Knowing When To Buy a Home and at What Price
There is a very real cost associated with buying and selling a home, just as there is with renting an apartment. Many younger individuals and couples struggle with the decision regarding when to buy a home as well as what type of home to buy given these factors.
Building Equity
The main argument against renting an apartment is that a renter is not building equity in a home. Over time, real estate tends to increase in value due to inflation and renovations, although there is a very real risk that housing prices can bubble and drop precipitously in some areas.
The increase in the value of housing inventory (in Boston, for example) makes investing in real estate a wise decision as it prevents the escalating cost of renting a home over time. However, buying a home does take quite a bit of liquid assets to execute. And investing in a home could prevent someone from investing in other assets.
Having an asset that you can dispose of when you sell a home also provides some financial support in old age. Understanding when and where to purchase a home is important and can impact the decision-making process and return on home investments.
Funds Needed to Buy a home
When buying a home, purchasers will need to make a down payment on the home and have funds to cover some significant immediate costs. It is recommended to be able to have 20% of the purchase price of the home as a down payment in order to avoid mortgage insurance. Which is an added cost of owning a home that does not add to the equity in the home and should be avoided when possible
In addition to the down payment amount, a buyer will need to have funds available to cover the closing costs associated with the home purchase. These include fees and charges that are specific to the state where the home is located and can add a significant amount onto the mortgage loan taken.
Contact a mortgage lender for a good estimate of the closing costs to understand the costs. In addition, be prepared to have funds available for a full year of home insurance and additional funds set aside for any repairs that are needed on the home. Keeping a reserve for those unknown items that can pop up at any time.
The Starter Home vs. The Forever Home
Due to limited funds, many new homeowners will seek out a starter home that is in need of repairs and and a little TLC to be presentable. Other people will instead save up a significant amount of money to invest in a forever home. No one strategy is the right strategy, the answer for the best option will depend on your individual circumstances. Here are some of the factors that can impact your decision.
Factors That May Lead a Home Buyer to Buy a Starter Home:
- Low current interest rates on mortgages
- Low home prices
- Excess cash funds
- The end of an apartment lease or a significant increase in rents
- Rapidly improving neighborhood and good opportunity on home purchases
- Your ability to renovate the home yourself or at low cost
Factors That May Lead a Home Buyer to Buy a Forever Home:
- High current interest rates
- A perceived view that current home prices are higher than typical
- Desired to live in a specific community or school district
- Established neighborhood with high cost of entry
- Limited current available cash
Finding the right home can be challenging. Balancing out the opportunity that a starter home can offer with the challenge associated with renovating is important, but also keep in mind the closing costs associated with buying and selling a home as well as the disruption in your life that switching homes can have. If you are thinking about renovations, you will see a difference
When buying your first home, the timing is important. Real estate sales increase and decrease in the same months every year. There is a buying and selling season all the way down to statistically the best time to list your home for sale.
Balancing out these factors with your overall life plan can be difficult but understanding when the market provides opportunities for you can make the return on a home purchase more opportunistic.