Time to Change Home Buying Tactics

Strategic Decisions in the Game of Life: Golden Chess Pieces and a House on a Chess Board

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Credit Sesame discusses home buying tactics in the current market.

A red-hot housing market over the past couple years has made things tough for would-be home buyers. That may be changing in some ways, but the path to home ownership is still a steep challenge.

Preparation is the key. While the booming market has given buyers a fear of missing out, buying a home is not something you should rush into.

Taking a little time to get your finances fully lined up may mean it takes longer for you to get into the market, but there are a few home buying tactics that may increase your chances of closing a deal successfully.

Lower sales volume may cool prices

A recurring theme in stories about real estate recently has been that buyers have to bend over backward to meet seller demands. This includes making purchase offers that are above the asking price, and waiving contingencies for things like home inspections.

Demand for housing has been given added fuel by investors. In addition to competing with other buyers who are looking for a place to live, people in the market for a home have also been bidding against professional investors who are buying a large volume of houses.

This isn’t a healthy environment for individual buyers. Having to stretch to higher offer prices could impact your budget for decades to come. Giving up protections like home inspections could make you regret having reached a deal on those terms.

At last though, there are signs that the market may be cooling off. The National Association of Realtors reported that home sales fell for the fifth straight month in June.

Sales in June were down 5.4% from May’s volume, and 14.2% from a year earlier. Meanwhile, the supply of houses on the market increased by 9.6% in June.

While this has not yet brought home prices down, the supply-and-demand fundamentals of fewer sales and more homes available should at least cool the pace of housing price increases.

In turn, slowing price increases could calm down some of the investor demand that has contributed to the hot housing market.

As always though, real estate conditions vary greatly from one area to another. From the time you start to think about buying a home, you should pay attention to local conditions to see what trends in your area are like.

Higher mortgage rates eat up more of buyer’s budgets

While easing demand might take some of the air out of housing prices, buying a home isn’t becoming more affordable.

That’s because of the sharp rise in mortgage rates. According to mortgage finance company Freddie Mac, 30-year mortgage rates are up by nearly 2.5% so far this year.

That rise in mortgage rates substantially increases the cost of borrowing. As a result, more of each mortgage payment has to go towards interest payments rather than principal. That leaves buyers less money to put towards the price of their homes.

While rising interest rates might put a damper on home prices, that won’t create bargains for buyers who have to borrow to finance a purchase. It just means shifting more of your budget from the purchase price to interest payments.

Bigger down payments are especially important

These conditions make it worth considering making a larger down payment. This can help make home buying more affordable in two ways:

  1. A larger down payment makes a mortgage loan less risky. That might earn you a lower interest rate.
  2. The bigger your down payment, the less you have to borrow. That means more of your money can go towards the price of the house rather than to interest payments.

Saving up for a bigger down payment would be a real shift in home buying tactics from the eagerness to jump into the market that home buyers have shown over the past year or so. It would take more time, but it could make for a better, more affordable long-term decision.

Think ahead when choosing a mortgage

Speaking of thinking long-term, your choice of mortgages should be based on your long-term needs. That doesn’t necessarily mean choosing the loan that gives you the lowest payment at first.

As mortgage rates have risen, the percentage of people choosing adjustable-rate mortgages (ARMs) has risen. That may be a decision some of these home buyers regret in the future.

Most mortgages have fixed interest rates. The interest rate you sign up for will be the same throughout the life of your loan. That means your payment won’t change.

In contrast, ARMs are designed to periodically reset their rates based on market conditions. If rates go up, your monthly loan payment will get bigger.

The attraction of ARMs in today’s environment is that they offer a lower interest rate initially. However, that means taking the risk of paying higher rates later on. That could even result in your payment rising to a level you can no longer afford.

So, when considering an ARM, think about whether a cheaper initial payment is worth the risk of eventually getting priced out of your own home by rising interest rates.

Work on your credit while saving for your down payment

Besides shooting for a larger down payment and avoiding exposure to rising interest rates, another tactic for today’s housing market is to work on improving your credit before applying for a mortgage.

The better your credit, the lower your interest rate is likely to be. Given mortgage loan terms are often for 30 years, shaving a little off the interest rate you’ll pay over that time can make a huge difference.

Polishing up your credit score can take a little time. However, if you use the time when you’re saving up for a larger down payment to also work on your credit record, everything can come together by the time you’re ready to enter the market.

The bottom line is that higher prices and rising interest rates have made it harder to afford to buy a home. Home buying tactics like using a larger down payment and improving your credit score can push back on those rising costs and make buying a home more affordable.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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