Taking a break from our emails on general subjects, I wanted to share my thoughts on a recent home purchase. At 38 years old and some life changes in between, this is the 4th home I have purchased. My first home was in 2010 at 24 years old. Homes were cheap and plentiful then post financial crisis. A bit different to say the least than the current environment. Let’s jump in:
My 2 rules I tell every client when shopping for a home are to buy a house you really want to live in and buy a house you can afford. I broke this first rule in 2018 when my wife and I purchased our previous home. We had a specific neighborhood we wanted to live in and I had already sold my existing home so my items were in storage. We found a home and pounced on it. Was it nice? Absolutely, but it was a 2 story and didn’t have the layout/features we wanted. Five years later we are moving because we found the house we really want to live in. Side note, moving stuff for a family of 6 plus a dog and fish tank is certainly fun.
Let’s elaborate on buying a house you can afford. Our general rule of thumb for our clients is the mortgage payment should be between 15% to 20% of your gross household income. What if you find your forever home and it is 21% of your gross household income? Unless you expect significant income declines in the coming years, I’m pretty sure you will make it work for that extra 1% and not have any regrets. Don’t forget about setting aside money for maintenance. The 1% rule is a decent one to follow, meaning you set aside 1% of the purchase price annually for maintenance costs.
Interest Rates Are Irrelevant
Might be a shocker here but let’s go back to the buy a house you can afford rule. The median interest rate from 1971 to present is 7.37%. We have been spoiled the past decade as the average rate was around 4%. Did people stop buying homes in the 70’s, 80’s, and 90’s when rates averaged above 8%? My rate is 7% and I don’t really care. Why? Because I’ve followed my 2 rules above and I can refinance should rates float down (not guaranteed of course).
Go With a Local Realtor Who Knows Your Market
Everyone knows a Financial Advisor in their orbit. Multiply that when it comes to realtors. The mistake I made here is I went with one who resided in the Tampa area vs my local market. Not a knock on her as we were very happy overall. However, we were doing a contingency sale meaning the seller of the house we were buying contractually allowed us to sell our existing home first. The market is softer in my area with supply coming online and sitting for a while. Generally, you have 60 days to sell your home on a contingency sale, so you need to be aggressive. Having an aggressive posture at the beginning on price and showings would have probably moved the house quicker. A local realtor knows this and should act accordingly.
Get 3 Loan Estimates From 3 Different Mortgage Brokers
I could do an entire article on this. A loan estimate will show you the estimated costs with all parties and the rate. Ensure you are comparing apples to apples meaning fixed rates, no points, and the same loan amount. Just because a realtor recommends a broker doesn’t mean they are the best option. Also, when you get the initial loan estimate, you are generally pre-approved. The full underwriting process will happen once you are under contract. Ensure you are aware of any items the broker/lender might be concerned about in advance, so you aren’t scrambling last minute in underwriting as your closing date approaches.
Be Patient Once You Move In
When you buy the home you really love, there will be a lot of things you want to do on furnishing, improvements etc. Remember, you are playing the long game with your money and HGTV isn’t coming to your house next week for a filming. Take your time with improvements and don’t stress yourself with excess spending to expedite the mid-century modern theme you have always dreamed of.
You don’t buy a house very often so do your homework pre-sale and take your time. Even after multiple home purchases, I am always surprised about something. One last thing, hire movers as your spouse will thank you. Fortunately, I followed that advice.
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