Many individuals believe that now is an excellent time to purchase a home because prices have fallen significantly in the wake of the bursting of the housing bubble. It's possible that this is the case for some people: interest rates are historically low, and there are some amazing deals to be had on the market. When contemplating whether or not to become a homeowner, housing costs and interest rates are not the only considerations to take into account; nonetheless, there are situations in which renting is still the superior choice.
Even at today's more affordable housing prices, being a homeowner comes with a significant time commitment as well as a significant financial investment. There is more to think about than just making that mortgage payment every month, such as budgeting for repairs and ensuring that you don't lose your mobility.
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There are several considerations to make when deciding whether or not to purchase a home. What is the current state of your finances? Are you ready to settle down? There are a few warning signs that should make you reconsider whether or not you want to buy a home at this time. If only one of these circumstances is true, it is possible that this recommendation will still make sense; however, if more than one of these circumstances is true, you should surely give yourself pause, and some of these circumstances bear more weight than others.
Having your own house comes with a number of benefits. You can grow equity and benefit from tax savings at the same time. You will have the freedom to furnish, embellish, and otherwise personalize your own space. Additionally, there is a good chance that you may have additional space to accommodate a growing family. Considering all of these advantages, why not invest in real estate?
The truth is straightforward: not everyone has what it takes to be a responsible homeowner. There are dangers associated with making this investment. You run the risk of losing money. You are going to be responsible for the upkeep and any necessary repairs. In addition, some people are better candidates for homeownership than others.
Perform a detailed analysis of the numbers, as well as your current situation. Talk to industry professionals such as mortgage lenders and real estate agents as well. It's possible that you'll reach the conclusion that investing in real estate is in your best interests. You can also get to the conclusion that there are excessively many unknowns involved.
Should I Buy a House Now or Wait?
The Current State Regarding Your Financial Situation
When assessing whether or not you are prepared to embark on the journey of homeownership, the current health of your finances is possibly the single most critical issue to take into consideration. When evaluating your present financial situation, you need to provide responses to the following two questions:
Do I Already Have Some Money Saved Up for the Down Payment? In order to avoid having to pay private mortgage insurance, the minimum amount of a down payment that you should be able to make is twenty percent of the total cost of the home (PMI). PMI is a complete and utter waste of money because all it does is protect the investment the bank has made in the loan in the event that you default on it. When you buy a home with no down payment, you put both the bank and yourself in a precarious position because you run the danger of paying more money on the mortgage than the house is actually worth. PMI safeguards the lender, but if you haven't contributed to the down payment on the house, you won't have a safety net either.
How Much of a Mortgage Payment Would I Be Able to Afford? This may seem like a silly question, but it is essential to take into consideration potential future mortgage payments in addition to current instalments. If you opt for a mortgage with a fixed rate, your monthly payments will remain the same throughout the duration of the loan, making it much simpler to estimate whether or not you will be able to manage the payments in the future. On the other hand, if you get a mortgage with an adjustable rate, you might be able to afford the payments for the time being, but that might change in the future when the rates go up.
So why do people choose to get mortgages with variable interest rates? In most cases, this is due to the fact that their initial interest rate was lower than average, which gave the impression that they could afford the mortgage despite the fact that this was not the case. Avoid falling prey to this snare. If you have to resort to alternative forms of finance in order to be able to afford your house, then you just can't afford it.
The Security of Your Financial Prospects in the Future
This is yet another essential factor to take into account when making the choice between purchasing a home right away or delaying the purchase until some point in the future. If you have recently switched jobs, are considering switching careers, or are anticipating any big changes to your income, it is not a smart idea to purchase a home until you are in a situation that is more stable until you are in a situation that is more stable. Financial organisations, such as banks and mortgage lenders, will typically need that you have been employed by the same firm for at least a year or two before they will even consider providing you with a loan. This is a prerequisite for even giving you the opportunity to apply for a loan.
In addition, you need to be sure that you have a plan to pay your mortgage in the event that you are terminated from your job in the future or encounter some other kind of unforeseen expense. This implies that you should have an emergency fund built up, with enough money to cover at least a few months' worth of living expenses before you purchase a property. In most circumstances, this indicates that you should have this saved up before you purchase a home.
If you want to be able to afford all of the fees that come along with becoming a homeowner, another good tip is to have a savings account set up for any unanticipated bills that may arise. In light of the fact that you will not have a landlord to turn to in the event that something goes wrong, it is extremely essential for you to have some money set aside for repairs, for example.
Your Credit Score
When it comes to assessing whether or not you are ready to buy a home, the state of your credit is just as important as the state of your finances to take into consideration. Your credit score will determine not just the interest rate that a mortgage lender will offer you, but also whether or not they will lend you money at all. Your interest rate could be much higher if you have a bad credit score, which would mean that you would pay thousands, or even hundreds of thousands, more money over the course of the loan's lifetime.
A credit score of 720 or above is typically required in order to qualify for the best interest rates. If your score is lower than average, you might want to postpone the purchase of a home while you work to raise it. This can be accomplished by:
- reducing the amount of debt;
- obtaining a correction of an error that was made on your credit report;
- Paying all bills on schedule each and every month;
- Avoid applying for new loans or opening new lines of credit if possible.
