WARNING! Don't Make These First Time Home Buyer Mistakes

Attention all first-time home buyers! Are you ready to take the leap into homeownership but feeling a bit apprehensive about the process? Don't worry, we've got you covered. In this blog post, we're going to share with you the top warnings every first-time home buyer should know before signing on the dotted line. So, buckle up and get ready to arm yourself with the knowledge you need to make smart and informed decisions during your home purchase. Let's get started!

Interest Rates Are Not Going Down

Not to be the bearer of bad news, but the days of 2.5 and 3% interest rates are gone and more than likely will not be seen again anytime in the next decade. Interest rates for home loans climbed relentlessly in 2022, with the Fed hiking rates 7 times throughout the year, doubling what they were in 2021. This is due to the Federal Reserve's actions to restrain inflation, which indirectly pushed mortgage rates higher. While some housing experts say that mortgage rates have likely reached their peak and expect rates to fall further before stabilizing, they remain cautious given the past year's extreme fluctuations and economic uncertainty.

The latest Consumer Price Index (CPI) said inflation rose by 6.5% in December, down from a 7% increase the previous month. Prior to this, the Fed signaled plans to continue raising the federal funds rate into 2023, though likely at smaller increases. Experts expect the Fed's ongoing monetary policies to continue to put some upward pressure on mortgage rates in the coming months, which are directly impacted by the bond market, which reacts to the Fed's actions. Once the dust settles sometime in 2024, we are more likely to see a 4.5-5% range on mortgage rates become the norm. You can also look at a 2-1 buydown pros and cons.

It Doesn’t Make Sense to Buy a Home Right Now

Hear us out on this one. From a logical standpoint, it may not make sense for everyone to purchase a home at this time. This statement of course is based on the perspective of viewing a home as an investment, while also considering the need for a place to live. A mortgage offers many opportunities including a tax write-off and the chance to build equity. However, the sense of pride and personalization that comes with homeownership should also be considered.

In the past, many individuals have treated their homes as banks and investments, due to the high returns that were being seen. However, with the rising interest rates this is not the case at hand. Luckily, the average American now remains in their home for 13 years, much longer than in the past, so any one who purchased over the past two years should still do well as home values increase in the future. However, there is an exception to this, as the average millennial stays for just 5.5 years. Many millennials entered the buyers market over the past couple of years due to the fact that record low interest rates made it easier to  leave rental life behind and more affordable to become a homeowner. However if these millennials decide to sell after just five years, they’ll likely be closer to breaking even than making a substantial profit as the current time horizon for making a sound financial decision when purchasing a home is 5-10 years. Also, with home values expected to be flat and potentially decline by 10% in 2023, the strategy of "house hacking" or building a rental portfolio within a 2-year time frame is no longer feasible. Therefore, if an individual is not looking to make a long-term commitment, they may be further ahead to continue renting.

Only Buy Now If It’s Right for You

When purchasing a home in the current market, it is important to understand that the focus is not just on appreciation, but also on finding a stable and secure place to call home. While the value of a home may depreciate over time, much like a car, it is still a necessary and important asset for many individuals and families. Similar to holding onto a car for a long period of time, which can result in a lower cost per year than a lease or new car purchase, holding onto a home for a significant amount of time can also result in a lower cost per year. This is because, unlike a car, the value of a home can appreciate over time, potentially resulting in a significant return on investment.

For those considering purchasing a home in the current market, it is crucial to take a long-term perspective and weigh the costs and benefits of both renting and buying. Historically, the value of homes has been known to appreciate over time, providing homeowners with a valuable asset that can be used for financial security, retirement planning, and even passing down to future generations. However, it is important to note that the real estate market is constantly changing and the rate of appreciation may vary depending on various factors such as location, economic conditions, and supply and demand. 

Don’t Get a 3-2-1 Loan

If you are ready to buy your first home, it is important to be aware of certain factors that may impact your decisions along the way. For one, avoid falling for 3-2-1 loans. You've likely heard about these in the news lately, as they've been making a comeback, but the cons tend to drastically outweigh the pros for these types of loans and a professional real estate agent can likely get you a better deal using alternative strategies. For a deep dive into this topic, visit our blog on The Truth About Mortgage Buydowns | Pros & Cons. 

Additionally, it is important to compare the current interest rates, the cost of the desired home, and the current monthly rent payment. If your current rent is 20-25% cheaper, the tax and principal paydown advantages of homeownership may not outweigh the cost difference. However, if the cost is within 5-10% of each other, buying is probably the best option.

Weigh Your Options

If buying does make sense, there are a coupe of lesser known avenues to take towards saving a considerable amount of money on a home. The first of these is purchasing a home currently under a VA loan. The main advantage of purchasing a home under a VA loan is a buyer can take over the seller’s mortgage and assume their interest rate for a low closing fee of $2,000. Additionally, if the property value has increased, the buyer can use the difference to pay the seller, thus obtaining a home with a low interest rate at a significant savings of $550 per month. 

Another alternative to 3-2-1 loans are “subject-to” home purchases. This means that the buyer is taking over the existing mortgage of the property, rather than the seller paying it off. The unpaid balance of the mortgage is then factored into the purchase price. This option is often attractive to buyers because it allows them to take advantage of the current interest rate on the mortgage, rather than obtaining a new one. While buying a home as a subject-to can save a buyer large amounts of money in the long run there are both pros and cons to consider and these can be rather intricate transactions, so please give us a call with any questions to see if this is a good option for your home purchase.

Above all else, remember that purchasing your first home is an important milestone and a wonderful accomplishment. Also, it should be FUN! Yes, there are a lot of moving parts when it comes to buying a home, but just like anything else in life, the more you prepare for it through education, the easier it will be. What’s important is that you make the right choice depending upon what is best for you and your family. And if that means waiting a while before making a purchase, that’s ok too.