If you are shopping to purchase a home, rising interest rates may be scaring you off. While they are only nearing historic averages, rates are much higher than they were a few months ago. 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 both financial and personal factors.
One of the big factors to consider when deciding to buy a home is housing affordability. Housing affordability in May 2022 is down over 30% nationally compared to a year ago, according to NAR’s Housing Affordability Index, which measures “whether a typical family earns enough income to qualify for a mortgage loan”. Increased mortgage rates and inflation are why housing affordability is decreasing so rapidly.
Interest rates continue to rise and are nearing historic averages. Dr. Lawrence Yung, head economist of the National Association of Realtors, notes that a 300,000 mortgage in December would cost $535 more per month today. But do not let raising interest rates be the reason you decide not to buy. First, the rates will not fall anytime soon! Second, if you need to move, you need to move. Whether it’s for downsizing, a new job, or a growing family, move because the time is right for you — not because the market tells you to. Economic and financials are only part of the homeownership equation. Use our Comprehensive Home Buying process to consider all of the factors when you’re buying a home. A Comprehensive Home Buying Process
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. When we did, it turns out we had different needs, risk tolerance levels, and ideas for the perfect home.
With your partner, thoroughly discuss each of your wants, needs, desires, and fears as they relate to buying a home. 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 to systematically track 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 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. Beware: there are many hidden homeownership costs that first time buyers don’t account for. 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 20 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 great agents and lenders in Ann Arbor who know how to help you purchase your dream home. Your job is to connect with a few and hire an agent and 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? Can they offer a systematic approach to buying a home? Will they answer all of your questions? 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 becomes much easier once you lay the foundation using the steps above. Many home shoppers just start at step 4 and fill in the other steps as an afterthought. Finding a lender after the fact, improper research, and not understanding all the expenses will cause problems.
Helpful Resources For Planning And Budgeting
- Dave Ramsey’s 5 Steps to buying a home that won’t bust your budget guides you on how to calculate a “pre” and “post” home purchase budget. Use this 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.