You can improve your credit score over time by borrowing in a responsible manner; as a result, the older bad items on your credit report will have less of an impact, your score will go up, and you will be in a position to buy a home at a better interest rate.
Your Dedication to Remaining in the Same Place
Purchasing a property initially calls for a large financial commitment from prospective buyers. To begin, you will have to find the money to cover the mortgage closing costs, which might total several thousand dollars or more. If you don't have this money, you won't be able to buy the house. After you move in, the vast majority of the mortgage payments you make in the beginning will go towards paying the interest on the loan rather than towards reducing the original amount that you owe on the mortgage. This is because interest is often charged at a higher rate than principal. It is essential that you give careful consideration to the possible future repercussions that selling your home could have on your finances. In most cases, you will be expected to pay a commision to the real estate agent who helps you find a home.
If you do not plan to live in the house for an extended period of time, it will be extremely difficult, if not impossible, to turn a profit on the purchase of property given all of these expenses. If you do plan to stay in the house for an extended period of time, however, you will be able to turn a profit. If you are going to buy a house, many professionals recommended, up until relatively recently, that you should expect to settle in for at least two years after your purchase of the property. This recommendation is no longer widely followed. However, this estimate has been revised to indicate that you should avoid acquiring a property unless you anticipate to continue living in the same location for at least three to five years. This is due to the unstable nature of the real estate market, as well as the fluctuating prices of individual properties. If you are not absolutely positive that you will continue to live in the same place for the foreseeable future, then now is not the proper time to make a purchase.
The Real Estate and Credit Markets Current State
You still need to take this factor into account, despite the possibility that it is not as significant as some of the others on the list of considerations. When assessing whether or not property values are going to improve in the near future, it is important to take both the current interest rates and the opinions of industry professionals into consideration.
- If interest rates are at all-time lows, it might be a good idea to buy because you'll pay less to borrow money now than you would in the past because interest rates are so low.
- Holding off on purchasing a home for a while if property values are declining can be in your best interest because you might be able to discover a better deal on the same type of house in just a few months.
It can be quite impossible to precisely predict what would happen with interest rates or property values, so these factors shouldn't be the deciding factors, but it's still worthwhile to look into them.
Your Dedication to the Dream of Homeownership
Being a homeowner is very different from being a tenant in a number of important ways. You shouldn't put off taking responsibility for the upkeep and repairs at your home by relying on other people to do it for you. Instead, you should do them yourself. It's likely that you'll have extra yard work to do, in addition to the other responsibilities that renters don't have to worry about, but that's not a guarantee (such shovelling snow and cleaning out gutters, for example). Even if there are a lot of people who don't mind having such obligations, there are also a lot of people who would rather avoid the hassle. You should first ask yourself if you are ready to take on the additional responsibilities that come along with becoming a homeowner before making a decision. If you are, then you should go ahead and make your choice.
First, evaluate your debt-to-income ratio
The first and most obvious choice point is the amount of money. If you are in a position to pay cash for a home, then it is without a doubt within your financial means to do so at this time. If you are able to qualify for a mortgage on a new home, most industry professionals are of the opinion that you will be able to afford the purchase even if you do not pay for it in cash. But how much of monthly payment would be manageable for you?
When deciding whether or not to grant mortgages, the government of Australia normally follows a regulation that stipulates a debt-to-income (DTI) ratio of no more than 43 percent. When calculating whether or not the borrower will be able to fulfil their monthly commitments to the lender, this ratio is taken into consideration. Certain lenders may have more flexible lending rules or more stringent standards, depending on the status of the economy and the real estate market in particular. A debt-to-income ratio of 43 percent indicates that the sum of all of your regular loan payments, as well as your housing-related expenses (mortgage, mortgage insurance, homeowner's association fees, property tax, homeowner's insurance, and so on), should not equal more than 43 percent of your monthly gross income. This applies to both your housing-related expenses and your regular loan payments. This accounts for all of the costs you incur in connection with housing. This computation also goes by the moniker "debt-to-income ratio," which is another name for it.
For instance, if your monthly gross income is $4,000, you would multiply that number by 0.4, which would bring the total amount of money you should spend on debt payments to $1,720. Let's imagine you already have the following monthly commitments: a minimum payment on your credit card of $120, payment on your auto loan of $240, and payments on your school loans of $120, for a grand total of $480. That means, hypothetically speaking, you may afford up to $1,240 per month in more debt for a mortgage, and you will still be well inside the maximum DTI. Naturally, having less debt is beneficial in any situation.
What Mortgage Lenders Want
You should also think about the front-end debt-to-income ratio, which compares your monthly income to the amount of debt that would be incurred just by housing costs. This ratio evaluates your income in relation to the amount of debt that would be incurred each month. Lenders prefer that ratio to be no more than 28 percent, as a general rule. Even if you don't have any other commitments, you can have problems getting authorized for a monthly housing expense of $1,720 if you have a gross salary of $4,000 per month, for instance. In order to maintain a front-end DTI of 28 percent, your housing expenses should be less than $1,120.
