There is no arguing that it is a seller’s market in the Twin Cities, as well as most other markets across the country. Add that to an already high-demand time of year, and it is easy to see why prospective homebuyers have their hands full.
This doesn’t mean don’t buy a house… but it does mean that home shoppers need to be especially savvy with their finances while navigating this fast-paced, quick-decision environment. Dig in to more than just asking price. Other factors like the mortgage terms, anticipated expenses, and the length of time you plan to stay in the home all matter greatly.
Here are eight important tips to keep in mind when seeking to purchase a home this season:
This is an often-overlooked step, but for Christians this is an important first step and something to be consistent with throughout the entire home buying process. Below are some of the ways you can bring this important life event before God:
Praise God for the potential opportunity you have to buy a house.
Ask for wisdom with this big financial and life decision.
Ask God to expose any motives you have for purchasing a house that are not in alignment with His plan for your life.
Pray for specific direction from the Lord in terms of the location and size of house to purchase.
Ask for trust in God’s leading as this can be a process that brings on anxiety and uncertainty.
Shop for Rates & Get Preapproved
Different lenders offer different rates. Take your time to find a mortgage provider that gives you a competitive offer and that you feel confident will serve you well.
You can generally get loose rate quotes quickly and easily online. Be aware, however, that these advertised rates are likely the company’s best rates; meaning they will require an excellent credit score to have them offered to you. Know your credit score and try to determine what rate you’ll qualify for before applying for preapproval. Doing so places a hard pull on your credit, and too many of these kinds of inquiries can harm your score. Therefore, try to limit the number of hard pulls during this process to 2 or 3. (Looking for ways to build your credit? Check out this post!)
Then get preapproved. Having a preapproval letter in hand will bring instant credibility to your offer and will be especially handy should you need to act quickly on a property. In fact, being preapproved can mean the difference between having an offer accepted and not.
Find a Realtor
Realtors can provide a lot of value when purchasing a home. For starters, they make it much easier to get into homes for showings. More importantly, a good realtor will help you navigate the home buying process with confidence from start to finish. When you find a home you’d like to put an offer on, they will help you to write an offer in a way that gives you the best chance to get the house against other potential competing offers. They often earn their value and then some during the negotiation process alone.
But don’t pick just any realtor. It is important to find a realtor who has experience, has knowledge of the market you are shopping in, one who won’t push you into a sale you don’t feel comfortable with, and with whom you are able to sign an exclusive buyer agency agreement.
Consider interviewing 2-3 realtors before choosing the one who you feel is the best fit for you.
Consider a 15-Year Mortgage
One way to reduce the interest you pay is to shorten the length of the loan. A 15-year mortgage is generally close to a full percentage point lower interest than a standard 30-year mortgage. Sure, the shorter loan term means your monthly payment will be higher. If you can stomach it, however, you’ll drill down the principal balance much faster and pay significantly less over the life of the loan.
As an example, let’s compare a $300,000 loan on a 15-year vs. a 30-year term:
*before taxes and insurance
In this example, a 15-year mortgage saves over $107,000 over the life of the loan!
The lower amount of interest paid does mean there will be less of a tax benefit for those itemizing their deductions. However, far fewer are in this camp after the new tax bill passed at the end of 2017 that nearly doubled the standard deduction.
While it’s great to do a 15-year mortgage if you can, it’s also important to know what you can afford and not overreach.
Compare Your Monthly Payment to Your Income
Owning a home won’t be much fun if you can’t afford to keep it or maintain it well. The benchmark rule-of-thumb for affordable housing is 30%. That is, a household shouldn’t spend more than 30% of their income on housing.
This isn’t a bad jumping off point, but I resist a blanket rule for everyone. That’s because what you should spend on housing depends on many factors like where you live and what your other expenses are.
A better approach to the equation is to look at what remains after all home expenses are paid each month. Is what’s left sufficient to help you accomplish your financial and life goals? As a financial planner, I especially enjoy digging into this and helping families achieve what they value deep down.
Put 20% Down
Put less than 20% down and you’ll likely pay private mortgage insurance (PMI). This is an added expense (that protects the lender and provides no benefit to you) that gets charged each month until you reach 20% equity based on the original loan value, or until you pay for an appraisal in hopes of proving your home value has increased enough to surpass the 20% equity threshold.
Saving the cash for a 20% down payment is ideal. If that’s not feasible, you may want to have a conversation with your financial planner about whether you’re in the right price range. If so, they may be able to look at your assets and identify other ways to achieve the necessary down payment to avoid PMI.
Putting 20% down also may provide a lot more flexibility should house prices decline. For example, if you are only able to put 5% down and home prices drop by 10%, you would not be able to sell your house should there be a reason to move, because you wouldn’t be able to pay off your mortgage with the sales price. If you had put 20% down in this scenario, you’d still be able to sell.
Check for First-Time Homebuyer Opportunities
A strong economy has caused the accessibility of first-time homebuyer credits and benefits to diminish somewhat, but they still exist. Check your state's housing website for information on what’s available.
In Minnesota, www.mnhousing.gov lists opportunities for some first-time homebuyers such as lower interest rates, down payment assistance, and a special reduction or elimination of mortgage insurance.
Don’t Skip the Inspection
With the competition fierce, it might be tempting to sweeten your offer by removing the inspection contingency. This is generally a bad idea. The inspection is your line of defense against potential issues that might emerge after you own the home. Home ownership is too big of a financial commitment not to take measures to understand what you are investing in as much as possible.
Need more help working your way through the home buying process? Check out our recent podcast episode on how to handle the hot housing market. If you want personalized, one-on-one help, Guide Financial Planning is here for you! Reach out today, the introductory phone meeting is always free.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.