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Editor’s Note: This story originally appeared on The Penny Hoarder.
Is now a good time to buy a home?
It’s an evergreen question—always relevant—and it’s a highly personal question. Only you can answer whether buying a home makes sense for you at any point in time.
That said, the reality of unpredictable interest rates and the ever-changing housing market will play a role in your decision. And, right now, those indicators are blinking red.
In early 2023, consumer confidence is at an all-time low according to Fannie Mae’s Home Purchase Sentiment Index. Only 17% of consumers believe that it is currently a good time to buy a home. So who is right?
Is now a good time to buy a home?
As 2023 got underway, the dramatic increase in housing prices we were seeing in 2021 stalled. In fact, according to the National Association of Realtors, home prices have decreased for nine consecutive months through October 2022. Not only this, but some experts are of the view that the steady leak may turn into a torrent and the prices are about to decline.
On top of that, fixed 30-year mortgage interest rates are hovering around 6.5% — the highest they’ve been in 20 years.
When asked about the outlook for mortgage rates in 2023, eight industry insiders told Mortgage Report that they expect interest rates to move anywhere from 5% to 9% — a range that may not necessarily last. Get a homebuyer excited.
Inflation may continue to push rates up, while an impending recession may cause them to decline. Ongoing inflation, Federal Reserve policies and fears of an impending recession make predicting the near-term future of interest rates difficult.
That said, if you’re ready to buy a home soon, you have options. You just need to be ready to shoulder that financial burden.
4 questions to consider before buying a home
Ultimately, whether you should buy a home now or not depends largely on how prepared you are and your financial situation more than the market conditions.
Before buying a home – the single biggest purchase most people make – you need to have a solid financial plan in place. There are a few things to consider before making that purchase.
1. How long do you expect to live in this house?
The future can’t always be predicted—life happens, after all—but you should have an idea of any major decisions you may be making in the near future.
Do you hope to get married? Are you planning to have children in the next five to 10 years? How permanent is your current job position? Do you want to stay in that place for a long time?
If any of those conditions are in flux, you may want to put off home buying now. A two bedroom condo can get a little tight once you start having kids. Or when your company asks you to relocate to another city, the home you thought was your dream may become a financial burden around your neck.
The best time to buy a house is when your life is fairly stable, both personally and professionally. That doesn’t mean you need to set everything up perfectly. But you should carefully consider the pros of buying a home versus the cons of potentially moving in the short term — and figuring out what to do with your home — as life changes happen.
2. How much down payment can you make?
Conventional wisdom has always said to make a 20% down payment in order to avoid private mortgage insurance. PMI covers the lender if you stop making payments.
The current median sale price for a home in the US is $359,000. This means the buyer would need to make a down payment of $71,800 to avoid PMI. For most buyers, planning and some aggressive saving will be required before making a purchase.
The more you put down, the lower your mortgage will be – meaning lower monthly payments. So you would subtract the down payment amount and borrow $287,200 instead. Most lenders require a minimum down payment of around 3% to 5%, so you have this option if your budget allows for larger monthly payments (more on that later).
First-time home buyers usually have more options – with lower down payments and lower credit scores. This includes:
FHA Loans: If you qualify, you can consider an FHA loan insured by the Federal Housing Administration. These loans require only 3.5% down and a credit score minimum of 580. Or if you’re able to put down 10%, all you’ll need is a 500 credit score. VA Loans: Department of Veterans Affairs loans are an option for eligible military members and veterans. They do not require a down payment and usually come with lower interest rates. They may require a funding fee which may be included in the overall mortgage. USDA Loan: If you live in a rural area, you may qualify for a loan from the US Department of Agriculture. There is no down payment required for these loans. You must live in an eligible area, however.
Remember, the more you can manage to put down on the front end, the less debt you’ll take on over the course of your mortgage.
3. What about your credit score?
Make sure you know your credit score well before starting the home buying process. That small number will greatly affect your loan options when it comes time to sign a mortgage.
The standard magic number required for conventional loans is 620. Anything between 670-739 is considered “good”. Between 740-799 is considered “very good”. And anything above 800 means you have “excellent” credit. The better your credit score, the better your loan options and interest rates.
