Buyers Wrestle With Stretching Budgets
February 3, 2022
The median home price nationwide is about $358,000, up nearly 16% from a year ago, according to the National Association of REALTORS®. Buyers know they have to stretch their budgets to afford homeownership. But how much can they afford?
Many say they are willing to extend their budgets to the maximum to buy a home. Young adults, in particular, say they’d be willing to empty out their piggy banks to win a bidding war. One in six millennials say they’d even be willing to offer $100,000 or more above the asking price for their dream home, according to a survey released last week by Clever Real Estate.
House hunters increasingly need to know their budget cap before home shopping, real estate and financial experts say. “Head into a house hunt with your numbers in hand.
Know your top number,” Jay Zigmont, a certified financial planner and founder of Live, Learn, Plan, told realtor.com®. “If you can afford a $250,000 house, don’t look at $300,000 houses. You will by nature like the $300,000 houses better and start rationalizing spending more.”
Buyers should seek preapproval for a mortgage, which real estate professionals call a critical first step for setting a budget cap. Banks usually allow up to 28% of gross income as a monthly house payment, Zigmont says. That should include mortgage and all housing expenses, including property taxes, home insurance, and mortgage insurance if needed.
But borrowers with other debts, including credit cards and student loans, need to factor those into their costs. That will help them calculate their debt-to-income ratio, which lenders will also weigh.
“Lenders usually look for a debt-to-income ratio of 36% or less when underwriting your loan,” says Anthony Carlton, a certified financial planner and vice president and wealth adviser at Farther Finance, told realtor.com®. In all, the borrower’s debts, including the mortgage payment, should total about 36% of your pretax income.
Borrowers can turn to online home affordability calculators that can provide a snapshot of what they could afford by taking into account their income and debts and the size of the down payment.
Buyers Rush to Lock In Rates
February 2, 2022
With mortgage rates are on the rise, buyers are watching them closely—and nervously. Their anxiety may be intensified by the rising costs of home prices. Home prices are up nearly 16% compared to a year ago, according to the National Association of REALTORS®’ data.
Some buyers are arranging rate locks to ensure the stability of their mortgage rate as they shop for a home. That way, if interest rates rise further, they can look for homes knowing they have a set rate. For these buyers, the peace of mind of a long rate lock may be worth the extra cost to hold that interest rate.
While rate locks are most commonly for 30 days, buyers can lock rates for 45 days or more. But buyers must pay for a rate lock and will pay more for a longer hold.
Buyers are also looking at buying down their interest rate by paying points to get a more attractive rate. Lenders may offer an option to pay a lump sum upfront to lower the interest rate over the life of a loan. One discount point, in general, costs 1% of the total mortgage and could lower the interest rate by around 0.25%. Purchasing points could save tens of thousands and even hundreds of thousands of dollars over the life of a loan, lenders say, for buyers nervous about rising rates.
Pressure on Rates
However, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, tells buyers not to panic about rates. The Federal Reserve last week announced it would raise its interest rates in March to help mitigate inflation. Mortgage rates, however, typically follow the trend of the 10-year Treasury yield and not the Fed’s key benchmark short-term rates, although the latter can influence mortgage rates.
NAR predicts the 30-year fixed-rate mortgage will rise this year and average 3.9% by the end of the year. Thirty-year rates currently average 3.55%, according to Freddie Mac. “Even with this increase, mortgage rates will remain near historic lows,” Evangelou says.
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