When Buying a Home Isn't The Right Move
Today's extremely low rate environment has allowed homeowners to refinance their mortgages and prospective homebuyers to lock in better rates. Not surprisingly, mortgage lenders try to make it sound like now is always the perfect time to purchase a new home.
It may be the case for some Americans, especially those who live in major metropolitan areas -- 88 percent of which saw increases in home prices in the fourth quarter of 2012, according to Freddie Mac. But, low rates and rising home prices doesn't mean it's time to buy.
In reality, there are plenty of good reasons to wait before taking on the burdens that comes with being a homeowner.
If any of these situations match your current position, then you have good reasons to think twice before buying a house.
The unattractive credit score
Whether you have made mistakes in the past or you've just never had a loan or credit card before, a poor credit rating usually means that you will pay high interest rates on your mortgage, if you can even get approved for the loan in the first place.
Without good credit, you should focus on improving your score before you start applying for home mortgages. Most of the lenders will turn you down, which means you will just waste your time and money. Applying for credit -- whether or not you're approved -- also results in a ding to your credit score. A few lenders might give you offers for a mortgage even with a poor credit score, but those loans will have extremely high interest rates.
It's better to take some time, work on your credit score and start looking for mortgage offers once you have a credit history that's more appealing to lenders.
The lacking down payment
Before the recession, some lenders handed out mortgages without any down payment requirements. Those days have passed. Quite frankly, this is a good thing for the average home buyer.
Today, you can probably buy a home if you have a down payment of at least 10 percent. Short of that, many lenders won't even look at your application.
First-time homebuyer programs often allow buyers to purchase a home with a smaller down payment, if other credit criteria is met – but it still doesn’t automatically mean you can afford the home.
Even at ten percent, which is a sizable chunk of cash, you will have to buy private mortgage insurance (PMI) that protects your lender should you default on the loan. Depending on the lender, you might have to pay for PMI until you have built at least 20 or 30 percent equity in the house.
That means you spend a little more money every month just because of your down payment's size. If you want to get the most out of your money, save until you can afford a 20 percent down payment and avoid having to pay for PMI.
The inflated home prices
If you already have a neighborhood picked out, then you should pay close attention to the housing prices in that area. Housing bubbles burst when they reach ridiculously high, unsustainable values. After all, a house is only worth what someone will pay for it. If a home seller's expectations exceed the homebuyers' expectations, then the price could fall quickly.
Inflated prices happen all the time. You can think of them as miniature housing bubbles that only influence a specific neighborhood or street. Like all bubbles, they will eventually burst.
Instead of rushing ahead and buying an over-priced home just because you can, sit back and wait a while to see how the market moves. You could save thousands of dollars just because you bought at the right time.
The major life change
Major life changes can inspire a person to make other changes. Getting married might make you think that you have to move out of your apartment so your future children can enjoy a bigger house with a yard. Similarly, a breakup could change your perception so that you just want to get rid of everything you have and start life over fresh.
These feelings are normal, but they could encourage you to make bad home-buying decisions. It's best to purchase a home when you can think rationally about every aspect of the exchange. Does the home loan have a good interest rate? Does the house really match your needs? Is the neighborhood becoming more attractive or less appealing?
It's hard to think about these factors rationally just after a major life change.
There are good times and bad times to buy a house. It's important to know the difference so you can avoid costly mistakes.