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How to Figure Out if You Can Actually Afford That New Home

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High inflation often leads to high anxiety. As a result, many Americans strive to keep the cost of their home, one of the most basic and most human needs.

However, as home prices are already at high levels and mortgage rates are skyrocketing, many buyers want to dive in before they’re ready or because they’re afraid that things will only get worse. maybe.

“There is this psychological pressure that everything is uncertain,” he said. Simon Blanchard, Associate Professor at Georgetown University McDonough Business School, studies consumer economic decision making. He said it can make a necessities like a home feel concrete.

“Focusing on the present and fixing this part of the budget may sound comforting,” he said. “The danger is that the vulnerability can occur due to inadequate flexibility for later use.”

According to the National Association of Real Estate Agents, the median national home for existing homes in March was $ 375,300, up 15% from $ 326,300 in the previous year. Interest rates on 30-year fixed mortgages for the week ending Thursday were 5.10%, up from 2.98% a year ago. According to Freddie Mac..

This has significantly reduced the amount that potential buyers can pay. With a median mortgage of 10% down payment, regular monthly mortgage payments will be $ 1,834, an increase of 49% from $ 1,235 a year ago, and both prices and interest rates will be higher. account. It also does not include property taxes, homeowners insurance, mortgage insurance, and other non-negotiable items that are often required with a down payment of less than 20%.

When inflation With the highest price in 40 years and rising costs for almost all, some buyers are caught up in the irrationality of aggressively bidding on prices and skipping basic precautions such as home inspections. Is easy.

“There’s a rarity idea right now,” said Jake Northlap, a financial planner for a young family in Bristol, Rhode Island, where he and his wife wait a year before buying their own home. He said he decided to save more.

Some future buyers are doing the same — mortgage applications have been slow lately — but the market is The competition remains fierce This is because the supply of national homes is chronically low. It can lead to false assumptions and bad decisions.

So it’s time to evaluate not just what you’re doing, but before you come across an open house circuit. can Use but you should do it Expenditure — and potential future costs.

Before you start scanning your list, it’s helpful to have a solid understanding of what you can do and how different price points affect your ability to save and spend elsewhere.

Some financial experts suggest working in the opposite direction. Assum a minimum savings rate (for example, 15% or 20% for retirement, college savings, and other goals) and consider all other recurring debt and expenses in your spreadsheet. Then try different home prices to see how they affect everything else.

“The right mortgage amount isn’t a pre-approved amount, it’s a generous amount,” said financial planner North Wrap. “The biggest mistake I see when people buy a home is that they don’t fully understand how other areas of their economic life are affected.”

What is the affordable price? The answer obviously depends on your household, income, family size, and other factors.

Government housing officials have long considered spending more than 30% of their total income on housing is a burden. this is,”Weekly wages It became a rule of thumb in the 1920s.That standard was later etched Nationwide housing Marginal Policy — Low-income households pay only a quarter of their income to public housing, and the cap was raised to 30% in 1981.

Some financial planners may use a similar rough starting point. We spend less than 28% of our total income on all mortgage payments, property taxes, insurance and other housing costs, with an additional 1-2% allocated to repairs and maintenance.

However, this is not useful for everyone. This is especially true in high-cost metropolitan areas where it is often difficult to find rental properties within these limits.

“Take all your monthly expenses into account and really decide how much you want to put in your home.” Fiduciary Finance Advisor.. “I never recommend clients to closely track their income percentages to determine their monthly spending. The rule of thumb is a guideline and should be considered, but it’s all inclusive. It does not mean.”

Rising interest rates mean that many had to significantly curb their price range. A family with a $ 125,000 income who wanted to reduce 20% and spend less than 28% of their total income (about $ 35,000) on their homes would comfortably buy a $ 465,000 home when interest rates were 3%. Is done. According to Eric Roberge, financial planner and founder of Beyond Your Hammock in Boston, this figure will shrink by 5% to $ 405,000. His calculations take into account property taxes, maintenance costs and insurance.

He generally proposes to allocate a modest percentage of household income (about 23 percent or less) to homes, but admits that it is difficult in many places. “Affordable calculations remain the same,” Roberge said. “But a big rise in prices really changes the affordability.”

There are other considerations. As many Americans move from cities to larger suburban spaces, for example, how much it costs to operate and provide a home, or how much extra to transport. Also need to be considered.

According to experts, the non-ideal form of the property attracts people who want to save some money, but supply chain issues and other issues make it much more difficult. There is.

“Recently, some clients have tried to partially avoid the affordable issue by buying a home that needs significant improvement,” he said. Melissa Walsh, Financial Planner and Founder of Clarity Financial Design in Sarasota, Florida. It was a few years ago. “

She suggests saving a lot of cash — she had two clients spend more than twice their initial quote for this year’s refurbishment.

Floating rate mortgages generally carry lower interest rates than fixed rate mortgages for a period of time, often 3 or 5 years. It will then be reset to the standard rate, usually annually and on a schedule.

According to Freddie Mac, the average interest rate on a floating rate mortgage on May 1st was fixed for the first five years and then changed every year, but the average interest rate for the week ending Thursday was 3.78%. Last year it was 2.64%.

An increasing number of buyers are considering floating rate mortgages. According to the Mortgage Banking Association, it accounted for more than 9% of all mortgage applications for the week ended April 22, doubling its share three months ago, the highest level since 2019.

But they are definitely not for everyone. Kevin Iverson, President of Denver’s Reed Mortgages, said:

If you know you’re going to sell your mortgage before the interest rate is adjusted, it could be a good loan. However, we do not know what the interest rate will be in five years. Also, the surge in interest rates put many borrowers at risk during the 2008 financial crisis (although ARM today is generally safer than its products at the time).

Be more vigilant So-called alternative finance — Certificate contracts and “moving property” loans that are regularly used to buy manufactured homes — Often lacks typical consumer protection..

The cost of simply entering a house may be the most painful in the short term, but later on other costs can be just as annoying.

A Recent Papers by Fannie Mae Economists analyzed the costs normally incurred during a seven-year homeownership life cycle and found that the largest contributors included almost everything but mortgages. Other ongoing spending (utilities, property taxes, home renovations) accounted for about half of the borrower’s costs, with transaction costs of 20%, according to economists.

They used the 2020 loan data. According to this data, the average first-time homebuyer was 36 years old, earned $ 7,453 a month, and bought a home for $ 291,139 with an 11% down payment. The actual mortgage, excluding the principal repayment, accounts for about 30% of the total cost for the seven years.

Their Takeaway: “Renting is a big part of the cost of owning a home, but the cost is often paid to utilities, property taxes, home repairs, and various parties to buy or sell a home. Temporary charges will overshadow it. “

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