How far should homebuyers be stretching themselves to get into a property?
While national statistics paint a picture of robust but sustainable growth, many local real estate markets are speeding out of the reach of many homebuyers and renters. In some areas like southwest Florida, many renters face a leap of over $500 dollars a month when their leases renew. When rents leap from an average of less than $1,000 a month, to $1,600 or even $2,000 per month within two years, residents either have the choice of buying or searching for housing far away in a new city. Those that haven’t mastered the world of remote working, may have no choice but to buy a home, if they are to have any hope of staying within the area they need to be for work. After all, no one is even pretending that wages are growing at a fraction of the rate of real estate values and rents. It’s just a matter of how much house to stretch and buy.
It’s a Great Time to Buy a Home
While it may be a very ugly time to be a renter, it is a fantastic time to buy a home. Yes, home prices might be nudging up, and well-priced homes may be selling within a matter of hours, but low interest rates make this a sweet time to buy. You can either suffer with paying more rent for a smaller place next year, and perhaps even further from work, or buy and enjoy that extra money going into your net worth each month.
Those that wait will only find it costs more to buy the same house. Even if house prices were to go down, higher interest rates would likely still mean paying more for that house than if purchased now.
You can’t afford to wait. So how much house should you buy? What factors might play into that decision?
Keeping it Comfortable
A home is not going to provide a sense of security, or the happiness that should come with homeownership if it isn’t affordable. If paying the mortgage, insurance, and taxes is a constant battle and worry, it isn’t going to be a pleasant experience.
In some cases, what you may be comfortable with may be more or less than what a home mortgage lender will qualify you for. What’s important is that you know how much you are comfortable with each month for a housing payment. What’s that number for you?
Don’t Regret Buying too Little Home
While it’s important to ensure your payments are affordable and manageable, you also don’t want to pinch the pennies so tight that you end up settling for a property you’ll be hating every day and feel trapped in.
The Math in Favor of Going Bigger Now
If you can afford to buy more home now, you should. Here’s why:
Eliminate the extra cost of selling and moving again
Interest rates are historically low, and won’t likely be lower for several decades
You know you can qualify now, but you don’t know that will apply tomorrow
You’ll be building up more in equity each month
You’ll be enjoying compounding gains at a higher rate
The tax breaks will be greater
There may not be the inventory you want later
The time value of money and inflation means you’ll be paying less later
Beware Of Needlessly Going Too Big
Just because there may be advantages of grabbing more of the house you want now, doesn’t automatically mean bigger is always better.
A bigger home doesn’t always mean more happiness. Sometimes it is unnecessary, and will bring needless maintenance costs and headaches. If you are a couple with one childs do you really need a five bedroom house? If you are one adult with two kids about to go off to college next year, do you really need a bigger house with room in the yard for a play set?
Will you really want to keep a large home for a long period of time? Most people end up downsizing at some point. However, your case could be the opposite. Maybe you are just getting started. You might be shooting yourself in the foot with a two bedroom home, when interest rates could be far higher in two years from now. Keep your real long term goals in mind.
Steps to Choosing the Right Home
Set a comfortable budget
Get pre-qualified for a home loan
Shop around for homes
Get on lists for immediate notifications of new house listings
Act fast when you find a good deal
Ask how you can make a bigger and more expensive more affordable by paying points, adding more down payment, etc.
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