June 23rd, 2015
How many times have you heard “Buy low, sell high.” That’s the investor’s maxim right up there with “location, location, location.” The trick is in knowing when to buy and when to sell. Investing in a home is never as easy or as quick to deliver returns as you may wish. We all want to ride the boom and avoid the crash. Here are three ways to buy a home safely.
Buy within your means
Irresponsible lending led to one of the biggest recessions in modern history. Many homeowners lost their homes. You don’t want to join them by buying a home that’s bigger, more luxurious or pricier than you can reasonably afford.
Lenders are facing heavy government penalties for lending to unqualified borrowers, so they’re insisting that lending standards return to historically safe and sustainable parameters.
That means you won’t be able to pay half your income toward housing which was common during the housing boom. Today, you’ll pay approximately no more than a quarter to a third of your gross monthly income for a home.
As your income improves, your home becomes even more affordable, allowing you to meet other life goals, such as adding new members to your family or starting a business of your own.
Don’t try to time the market
Some homebuyers believe that waiting for prices or interest rates to go lower is the way to buy a home. But there are two things wrong with that approach.
First, what is the market going to do? Unless you have a crystal ball, it’s hard to know. Between 2006 and 2011, home prices fell an annualized 7.7% a year, or 27%, according to Fiserv Case/Shiller. Since 2011 and 2014, they’ve gained back that much and more on an annual basis.
Mortgage interest rates follow the U.S. Treasury yields. A quarter point rise in interest rates will cost you roughly $25 more per month. Lock in an interest rate with your lender and don’t second-guess yourself. You’ll have more peace of mind as well as a stronger negotiating position with the seller.
Buy long term
The longer you own your home, the more equity you build. Equity is the percent of ownership you have in the home. Think of equity as money you’ll get back when it’s time to sell.
To protect your equity, reinvest in your home to keep it in top condition. Then when it’s time to sell, your home will be more appealing to buyers and sell for more money than similar homes that aren’t as updated or attractive.
If you buy a new home every few years, you’ll throw away thousands in moving and closing costs. It’s far better to hold on to your first home for as long as you can. At some point, you can turn it into a rental property that produces income for you.
Choose the best home you can for the money and it will return the favor.
Written by Blanche Evans