If you are shopping to purchase a home, you are tuned in to the message that interest rates are at an all-time low. Everybody is telling you to buy a house now and if you don’t, you will miss out as increasing home prices put your dream home out of your reach.
We want to make sure that our buyers and sellers are seeing the whole picture and making the best financial decisions for their future. If you want the best results make sure you are buying a home for the right reasons and are following a comprehensive approach that considers all factors; financial, economic, and personal.
One of the big factors to consider when deciding to buy a home is housing affordability. Housing affordability in April 2020 was up 7.3 % nationally compared to a year ago, according to NAR’s Housing Affordability Index, and as indicated in the above graph.
The data indicates that record-low mortgage rates and increased incomes have offset rising home prices. NAR states that “as of April 2020, the national and regional indices were all above 100, meaning that a family with the median income had more than the income required to afford a median-priced home.”
Median home prices rose and the effective 30-year fixed mortgage rate fell to 3.37% in April from 3.51% in March. Mortgage rates are almost a full point lower now compared to last year’s level of 4.3%.
When people are telling you to buy now while interest rates are low, they are likely using these facts to do so and interest rates are definitely an important factor to keep in mind. According to Dr. Lawrence Yun, Chief Economist for the National Association of Realtors, interest rates are at an all-time low and it is possible that we could see rates dip even lower in the near future; below 3% on a 30 year fixed rate loan! With current rates hovering between 3-4%, it is certainly a great time to take out a mortgage or refinance your current one!
A Comprehensive Home Buying Process
Economic and financial considerations are only part of the equation in deciding to take on homeownership. Here is the system we use to get our buyers to the finish line that considers all facets of the decision process and in our experience yields the best long term results for our buyer clients.
1. Determine why you want to own a home.
Becoming clear on your reasons to move and what it means for your household is the first step in your home buying/selling process. Start here so that you make the right decision for your family, lifestyle, and future.
Our clients most often site these reasons: lock-in housing expenses for the long haul, schools, community connections, having space and freedom to fulfill their plans and dreams (including the dream of owning their own home), financial asset building, and being close to family.
Do what Steve Covey says and begin with the end in mind. My first realtor had to say to my wife and me “Oh, I see, you want TWO homes”. We hadn’t really talked about what we wanted too much and when we did, it turns out we had different needs, risk tolerance levels, and ideas for the perfect home.
Plan a “summit” with your partner and thoroughly discuss each of your wants, needs, desires, and fears as they relate to buying a home and your future plans and goals. When you get into a discussion, you may find that you and your partner’s needs and fears differ quite a bit, and compromise is needed.
2. Get serious about your budget
Track your income and expenses to find out and fully understand where your money really comes from and goes. Then, create and STICK TO your budget.
Use a financial tracking software product such as Mint or Quicken to systematically track all of your income and expenses. Be sure your budget includes categories for retirement savings and, for homeowners, a plan to set aside at least 1% of the cost of your home per year for home improvements, maintenance, and repairs.
We often find there is a financial optimist and pessimist in each household. One person hawks the bills and is putting on the brakes while the other wants to spend and fearlessly forge ahead. The optimist will tend to underestimate or forget about important expenses while the pessimist can be too conservative and not see opportunity. A working budget and income/expense tracking system can get both parties on the same page.
Once this step is completed you can begin to clearly see how much home you can comfortably afford, how much debt you are currently carrying, and how much savings you have to put towards a downpayment, closing costs, moving expenses, and new home renovations/updates. Your lender will tell you how much the bank is willing to loan you, you have do decide how much debt to take on and the number can be very different.
Hire an experienced, local real estate agent and mortgage lender. After 17 years of selling and buying homes for clients, I have seen a lot! I have some great stories, a few horror stories, and a lot of perspective on the industry and market in Ann Arbor. There are lots of great agents and lenders practicing in Ann Arbor who have been around the block a time or two and know what it takes to help people find and purchase their dream home. Your job is to connect with a few and hire a real estate agent and a lender you are comfortable with.
What do you need to find out? Is this person a good listener? Do they have time for you or do they always seem unavailable, are they consultative in nature? Can they negotiate well for you? Do they have good ideas to share that you have not thought about? Do they have resources to offer and are they connected in the community? Do they offer a systematic approach to buying a home or do you feel they just want to get to the closing table? Do they answer all of your questions, if not on the spot then with a follow-up call or email? Do they have testimonials and references available?
Use your agent to get at least two mortgage lender recommendations. Your agent will have a rapport with many lenders and will offer the ones that get the job done on time, are available to consult and answer questions, and have a great track record.
4. Shop for your home.
Finding a great home that truly meets your needs becomes much easier once you lay the foundation and have a framework using the steps above. Many home shoppers just start at step 4 and fill in the other steps as an afterthought. A helter-skelter home search, finding a lender after the fact, not having done research on neighborhoods, and not understanding all the expenses involved in buying a home is a sure way to get a lesser result.
Helpful Resources For Planning And Budgeting
- Dave Ramsey’s 5 Steps to buying a home that won’t bust your budget gives a step by step guide with examples on how to calculate a “pre-home purchase” budget alongside a “post-home purchase” budget in order to determine how much you can truly afford in a mortgage payment and taxes.
- The Michigan Property Tax Estimator. This tool helps you calculate the estimated property taxes or home at a given price. Provided by the Michigan Department of Treasury it is one of the most accurate at-home resources for calculating taxes.
- Piper Partners Blog: How Much Does It Cost To Buy A House? – Consider All The Expenses. In this comprehensive guide to buying a house, we help identify and calculate some of the hidden costs of a real estate transaction such as loan origination fees, down payments, inspection fees, and closing costs.
- Piper Partners Neighborhood Pages: We offer dedicated pages for 100’s of neighborhoods. You can view active and closed listing data and subscribe to updates.
- Piper Partners Blog: 6 Questions To Ask When Interviewing a Buyers Agent This post gives some example questions to ask agents as you interview them; Questions that challenge their local area knowledge and expertise!
- Piper Partners Blog: The Ten Reasons People Buys And Sell Homes In this article, we will go through the 10 reasons people make a move and our advice for each situation.