It’s the beginning of the year, and for many households that means that homebuying season is right around the corner. Most buyers have a nervous sense of anticipation thinking about the competition they face in finding the right property, and this tends to ramp up as the long winter lull comes to an end.
During the last two years, many younger households have found themselves clamoring for more space, while the older households who often sell to them have been reluctant to downsize. With the housing market especially competitive here are three big mistakes homebuyers tend to make, and how you can avoid them:
Set a budget, and stick to it
No matter where you live, home prices are currently high (or extremely high) by historical standards. As a result, many buyers begin their journey at or near the threshold of what they can afford.
Some view how much a bank is willing to lend as a good indication of what they should spend. However, banks are focused on your ability to pay the mortgage (and home insurance and taxes) without consideration for lifestyle or savings capacity.
For households in their 30’s and 40’s retirement can feel like, and is, a long ways away. But keep in mind that a home purchase is big enough on its own to potentially push your retirement date 5 years later, or inhibit your ability to help your children save for college. That’s why it’s important to know what you can (and can’t) spend.
Don’t depend upon refinancing
Interest rates were reduced to historically low levels to stimulate the economy at the onset of the pandemic, and it’s important to consider what this means over the length of a typical mortgage (i.e., the next 30 years).
For decades, interest rates gradually declined and many relied upon that to reduce their monthly payments. So what does this mean if rates don’t (or can’t) go any lower?
It means that refinancing may not be an option for payment relief, so you need to be prepared to handle your monthly payment for the foreseeable future.
Moreover, with inflation recently reaching levels not seen in nearly 40 years, the government is now expected to raise interest rates several times during 2022. Basically, a reversal of earlier stimulus.
When interest rates change, that means how much house you can afford will change, too. Update your financial plan to consider what you can afford if/when mortgage rates rise.
Take consideration of all lifestyle changes
The most common reason that people buy a home is life change, so you’re likely to see several big changes in your budget simultaneously. New family members, or a new commute, can be a catalyst for a car purchase, while moving to a larger property will bring higher home operating costs and property taxes.
With many (large) moving pieces in your budget, you’ll want to take a close view to get as much of it right as you can. That way when unanticipated changes arrive, and they always do, they will be comfortably manageable.
If you’re buying a home this season (or considering it), speak to an advisor now so you can hit the ground running. Happy house hunting!
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.