the home. The median price of a home right now is $319,000, according to Redfin.
“If a person finds a home that they love and fits within their budget but are just short of their down payment goal, they could consider lowering the down payment goal to take advantage of the lower interest rates now,” says Eric Simonson, CFP with Minnesota-based Abundo Wealth.
It's also important to realize that there is high demand for houses right now and low supply. Individuals should analyze different areas and trends to determine if they have what it takes to put money down in the current market.
“If the home buyers are dead set on the area, [they should] be prepared,” Greiser says. You may need to make a higher offer, and you should have all necessary documents and pre-approvals ready in order to make the process smoother and faster.
3. Make sure you can afford the total costs of homeownership
“Even though interest rates are low, don’t buy more home than you can afford,” says Dan Herron, a California-based CFP and founder of Elemental Wealth Advisors. Closing costs, homeowners insurance, property taxes, repairs and maintenance are all other expenses that need to be considered. “You’re the landlord now. That means if something breaks, you get to fix it,” Herron said.
4. Don’t worry about missing out, lower rates will linger
Silvia Manent, CFP and founder of Massachusetts-based Manent Capital said “this is a long-term and large investment that you may regret later on down the road." Mortgage rates are expected to remain low for the foreseeable future.
“Slow down and buy when you are ready,” Marte says. “People have been buying houses for a long time, even when interest rates were at 17%. Slow and steady wins the race.”