If you've been following trends in the housing market, many Americans are waiting to buy. That's because interest rates and home prices are high, and inventory is low. But that doesn't mean you have to wait for perfect market conditions to become a homeowner.
Here are six tips to make the right financial moves.
1. Higher Home Prices Will Continue
In 2020, home prices began rising dramatically for a variety of reasons. Due to the ongoing effects of the pandemic, more people were working remotely and spending time at home. Rates were extremely low, making homebuying more desirable. But when new home construction and sales initially stalled due to economic uncertainty, many homeowners decided to stay put in their existing homes and new buyers were scrambling to find affordable ones.
Despite a recovering economy post-pandemic, prices aren't expected to drop significantly, and some market watchers are worried about a recession. That's why waiting for the perfect time to buy is next to impossible. Crunch the numbers and see what you can realistically afford. Then shop accordingly. You may find your dream home sooner than you think.
2. Buy Now, Refinance Later
With rates on a 30-year mortgage hovering just over 7%, consumers are waiting for them to drop. The truth is, buying at a higher rate doesn't lock you into that rate forever. You can buy a home and then when rates drop, refinance your mortgage. For example, if you can reduce your rate by at least 1%, and refinanced a $550,000 30-year mortgage, you'd save $365 a month.
3. Your Home Builds Value
Since the 1950s, home values have increased, even when they dropped a bit during the recession. When you look at it from this perspective, it's easy to understand why buying a home is considered one of the best investments you can make to create wealth. As the value in your home grows, and you pay down your mortgage, the equity in your home builds. According to recent statistics, homeowners with mortgages saw a home equity increase of 8.6% year-over-year.1
4. You Get Tax Breaks on Your Home
If you're renting, most likely you've experienced higher prices. And as a renter, you don't get any tax breaks, your landlord does.
When you become a homeowner, here are tax deductions and credits you're eligible for:
- Mortgage interest. The deduction amount depends on your principal balance, interest rate and income tax rates.
- Property taxes. You can deduct up to $10,000.
- If you purchased points to reduce your rates, you can deduct them.
- Mortgage Insurance. If you put less than 20% down to purchase your home, you most likely had to add Private Mortgage Insurance, or PMI, to protect the lender if you were to default on the loan. You may be able to deduct this.
5. Your Down Payment Can Be Less Than 20%
If you've been working on growing your savings to buy a home, you may think you need to put 20% down. But according to research2, the average number for first-time home buyers is 8%, while repeat buyers put down 19%. If you do choose to go with less than 20%, you will have to budget for adding PMI, which typically ranges from 0.5 to 1.5% of the loan amount annually.
6. Your Financial Situation is Stable
Before you buy, make sure you are in a strong place financially. Make sure your job is secure, you have emergency savings and plan on staying in the home for at least five years.
- Source: CoreLogic Equity Report 2. Source: National Association of Realtors