Why wouldn't you be able to use the whole ratio of your debt to your income if you don't have any other debts? Because lenders don't like it when their customers are living on the edge. Misfortunes can occur in one's personal finances, such as the loss of a job, the totalling of a vehicle, or the temporary inability to work due to a medical condition. If your mortgage accounts for 43 percent of your income, you won't have any wiggle room for times when you wish to or are forced to pay additional costs.
The majority of mortgages are considered to be long-term obligations. Bear in mind that it's possible that you'll have to make those payments regularly for the next three decades. As a consequence of this, you need to assess the dependability of your principal source of revenue. You should also take into consideration your prospects for the future and the chance that your costs will increase over the course of time.
Do You Have the Down Payment Funds?
If you wish to avoid having to pay private mortgage insurance on your property, it is recommended that you make a down payment equal to twenty percent of the purchase price of your property (PMI). The premiums for private mortgage insurance (PMI) are often rolled into the monthly payments for a mortgage and can cost anywhere from 0.5 percent to 1 percent of the entire amount of the mortgage loan on an annual basis.
The purchase of a house is not going to be out of the question even if the down payment is on the lower end. For instance, you can put as little as 3.5% of the purchase price down on a property if you secure a loan from the Federal Housing Administration (FHA), but there are advantages to putting up more money than that. A larger down payment results in not only the elimination of private mortgage insurance, as was discussed in the prior section, but also the following benefits:
- Reduced monthly mortgage payments: With a mortgage for $200,000, a fixed interest rate of 4%, and a term of 30 years, your payment would be $954 per month. If you had a mortgage for $180,000 with a duration of 30 years and an interest rate of 4%, your monthly payment would be $859.
- More lender choice: If you don't make at least a five to ten percent initial payment, there are some lenders who won't provide you with a loan due to that.
It is not nearly as crucial to be able to buy a new house right now as it is to be able to afford it over the course of several years. Even if you are able to pay for a house and have money saved up for a down payment, that does not answer the question of whether or not it is a good time for you to act on the possibility of purchasing a home at this time.
The Market for Housing
Assuming that you have your financial position under control, the next thing you should think about is the economic climate of the property market, either in the area where you already reside or in the area to which you intend to go. An expensive and worthwhile investment is a home. It is wonderful to have the funds available to make the buy; nevertheless, this does not resolve the question of whether or not the purchase is sensible from a financial point of view. This can be accomplished in a number of ways, one of which is by determining whether or not renting versus purchasing is more cost-effective. If purchasing turns out to be more cost-effective than renting, this is a compelling argument in favour of buying rather than renting.
In a similar vein, it is important to consider the longer-term repercussions of a real estate acquisition before making one. Investing in real estate has been a time-honoured practice that almost always results in a profit. Your great-grandparents could have spent $20,000 on a house fifty years ago and gotten five or ten times that much when they sold it thirty years later.
This idea can be put to the test by economic downturns and other catastrophes (like the COVID-19 epidemic), both of which should cause prospective homeowners to reevaluate their decision to purchase real estate as a long-term investment.
Many people who owned their homes at the time of the Great Recession lost money when the real estate market crashed in 2007. As a result, they wound up with properties whose values were significantly lower than the amount at which they had originally purchased them a number of years after the crash.
Be sure to include in your calculations the cost of the interest payments on your mortgage, the cost of modifications to the property, and the cost of ongoing, normal upkeep if you are purchasing the property with the expectation that its value would increase over time.
The Economic Outlook
In a similar vein, there are years in which the prices of real estate are abnormally low, and there are other years in which they are abnormally high. You can consider it as a sign that now might be a good time to make your purchase if prices are so low that it is evident that you are getting a fantastic bargain if you buy it at this time. In a market that favours buyers, low prices increase the likelihood that time will be on your side and that the value of your home will rise over the course of the next few years.
It is still too early to know what will happen to the cost of housing in 2020. The COVID-19 pandemic is expected to have a significant impact on the economy, and if past events are any indication, this will likely result in a decline in housing values.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
When evaluating whether or not now is a good time to buy a property, it is important to assess and examine all of these different aspects. Be sure that everyone in your family agrees with you, and that you are making decisions based on logic, not emotion. If you don't give serious consideration to every facet of this significant financial choice, you can find yourself straining to make mortgage payments that you can hardly afford, or even worse, you might find yourself in the position of having your home foreclosed upon.
Are you ready to make the investment in a home? In a word, sure, but only if you have the money to do it. However, "afford" does not simply refer to how much money you have in your bank account at the moment. You need to factor in a whole variety of additional financial and lifestyle concerns when making your calculations.
When all of these factors are considered, the question "whether you can afford to do it" becomes more complicated than it initially appears to be; yet, taking them into consideration now can save expensive mistakes and future financial troubles. There is, of course, a single instance in which seizing an opportunity is more advantageous than any other: namely, when you come across the ideal home, available for purchase in the ideal neighbourhood, at the ideal price.