There’s a home buying craze in the air, and the fever is spreading fast!
Everyone we know is either buying a home, or thinking of buying a new home.
But is it really worth it?
📸: Urban Outfitters
In true Penny style, we’re bringing you answers to your top home buying questions, including:
Plus, the ultimate Q: Should you invest in your dream home now…? Or should you wait?
(PS. If you’re not familiar with housing lingo, like REFI and whatnot, we created a cheat sheet for you! Just scroll down to the end.)
I know, right?! Basically, the COVID pandemic changed a lot of things, for a lot of people.
Yes, the pandemic hit tons of people financially. But it was also a great time to cut costs and save more.
Generally speaking, people who lived in cities moved out to the suburbs (reducing their overall home expenses), paid down their credit card debts, and saved more during the pandemic.
After a looong time flying high, interest rates lowered to 2.5% - 4% for your mortgage payment.
And, according to the federal reserve bank, there are no plans to increase interest rates until 2023! Meaning the chances that you could lock-in historically low interest rates for at least a few years is high.
The home buying craze – and equally crazy pricing – is the result of basic supply and demand:
…People finally have money to buy (and want to get out of the city, and into their best suburban WFH life).
…Interest rates are low (creating the perfect opportunity to buy).
Now, there is soooo much demand for new homes, but not enough houses available!
Driving housing prices through the roof! (pun intended ;) )
Bottom line: no one knows.
You could read every Wall Street Journal article and not get a straight answer on this. (Believe me, we tried.)
Again, according to the federal reserve bank, there are no plans to increase interest rates until 2023. But that doesn’t mean things won’t change. Nothing is set in stone.
You cannot time the real estate market.
You cannot time the stock market.
No one ever knows.
The only truth is: Home prices will follow natural supply and demand rules.
If interest rates go up, home prices will go down.
If the world reopens to a more “normal” post-COVID time, and companies require people to go back into the office (WFH no more), it’s possible people might move back to the cities… and sell their homes. Again. Which could also drive home prices down.
If interest rates stay as low as they are, home prices will plateau at higher rates.
Yay! You’re making money moves. Wooohoooo! Generally, you have two options (15 year or 30 year). Here is an example of a Penny gal.
Without considering your full financial picture, income, or any other factors, option B is the winner.
Why? You pay much less interest over time, and own the house much earlier. That’s a natural win-win.
BUT… As you can see, the payment for option B is a lot higher. That's less cash money for other things in your life.
So, the real question you want to be asking is: Do you want to commit to paying $2,900 a month?
Depending on your long-term goals, option A: the classic 30-yr mortgage, is waaay better once you factor everything in.
With the extra $900 a month here, this gal could easily:
That’s a triple-win!
You can, but ONLY IF:
That being said…
You don't have to sell your house to extract its full value.
You could do a home equity loan, which essentially adds to the balance of your mortgage.
How it works:
Depending on what your goals are for selling your home, this may be a much better alternative for cash in your pocket (and without the headache of a mortgage closing).
Sometimes herd mentality leads to doing what everyone else is doing.
BUT… just because your friends are buying $1.5M houses doesn't mean you have to.
(A recent survey found that 64% of millennials regretted buying their current home. Don’t let this be you!)
You can't compare your mortgage payment to your rent payment, and make a black-and-white decision from there.
Owning a home has many more expenses. Think: property taxes, home insurance, HOA fees, sewer, furniture, repairs… the list is endless!
When you consider buying a new home, ask yourself:
Think of YOU and your money goals. No one else.
Of course, we all dream about that charming, spacious house we've always wanted. But buying a house can make you cash poor.
Don't let this craze push you into a situation where you are going to feel stretched with the monthly payments… And further away from your financial goals.
PS. Some people are cashing out their 401ks in order to make the down payment -- scary stuff. Please don't EVER do that!!! Your future self will thank you. Literally. Like, $1 million times over.
PPS. Not sure what your money goals are? Take our free money maker quiz and find out! We give you personalized recs based on your financial situation.
Your home buying, home financing, and housing market mini-dictionary.
The current value of your home.
The value of your home for property tax purposes only.
Reapplying for a mortgage to reduce your interest payment.
A type of mortgage payment where you are paying more than just the interest rate (this helps you pay off your mortgage quicker!)
Building or community fees to fund maintenance for stuff like landscaping, gyms and swimming pools, building insurance, and so on.
Down payment = an initial up-front payment, similar to a deposit. Usually 20-30% of the house value.
Mortgage = recurring payments you make every month, to pay the remainder of your home loan. Like rent, but paid to your bank/lender.
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