Purchasing a home can be quite challenging, especially if you haven’t prepared your finances for it. It can take a long time before you can pay off your mortgage and can leave you bankrupt if you aren’t aware. However, purchasing a home is essential for most Americans, especially for those who have families. If you’re looking to purchase a home this year, here are some ways to prepare your finances for it. But first, let’s go through whether it’s a wise choice to purchase a home this year.
Rising Home Prices
Many Americans think that this year is the right time to purchase a home, despite the recent growth of home prices. They believe that it is a much stable investment when compared to stocks and bonds. However, this might be the same for your current position.
Let’s put it this way: the current average price of an American home is $329,000. It’s estimated that prices have risen by 17% this year due to the low stocks, and remember, $329,000 is the price asked by most people before negotiations. After negotiations and the auction, it’s expected that the average price will increase to a staggering $400,000. That’s an insane amount, especially if you compare it to the price of homes a couple of years ago. You have two decisions right with very different outcomes.
The first choice you have is to wait until stocks have caught up to demand. This might not take too long since listings have increased by 40% since last year. However, this doesn’t mean that prices will normalize by then. It’s just theorized that it will. This choice also depends entirely on your current status. If you’re single, you can get more value out by renting a single-bedroom apartment. This will help you lessen your costs and save up for a home purchase in the future. Renting is great if the costs justify the means.
The second decision is to purchase a home right now when prices are ridiculously high but mortgages are ridiculously low. Although this doesn’t mean that you normalize the price, a low mortgage rate can be a good cushion in the future. If you’re lucky enough, you can purchase a home under $300,000 with the low mortgage prices we have nowadays. You don’t necessarily have to shore up that amount of money if you plan to purchase a home this year. You have to need to plan your finances.
Pre-approved Your Mortgage
Getting your mortgage pre-approved should be the first step into the home buying process, and it’s also the most crucial. It’s one way you can ‘shop’ for a mortgage and see which one is the best for you. It’s also going to help you purchase a home on the market right away once you’ve made your decision.
It isn’t that hard to get a pre-approved mortgage. All you have to do is fill up a form from a mortgage lender, wait for their background check on you, and their approval. Once approved, they’ll give you a certificate which you can show sellers to the market. You can get multiple pre-approved mortgages, and it’s suggested that you do. One of the best ways to manage your finances is to create an average out of the pre-approved mortgages you get and see if you can afford it annually. If not, then it’s time for you to lessen your expenses or choose a home at a much lower price.
28% of Your Gross Income
Generally, people follow the 28% rule. This rule dictates that your mortgage should be less or equal to 28% of your overall gross income. This actually quite a lot if you think about it, but that’s how you should tailor your financial planning. You can go for something as low as 20% of your planned mortgage isn’t all that expensive. But going above 28% can lead to future financial problems in the future. Additionally, you shouldn’t take into account your savings and financial investments. These assets are going to be useful during your retirement and must only be touched by then.
When purchasing a home, make sure you can afford 20% of the home’s overall price. This is for varying reasons, the first of which you want to ease the burden of payments. Another reason is that this will help you get ahead of your finances. If you can’t afford the 20% downpayment, you shouldn’t purchase the home you chose. If you can’t afford 20% of the average price of homes, then you shouldn’t think about purchasing a home right now.
Include Other Expenses
When calculating a home, you should consider other expenses, such as home insurance and maintenance costs. This is all part of the buying process, and overlooking these expenses can spell disaster for your finances. Although your mortgage should take priority, these expenses can determine the status of your home in the future. This is why you should include your other home expenses when purchasing a home.
These are the essentials when it comes to managing your finances before you purchase your first home. It can be tough at first, but by remembering these suggestions, you should see whether you can afford a home this year or not.