number of U.S. house sales

Are you planning to buy a home this year?  As shown in the chart below, the rate of home buying dropped during the Great Recession but has picked up pace in the last few years.

Current mortgage interest rates are still low, so now may be a good time to purchase a home if you’re in the market. As the Federal Reserve increases benchmark interest rates in the coming months, it’s likely that mortgage rates will rise as well. Since buying a home is a significant investment, it’s important to understand the financial success factors before making an offer.

Source: https://www.statista.com/statistics/219963/number-of-us-house-sales/

Know your budget before you begin house-hunting. 

You can use an online mortgage calculator to get an idea of how much you can borrow based on a given monthly mortgage payment. Keep in mind that commission-based real estate professionals have an incentive to convince you to buy the most expensive property you can afford. However, the more you spend on your home, the less you’ll have available for other items such as food, clothing and travel.  You need to determine your price limit and communicate it clearly to your real estate agent.  Other budgeting considerations include

  • At some point during your ownership, you will likely need to make home repairs.  You must plan to set money aside for that, too.  If you’re buying a fixer-upper, you’ll need repair funds immediately; otherwise, you can create a maintenance fund over time. 

  • If your new home is a condominium, the homeowner’s association (HOA) fee will be added on top of your mortgage payment.

  • Property taxes and home insurance are important budget considerations as well.

  • If your down payment is less than 20% of the purchase price, you will also have the added cost of Private Mortgage Insurance (PMI), which can run between 0.3-1.5% of the loan amount annually.

Get a mortgage preapproval.

Having a mortgage preapproval will make it easier to buy a home that you like in a seller’s market. A prequalification is not sufficient to convince a seller that you’re financially capable of buying a home.  The more rigorous preapproval process will serve you better.  To grant a preapproval, the lender will require that you prove your income, assets, and creditworthiness (see http://www.investopedia.com/mortgage/pre-approval/ for more information on the documentation needed).  Here are some pointers when preparing for a mortgage preapproval:

  • The higher your credit score, the lower your interest rate. If you don’t know your credit score, it’s best to find out well in advance of house-hunting in case there’s a problem that has to be addressed. Many credit cards now offer credit checks as a service, or you can obtain your free annual credit report from one of the credit reporting bureaus through annualcreditreport.com.

  • You should shop around with different mortgage lenders to get the best rate. Within a 45-day window, all mortgage lender credit checks are counted as a single inquiry, so they won’t hurt your credit score.

  • If you or your spouse is age 62 or older, you may qualify to use a reverse mortgage to buy your home. For more information, the National Reverse Mortgage Lenders Association is a good place to start.

Know your location.  

Bear in mind that your home is not just a place to live, it’s also an investment. Is it located in an area likely to hold its value in a real estate downturn? If you’re planning to live there for decades, the resale value may not be as important since you will likely ride out any short-term dips in property values. Otherwise, you could end up in the unfortunate situation of trying to sell your home in the middle of a slump. You may also want to consider the rental income potential of the property.

Being prepared will help you find a home that meets your budget and can appreciate down the road, without constraining your life in other areas. Happy house-hunting!

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