Do you have what it takes to buy a house?
Three ways to know if you're ready to be a homebuyer.
The homebuying process is packed with questions: How are the schools? Is this the best price? Will the next-door neighbor ever put away that rusty trampoline in the backyard? And how long can you put up with the horrifying Mad Men-style orange wallpaper in the basement?
But of all the important questions—price, location, wallpaper—one of the most vital often goes unasked. Namely, is this the best time for you to buy a house?
Interest rates may be on your side
Interest rates on mortgages are still near historic lows, which is welcome news for most homebuyers because low interest rates mean the purchaser will pay less interest over the life of a loan. This can add up: Every percent of interest on a 30-year, $100,000 mortgage translates to roughly $20,000 in additional interest if you keep the loan for the full 30 years.
With that in mind, it's not surprising that many homebuyers are eager to take advantage of the present low interest rates.
"Interest rates fell sharply from late 2018 through the first three months of 2019, which has caused some buyers to jump off the fence and pursue properties," said Michele Hammond, a home lending advisor at JPMorgan Chase. "These former fence-sitters wanted to lock in those lower rates."
Is your down payment big enough?
Do today's low interest rates mean you should buy that colonial-style house with lush curb appeal? Maybe—but keep in mind that there are other factors, like your down payment, that could affect your decision to buy or hold.
Although the Federal Housing Administration requires a minimum 3.5 percent down payment for FHA loans, mortgage lenders often require private mortgage insurance for down payments below 20 percent. And, while you might want to go with the lowest possible down payment, there's a lot to be said for spending more time and saving up a larger down payment. To begin with, the bigger your down payment, the smaller the loan that you'll need to take out—and the less money that you'll end up spending on interest.
Larger down payments also improve your loan-to-value ratio (LTV), which lenders use to decide whether or not to approve a loan. To calculate LTV, simply divide the amount of the mortgage by the appraised value of the property. As your down payment goes up, the LTV ratio goes down—and so does your interest rate.
There's another reason to spend a little more time saving: While you might have your down payment squared away, there are a lot of additional costs, like title searches, that can add to the expense of the homebuying process. "I've seen instances where purchasers who set aside money for their down payment happily discover they have a little money left over—only to realize that they grossly underestimated the overall cost to close the deal," says Hammond. "Closing costs can easily reach another five percent of the purchase price."
Recruit your homebuying support team
If you decide to wait before making a home purchase, use the time wisely. You can start by building a team of people to help you with your decision. Real estate agents, mortgage experts, attorneys, and independent home inspectors can provide you with critical information regarding nationwide and local trends that are impacting property values, various funding options, and the true state of a property's condition and worth.
Hammond suggests asking friends and family for their recommendations when you're building your team. "As a mortgage banker, I hate to hear stories about homebuyers who experience financial stress because they didn't understand transactional costs or other closing costs associated with purchasing," she says. "These situations are entirely avoidable by surrounding yourself with the right people."
When it comes to timing, relax. If this isn't the right time to buy, don't jump into something that you're not prepared for. Instead, use your time to shore up your financial position, and gather the professionals you need to make the best decisions for you and your family. And when the time comes—trust your instincts about replacing that funky orange wallpaper. It's awful.
James Thompson is a business, culture, and technology writer who lives in Brooklyn, New York.