The Covid-19 pandemic helped spur one of the biggest housing boom cycles in history. In 2020, the Federal Reserve slashed interest rates to zero, dropping mortgage rates into the 2% range. Artificially low numbers coupled with the new remote work trend pushed more people to buy more homes in relatively far-off places.
In 2023, we are facing a far more challenging market. The Fed is raising rates to help curb inflation, and mortgage rates have nearly doubled from what they were a year ago.
[READ:How Much Does a New Construction House Cost in 2023?]
If this complex economic scenario has you scratching your head and checking your bank account, you are not alone. Many people are now facing a housing affordability crisis — but not all is lost. There are certain steps you can take to help figure out exactly how much house you can afford, and if now is the right time to buy:
— Get your finances in order.
— Shop around for loan options.
— Stick to the 28/36 rule.
— Find the silver lining.
Get Your Finances in Order
Before you even think about buying a home, make sure your financial house is in good order. Make a list of your assets and liabilities to figure out your debt-to-income ratio
. Pay down any large outstanding debt, check your credit report for errors, and don’t finance any large purchases like a car while you are sorting this out. Your balance sheet will make all the difference when it comes to applying for a home loan.
[READ:How to Find a Real Estate Agent]
Shop Around for Loan Options
One of the biggest mistakes people make is assuming they must stick with their personal bank to finance a home loan. Do your research and find out which institutions are offering the best loan products for your specific needs.
While a 30-year fixed-rate mortgage is likely the safest bet, interest rates are hovering in the high 5s and low 6s. You might want to explore adjustable-rate mortgages where you will pay less interest up front with an opportunity to refinance before the loan adjusts to a higher rate.
Another option gaining popularity right now is called a “buydown”: That’s where the borrower is able to get a lower interest rate by paying discount points at closing. Essentially, buydowns are a one-time fee paid upfront and the interest rate is lower for the loan term.
Stick to the 28/36 Rule
No matter how you finance your home purchase, most experts agree that people should not spend more than 28% of their gross income on housing expenses, and no more than 36% on debt. For example, if you earn $5,000 each month, your ideal mortgage payment should be no more than $1,400 per month. All other debts should amount to no more than $1,800 per month.
If you have too little left over after your mortgage and debt payments to cover your lifestyle expenses, you need to make some financial changes before moving forward.
[Read: Millennial Homebuyers: What the 2023 Housing Market Looks Like for Gen Y and Gen Z]
Find the Silver Lining
Don’t let the headlines stop you. If you find a home you love and have the means to buy it, then now is the time to buy. There is no such thing as timing the market perfectly. If you wait for lower rates tomorrow, you may risk losing out on your dream home today.
Buying real estate is an investment in your future, and one of the greatest ways to build intergenerational wealth. If you look at your home as a long-term growth investment, one you can use on a daily basis, then the initial sticker shock will fade in a few years. A home is not just an investment, it is for consumption. After all, you can’t live in your stock portfolio — but a home is where you will hang your hat, raise your family and celebrate life’s many milestones.
Figuring out how much house you can afford is a tricky exercise, but having a financial road map will help make the process much more efficient. Don’t be discouraged if you don’t get the house of your dreams on the first try — there is a house out there for everyone as long as they are willing to do the work, have a little patience and utilize the knowledge of real estate and mortgage experts to navigate the challenges of the real estate market.
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How to Afford a House in This Market originally appeared on usnews.com
