Buying a Home Now: How to Minimize Your Risks

Home prices will continue to rise, although at a slower rate. According to the Home Price Insights (HPI) report of CoreLogic, the monthly increase from May to June 2021 was 2.3 percent, while the increase from June to July 2021 was 0.7 percent. Nationwide home prices in June 2021 increased by 17.2 percent over June 2020. It predicts that by June 2022, the annual increase from June 2021 will only be 3.2 percent.

The highest nationwide annual home price increase was in Idaho at 34.2 percent. Following in the top ten was Arizona at 26.1 percent, Montana at 24.3 percent, Utah at 23.4 percent, Washington at 21.6 percent, Vermont at 21.2 percent, Rhode Island at 20.1 percent, Nevada at 19.9 percent, Oregon at 19.7 percent, and Connecticut at 19.6 percent.

Among the metropolitan areas, the highest annual price increase was in Phoenix at 26.9 percent. Following in the top ten were San Diego at 22.4 percent, Denver at 18.4 percent, Las Vegas at 18.3 percent, Los Angeles and Washington, which are tied at 13.8 percent, Boston at 11.6 percent, Miami at 10.9 percent, Houston at 9.7 percent, and Chicago at 7.8 percent. All these increases exceeded the gains from 2019 to 2020.

On the other hand, there are metropolitan areas that have a probability of seeing declines in home prices and potential homebuyers must monitor these. Springfield, Massachusetts has a 25 to 50 percent possibility of home price decreases. Others in the list have less than 25 percent possibility. These are Worcester, Massachusetts; Chico, California; Ventura, California; and Norwich, Connecticut.

Getting a Mortgage

In the week of August 5, mortgage rates hit new record lows in more than 30 years of weekly surveys by Bankrate when the 30-year fixed-rate mortgage benchmark reached 3.22 percent after falling eight points. Experts are predicting that mortgage rates will fall further.

Potential borrowers are, however, warned to look beyond the mortgage rates offered by lenders and to also consider the closing costs they indicate. As a potential borrower, you must gather all your required personal information, ask for quotes from several lenders, and carefully compare these.

Talking to an experienced mortgage loan officer will help you get a clearer view of your options in terms of the loan amount you can be qualified for and the monthly payments this entails.

Determining What You Can Afford

Do not necessarily take the largest loan amount you qualify for. Most often, lenders use the 28/36 formula in determining the amount of monthly amortization you can afford. This means that your monthly mortgage payment must be not more than 28 percent of your gross income, while the total of all loan payments, including a car loan and credit card payments, must not exceed 36 percent of your gross income. Note that it indicates gross rather than net income.

Your net income is your disposable income after taxes and all deductions from your salary. It is, therefore, smaller than your gross income. What you must do, before you even approach mortgage lenders, is to determine your current average monthly expenses, including existing loan and credit card payments. Deduct these from your net income.

If your company does not automatically deduct a retirement fund contribution from your salary, you must set one up yourself and start paying it. This is essential because you will be relying on this when you are no longer able to work.

It is also important to have a separate nest egg in case you lose your job for any reason. This must be the equivalent of six months to a year’s worth of monthly expenses, including all your current loan payments. This is your buffer while you will be looking for a new job.

You also need an emergency fund for exigencies such as sudden medical needs. If you have children, you must realize that your monthly expenses will be growing as they grow, and you also have to account for educational expenses.

Deduct all these from your remaining net income. What you have left is what you can afford to pay as a monthly amortization for a mortgage. Limit your loan to this monthly payment.

What makes your decision right is not the current mortgage rate nor the home prices and their availability. The rightness of your decision depends on your current financial state and what you can afford now and in the near future. Do not paint yourself into a corner by giving in to the pressure of owning a house that you cannot afford.

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