Interest rates are at a record low. This means that those who are wishing to buy a home might find that now is a good time to buy. But is it? To determine if now is a good time to buy, here are a few things to consider.
REVIEW YOUR FINANCIALS
Before you decide if you’re ready to buy a house, it’s important to review your financials. Since your unique financial circumstances play a large role in your mortgage approval, you’ll want to make sure your financial health is in tip-top shape.
To do so, you should review your:
- Down payment: Homes come with a lot of expenses, including coming up with a down payment. Saving for a 20% down payment is a great benchmark when applying for a home loan. While some loans may require less, having a substantial down payment will lower your monthly mortgage payments and the total amount you must borrow. Additionally, you will want to have excess funds available to pay for closing costs, insurance, taxes, and other costs that come with homeownership.
- Credit score: When determining your creditworthiness, lenders will review your credit score. Those who have good credit scores receive the most favorable rates. Credit scores from 670 to 739 are considered good; 740 to 799 are considered very good; and above 800 are considered exceptional. Credit scores from 580 to 669 are considered fair, which may not provide favorable rates or disqualify you from getting a mortgage.
- Debt-to-income ratio: Lenders will also look at your debt-to-income ratio (DTI) to determine how much of your income goes toward debt. A high DTI may reveal that you’re overleveraged and might not be in a position to take on more debt. Conversely, if you have more assets, lenders may determine that you’re less risky than those with few assets.
EVALUATE YOUR LIFESTYLE
It’s also wise to evaluate your lifestyle to determine if you’re ready to buy. For example, is there a chance you could relocate with your current job in the next few years? If so, you may either want to rent for a while until you’re sure you’ll be in one location for a long period.
Since homes come with a lot of expenses, you might be wasting money if you buy and then sell your home within a few years. Also, moving shortly after a purchase doesn’t give your home time to appreciate in value. Therefore, you could lose money on your investment.
COMPARE INTEREST RATES
Even if you determine that it’s the right time to buy, you should still evaluate current market conditions. While interest rates are currently at an all-time low, this trend may not last forever. Therefore, before you buy, observe the current mortgage interest rates.
Since interest is the cost you pay to borrow money, you’ll want to find the lowest rate available. Even if rates are low, you should also compare your options. A lot of lenders will let you prequalify and determine what rate you might be eligible for after you apply. Prequalifying for a loan will help you decide which lender may provide the most favorable rates.
TAKE THE TEMPERATURE OF THE REAL ESTATE MARKET
In addition to comparing interest rates, you should take the time to understand the local real estate market you’re interested in. Local economics plays a key role in the real estate market.
For example, if a large corporation is moving its operations to another city, you may see a spike in home sales. When this happens, you will likely see a high supply and low demand for homes. It may provide an opportunity for buyers to purchase a home at a competitive price.
On the other hand, if a popular company is building a huge office in your desired city, there will likely be a big demand for homes. Sellers in your area will be able to raise their prices to meet the demand and will be less willing to negotiate on the prices of their homes.
THE BOTTOM LINE
Before you take steps toward purchasing a home, you should do plenty of research. Take the time to understand your financial situation as well as what the real estate market is like in your desired area. This way, when it comes time to buy, you will be a confident and well-educated buyer.