Non-conventional loans will require a higher credit score. An example is a jumbo loan, which typically requires a credit score of around 700. Although there are ways to buy a home with a low credit score.
If you’re considering buying a home in the near future, it’s incredibly important to make sure you understand where your credit score stands and how you can improve it over time.
There are many ways you can actively work to improve your credit score – from making payments on time, applying for credit selectively and even asking for a credit limit increase. From taking it to not using it.
4. Have your budget ready?
According to data from the American Housing Survey, the average mortgage payment in the US is $1,100. Of course, this number can vary depending on where you live, how long your mortgage is, your down payment, and your interest rate.
But if only that was what you were expected to pay. It’s easy to forget all the other fees that are associated with mortgage payments. You have taxes, insurance and maybe HOA fees and mortgage insurance – and then there’s all the ongoing maintenance and other monthly expenses that come with owning a home.
How to see if you can afford a house
Let’s use an example. We’ll say you live in Nashville, Tennessee—a booming real estate market, but not out of control. By the end of 2022, the median price of a home in Nashville is $461,000.
We’ll also say you live in a homeowner’s association — and, luckily enough for you, Tennessee has the fifth lowest HOA costs with an average fee of $150 a month.
We’ll assume you have good credit and can get an average interest rate of 6.5% right now.
And we’ll assume in the end that you can manage a 10% down payment on a 30-year mortgage.
Lastly, we’ll assume that your credit score is also good enough to get you a good PMI rate of around 0.99%.
Let’s run the numbers.
Mortgage Payment: The $461,000 purchase price with a 10% down payment ($46,100) nets you a $400,000 mortgage. Including principal and interest, that equates to a monthly payment of $2,622. But this is only the beginning. Taxes: Your Nashville ZIP code — and its associated property taxes — will cost you $288 per month. Insurance: Homeowners insurance runs around $66 per month. HOA Fees: And we’ll tackle the average Tennessee HOA monthly payment of $150. PMI: Next is the PMI, which you will have to pay since you are making a down payment of less than 20%. Your PMI rate of 0.99% comes to a $4,104 annual premium, or $342 per month. Keep in mind, once you reach that 20% equity number, you will no longer need to make this payment. If you made this standard payment each month, and never made any additional payments, it would take less than eight years.
So, all told, you’re actually paying $3,468 a month for your $400,000 mortgage—the $846 that’s added after just the principal and interest.
The question is, potential Nashville homeowners, do you have the flexibility of $3,468 within your current budget? (Keep in mind that you’ll also have to pay for maintenance and repairs on top of that.)
If not, now is probably not the best time to buy a home.
It goes without saying, although we’re saying it now, that your numbers may be very different from where you live. A home in New York City or San Francisco will cost more than one in Nashville, while a home in the rural Midwest will cost much less. (A Midwest state may even pay you to move there.) Property taxes and HOA fees can also vary greatly depending on where you live.
The purpose of this exercise is to show that you really need to know exactly what you’re getting into before making a big purchase like a home.
But what about interest rates?
Whatever is true to say now may not be true five years from now. Through February 2023, interest rates on 30-year mortgages are increasing by 7%. In 2015, they hovered between 3% and 4%. And in early 2021, they were as low as 2.7%.
If you’re ready to buy a home now, even with high interest rates, you can always refinance when rates drop — and history tells us they certainly will.
For our $400,000 example, you would pay approximately $800 more per month with an interest rate of 6.8% than you would with a 3.8% loan. That’s a big difference, and it’s something that should be taken into account as you’re determining whether now is the right time.
So is it a good time to buy a home?
Based on what many experts are saying, as well as how the general public feels about the housing market, this is probably not the best time to buy. We are definitely in a seller’s market right now.
But as you’ve seen, there are a lot of variables involved in how you make that decision. Most buyers are not comfortable right now as home prices and interest rates are very high. But your situation may be different.
Home prices are always changing. Interest rates are always getting adjusted. What we see this time next year could be very different from what we are seeing now.
Know your budget. Know your credit score. Understand how much down payment you can afford and how it will affect your monthly payment. And just be realistic about your current life situation and how it might affect where you live in the near future.