When is the Time Right for a Home?
- Brian Walsh
- Apr 22, 2024
- 3 min read
I get asked this question often, partially because of what I do and partially because my wife is a realtor and people think I know the real estate market. Plus, everyone is complaining about interest rates on mortgages and high home prices, causing them to think that they cannot afford a home. Let's look into the matter a bit more and look at what is going on in each of these.
1) Interest Rates: They are what they are. In the course of home ownership, I have refinanced a home, moved between homes, and made my share of mistakes. The answer is still the same, the interest rates are what they are. Do they impact what you can afford? Absolutely!
When we bought our first home we did exactly what you are not supposed to do. Our first mortgage was a 6-month adjustable rate, interest-only mortgage...bad idea. 3 years later we refinanced it to a 30-year fixed, then a few years later we refinanced it again to a 20-year fixed, and then a few years later we moved out of that house into our current home. In 10 years I had 3 separate mortgages. The first one was a bad idea altogether and I would never recommend that to anyone. It worked out, but it could have been so much better. That is why I do not worry about interest rates, they are always changing, so buy what you can afford now, and if you can take advantage of a lower rate later on, refinance to reduce the number of years on your mortgage and/or possibly your payment.
2) Home Prices: Are they at an all-time high? Yes, but so was the stock market a month ago. Homes generally appreciate because buyers are willing to pay more to be in specific areas or for the upgrades made to a home. Those who take care of their homes and maintain their value will get a return on their investment. Homes appreciate over time, just look at the below graph on home values in the US. Yes, there was a decline back in 2008-1010, due to an increase in supply, foreclosures, short sales, and people overpaying in prior years, but that is not the norm. Now, since 2020 they continue to rise...why? Simply supply and demand. There are few homes on the market and people that are ready to buy are buying. I also believe some of this rise is due to the influx of Airbnb and VRBO investors who are buying homes to use for rentals. Prices will increase just like inflation, salaries, etc. So you can expect it. After all, while I purchased our first home for just over 200K, I was making about 40-50% less than what someone starting in the same job today makes.
3) So When can I Buy? The simple answer is when you have enough money in the bank. You should have at minimum 5% to put down on a house, 20% is ideal to avoid private mortgage insurance (PMI), but 5% is a good start. Plus, do not forget you are going to need money for home inspections, earnest money, moving costs, possibly appliances, and more. You need to know your numbers and have a target in mind. There are plenty of free calculators online. Here is an Excel sheet that I built and continue to use to manage my mortgage. It gives you the payment, and amortization schedule and shows you the difference in interest between a 15 and 30-year mortgage. I prefer a 15-year mortgage and this will show you why.
Do not go by what the mortgage lender tells you that you can afford! It will be way higher and strap your budget. Try to stay close to 25-30% of your take-home pay to enable the right amount of margin in your budget. If you are unsure, run your budget with the housing payment. Will you still be able to give accordingly? Will you still be able to save 15% towards retirement? Know these answers before jumping headfirst into a mortgage payment. And do not forget, you need to be able to pay taxes and homeowners insurance as well, which is part of your 25-30%.
In Summary:
Buy when you can afford it.
Know that the home is an investment.
Pay attention to the interest rate, but do not let that scare you away from buying.
Live below your means OR Live within your budget!
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