Buying a house is probably the largest financial transaction most people will ever take on. Following is why you need to consider purchasing a house if you have access to cash…
Buying a first home can be a pivotal moment in the milestones of life. Many people want the pride of being able to purchase a house on their own without help from family. While most people would probably want to be able to purchase a house themselves, what the market will support versus ability to save are two different things. If your credit and income will support buying a house and you don’t have any down payment funds of your own, but you can obtain those funds from family, pull the trigger. Here’s why…
Let’s say you were looking for a mortgage back in October of 2017 and let’s assume you were looking at an FHA mortgage around 4 percent. Let’s say that mortgage payment per month was $3,800 reflective of principal, interest, taxes, insurance and monthly PMI. Let’s say that you were trying to do the house purchase on your own and had access to gift money but chose to do it on your own instead. Fast forward until March of 2018- interest rates have climbed to approximately 4.75 percent on 30-year fixed-rate money driving that mortgage payment potentially up another $200 per month (for illustrative purposes) for $4,000 per month on the same priced house. Let’s also assume we’re looking in the County of Sonoma where housing prices were lower prior to the fires. Now the mortgage payment could be upwards of $4,200 per month because of the rise of housing prices coupled with rise of interest rates creating the perfect storm so to speak.
Future interest rates are another thing to consider. The Federal Reserve is poised to raise interest rates another four times this year. If the market is moving in an upward trend that ought to be enough motivation for you to consider asking for help from mom and dad or grandma and grandpa for help with the down payment. Market forces could support the situation by allowing you to cash out refinance in the future to pay family back too.
Alternatively, you would need to be to be saving at least 20 percent of your income monthly to purchase a house faster. If your timeline to purchase a house is on the longer timeline saving in the 10-12 percent range is a not a bad number to shoot for. The challenge with purchasing a house in the future especially when you have access to cash is paying more for the same house as well as paying a higher interest rate or risk your borrowing power diminishing as rates rise. It’s a catch-22. Get the gift if you can.
The question a smart home buyer would want to ask themselves “Is the pride of being able to do it on my own worth paying more over the term of a 30-year mortgage or worth paying more for a house in the future?” There are many first-time home buyer programs out there in the marketplace such as down payment assistance or USDA financing which could be an offset to coming up with the cash if gift monies are not on the table. This also includes, but is not limited to CALHAFA, FHA 203h and VA mortgage loan programs.
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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.