Why you shouldn’t rush to buy a house now
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With mortgage interest rates at their lowest, the temptation to buy is now greater than ever and may be meaningful to some. To put it in perspective, a 30-year, $ 250,000 mortgage with an interest rate of 5% would have cost you $ 1,342 already; now, with a 3% lower rate, that same mortgage can cost you $ 1,054. At $ 288 / month, the difference may seem negligible, but it adds up dramatically over time – for someone earning $ 3,000 a month, that’s almost 10% of their monthly income.
While the math may be in your favor, there are several factors you need to consider before pulling the trigger.
1. The amount and type of debt you have.
Lenders generally don’t want you to pay more than 43% of your income on debt. They assess your minimum credit card amount, your auto / student loan payments, and any other debt you may have against your gross income. If you’re having trouble making your payments, you may want to delay committing a mortgage for 15 or 30 years..
For many of us, it’s longer than anything we’ve committed to in the past. And unlike some types of debt, mortgages are generally recourse debt, which means that you are personally responsible for the loan. This loan can hurt you if you foreclose and the lender decides to go after your other assets.
2. How much you have left to spend each month.
As the owner, you will need to be prepared for additional expenses. Whether it’s an appliance needing replacement, a plumbing emergency, or a broken washer, you’ll want to have the funds on hand to cover these emergencies. If you’re used to managing a tight budget, you might unintentionally find yourself taking on debt to cover those surprise expenses.
When budgeting, try to limit all of your bills to 50% of your income, including the new mortgage. A good invoice / income ratio ensures that you have enough money to spend and save each month.
3. Down payment.
Some lenders may lure you in with the promise of a small down payment. If you qualify, VA (Veterans Affairs) loans can even lend you money with a 0% down payment. However, expenses like closing costs, escrow bills, and legal fees can quickly add up, forcing you to have more than the required down payment for the house. You can also be at a disadvantage when trading without the funds needed to lower your interest rate or increase your down payment.
Keep in mind that any down payment less than 20% may require you to purchase private mortgage insurance (PMI). Depending on the size of the mortgage, this can cost you 0.5% to 1% of your loan and is on top of your monthly payment.
4. Your current credit score.
Similar to a low down payment, some lenders can make an exception for a low credit score. The catch is that lenders usually charge a higher interest rate to offset the risk of a lower down payment. Since mortgages charge interest differently, the smallest difference in your interest rate can cost you thousands of dollars over the life of your mortgage.
In perspective, for a mortgage loan of $ 250,000 over 30 years, the difference between a rate of 3% and 3.50% over the term of the mortgage loan is $ 24,697. Waiting a few months and working on your debt / income / credit ratio will improve your position in the long run.
5. A tight real estate market.
While it can be scary to see a small number of homes blow off the market, the last thing you want is to rush into such a big decision and find yourself in the middle of a bidding war. Not only would buying a more expensive home result in a higher payment, but you could also risk having a loan worth more than your home if the market downturns.
Overall, think of home ownership as an investment above anything else. As with any investment, first make sure you are comfortable and able to manage risk. From there, your financial advisor can help you assess your options. You will be surprised how often renting in a warm market and investing additional funds elsewhere may be the best option!
Expert in financial advice, Albert App
Daniel Demian is an expert in financial advice at Albert. Daniel received his Bachelor of Commerce degree in Business from York University and is a Level 3 Chartered Financial Analyst candidate. When not working to improve his financial literacy and that of others, you can find him failing. train or explore the outdoors.
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