As one of the biggest financial transactions of our lives, the purchase of a home requires careful assessment of our finances as well as the potential impact of a mortgage. For advice on both buying and owning a home, we asked a panel of experts to weigh in with their thoughts on the following key questions:
Is this a good time to buy a home?
Real estate markets are very regional and location specific, so it can be difficult to state in general terms whether it’s a good time to buy a home. When asked this question, people generally want to know whether housing prices are too high or over inflated. Again, this can be a difficult question to answer as some housing markets are characterized by very short supply and expanding job opportunities which may very well justify year over year housing price increases.
It is important to remember that interest rates are still low and only expected to increase, thus if you are in the market to purchase, waiting may not be in your best interest. Waiting for housing prices to decline may cost you more in the end as any potential gain through lower prices may be offset by a higher interest rate.
What are the most common financial mistakes people make when buying a home and which are most costly in the long-term?
One of the more costly mistakes made by homeowners is purchasing more home than they can really afford. Homebuyers, especially first time buyers, often focus on whether they can make the mortgage payment, forgetting that homeownership comes with significant additional expenses such as higher utility bills, repair and maintenance costs. Another costly mistake is not getting a home inspected as a condition of the sale. Some homebuyers try to avoid this extra expense (generally $300-600) during the home buying process, but this additional cost may pay for itself many times over in the event that a defect is found. By making the home inspection a condition of the sale, the home buyer can often get the seller to take care of the repairs before closing.
Finally, homebuyers often make the mistake of getting emotionally attached to a home and over bidding for a property. This can especially be the case when inventory is low. It is important to remain objective and stay mindful of your budget so that you don’t write an offer with your emotions instead of your head.
If someone is currently over-leveraged and has trouble affording their mortgage payments what steps should they take?
The first step is to talk with your mortgage company. After the financial crisis, many banks and mortgage companies have programs that help homebuyers restructure their mortgage if they run into trouble such as a loss of employment or reduction in salary. Communication is the key here. It is very important that the homebuyer try to make contact with their bank as soon as they know they are in financial distress so that there is more time to work out a potential solution.
Is there any way for an individual to tell if their local housing market is overpriced?
It can be very difficult to determine whether your local housing market is overpriced. Accordingly, a significant concern of homebuyers is whether they are buying at the peak of a market. No one wants to purchase when prices are at their highest, thus you find a segment of homebuyers that try and “time the market.” Timing the market simply means attempting to figure out when prices will change within a market cycle; buying before you believe prices will rise and selling before prices start to fall. The problem with this is that market cycles are notoriously hard to predict, thus in trying to time the market, homeowners will often delay a purchase and only end up paying more in the long run. This may particularly be the case in this current market where interest rates are rising, which will increase the cost of obtaining a mortgage for borrowers.
The Federal Reserve has already increased interest rates twice in the last 5 months with additional rate hikes expected this year. My overall advice is if you are purchasing a home in your local market and plan to be in it for a significant period of time, then avoid trying to time the market and purchase the home that meets both your budgetary and long term functional needs. This will be a better strategy over trying to determine whether there is overpricing in the market.
Are there certain housing markets or circumstances where it is OK to be over-leveraged in mortgage debt? If so, how much is too much?
Over leveraging, by definition, is generally not a good financial situation to put yourself in. If you are already cashed strapped and are attempting to purchase a home you may consider renting, until your financial situation has improved, given home ownership often comes with many hidden and unexpected expenses, which can further deplete cash reserves.