Buying a home right now isn’t easy - prices are high, interest rates have climbed, and there aren’t as many homes on the market. If you’re a first-time buyer, it might feel like homeownership is well out of reach. The competition is tough, and finding something in your price range can be frustrating.
But don’t give up! Homeownership is still possible with the right strategy. By making informed financial decisions and exploring smart buying options, you can significantly improve your chances of success. In this article, we’ll share insights to help you navigate today’s market, manage the homebuying process, and make ownership more affordable.
The Home Price Reality Check
Before diving into the home search, it’s important to get a clear picture of local prices. Start by researching the median home price in your area. This figure represents the middle of the market, meaning half of homes sell for less and half for more. The median price gives you a solid starting point to understand what’s realistic and how your budget compares to the market. Knowing this upfront can help you set expectations and focus on homes within your reach.
Too often, people go into the homebuying process with prices and mortgage rates from years ago in their minds. The record-low rates during the COVID-19 pandemic were not typical and are unlikely to drop to those levels again anytime soon. Instead, focus on what’s within your price range for your first home. Many people strategically use their starter home as an opportunity to build equity – which can be used to make buying their forever home more affordable.
How Much Can You Afford?
Before you dive headfirst into house hunting, honestly examine your finances and determine how much you can afford. It’s essential to understand how a mortgage payment will fit in with your current income, monthly bills, debt repayments, and the rest of your finances.
While online calculators can help you determine what’s feasible for your budget, there are also two financial rules of thumb that assist in the process:
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Rule #1: Your maximum mortgage amount shouldn’t exceed 2.5x your annual income.
Lenders use the 2.5x rule to initially gauge your price range. If you and your spouse earn a combined income of $150,000, your price range would be around $375,000 ($150,000 x 2.5). This figure is a good starting point when estimating a reasonable budget.
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Rule #2: Your mortgage payment shouldn’t exceed 30% of your monthly budget.
Using your combined income of $150,000 from the previous figure, your monthly gross income would be $12,500. 30% of this figure is $3,750 – the maximum amount you should put toward housing expenses monthly.
It’s crucial to remember that your monthly mortgage payment will likely include other costs, such as property taxes and homeowner’s insurance.
Understand Your Borrowing Options
While house hunting can be exciting, the financial side of the homebuying equation can be a bit more confusing and stressful. There is a slew of mortgage options available, each with advantages and drawbacks. Factor in specialized loan programs, like First-Time Homebuyer options, VA Loans, FHA Loans, and the whole process can have you wondering how anyone ever buys a home!
Before you dive too deep into the rabbit hole of home financing, it helps to determine your homebuying goals. Are you looking for a starter home that you will outgrow down the road? Or are you searching for your forever home? Depending on your plans, you can use mortgage loans to your strategic advantage.
For example, two of the most popular mortgages are Fixed Rate vs. Adjustable Rate.
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Fixed-Rate Mortgages:
The interest rates are fixed and will remain unchanged throughout the life of your loan. This option is ideal if you favor consistent payments and plan to live in the house long-term.
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Adjustable-Rate Mortgages (ARMs):
With an ARM, the first several years of your mortgage will typically include an introductory period with low, fixed rates. Afterward, the interest rate can adjust with the current market. For example, a 7/1 ARM will provide a 7-year lower-rate intro period. After seven years, the mortgage rate can adjust annually.
ARMs are a wise decision if you don’t plan to live in the home long term, such as with a starter home. If your goal is to buy a property to build equity and you intend to sell the house before the intro period ends (e.g., within 5 years), your rate will never adjust. It’s a strategic way to lock in lower interest rates and reduce your monthly mortgage payments.
Adjust Your Expectations
Everyone has a vision of their dream home - whether it’s an open floor plan, a big backyard, or a prime location. But in today’s market, finding a home that checks every box and fits your budget can be tough. If you’re struggling to find the right place, it might be time to rethink your must-haves versus nice-to-haves.
Most first-time buyers don’t land their forever home right away - and that’s okay! Your first home is a stepping-stone, helping you build equity and move closer to the home you truly want down the road. Stay flexible, focus on what matters most, and remember - homeownership is about progress, not perfection.
The Greatest Barrier: Upfront Costs
For many first-time buyers, the biggest hurdle isn’t the monthly mortgage – it’s the upfront costs. Between the down payment and closing costs, buying a home requires a significant chunk of cash before you even get the keys.
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Down Payment:
Depending on the mortgage you choose, down payments can range from 5% to 20% or more. To put those figures into perspective, let’s use the $375,000 home from earlier. Your down payment would be between $18,750 and $75,000.
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Closing Costs:
This figure includes fees and costs associated with buying a home and contains prepaid property taxes and homeowner’s insurance. Closing costs typically range between 3% and 6% of the home price. With our $375,000 house, that’s an additional $11,250 to $22,500 due upfront.
Glancing at these figures can make homeownership feel out of reach. But don’t let the numbers discourage you - there are ways to break through this barrier. Start saving early, explore loan programs that offer lower down payment options, and research grants or assistance programs that can help lighten the load. With the right plan, you can take that first step toward owning a home.
These upfront costs are much easier to manage when buying your forever home down the road. The income you make when you sell your starter home can be used to offset these costs – making future homes much more affordable.
We’re Here to Help!
While the journey to homeownership may feel like an impossible quest, it can be achievable with proper preparation and understanding. Taking the time to plan out your home-buying journey can make all the difference when it comes to finding a house that fits your needs and your budget. By maintaining a patient and diligent approach, you’ll be on your way and in your dream home before you know it!