Among all the changes that the COVID-19 pandemic brought us in 2020 and much of 2021, one of the most universally felt was the unprecedented amount of time spent at home for millions of Americans. As many companies shifted to a remote-work environment, workers reduced their commutes to walking from the bedroom to their computer.
Even as the country cautiously returns to “normal,” dedicated home offices are now an essential part of the home for many. Whether related to the pandemic or other life events, 2021 has seen many Americans taking a closer look at the walls around them and the challenges of a home office. Some may be able to solve their issue with a renovation of their space, whether it be a simple weekend project or paint job, or something much more significant in scale. Home improvement retailer Lowe’s saw an annual sales growth of $17 billion in 2020, according to their CEO Marvin R. Ellison, who cited a “continued focus on the home” for consumers as the main driver for the substantial sales numbers. The increased demand for home improvement and renovation materials, paired with weather and supply chain issues, has caused a dramatic increase in the cost of materials, particularly lumber.
Is it Time to Make a Move?
Others, however, are facing a different question: is it time to make a move? Maybe your home suddenly feels small, or perhaps you’re now facing more space than you care to manage. This question, paired with enticingly low interest rates, has driven multitudes to the same conclusion: it’s time to buy a house! That feels much easier said than done in 2021’s housing market. Low inventory and motivated buyers have created an extremely competitive market. In May, the Associated Press reported that the number of unsold homes hit a record low in the spring of 2021. There were 1.16 million available homes at the end of April, and homes averaged 17 days on the market before selling. Those who decide to list their homes seem to instantly receive multiple offers, many over asking price, pitting buyers in a race to differentiate themselves in a sea of competing bids and buyer letters. Many homebuyers are willing to expand the limits of their budgets and even empty the coffers to secure that coveted listing. The risk of such a heated housing market is that buyers could be left with depleted savings and higher than anticipated expenses hindering future savings goals.
Where to begin?
So how do you navigate this labyrinth of obstacles? Is this really the time to buy, or should you wait? Maybe you’re ready to pull the trigger on that addition or home renovation but aren’t sure what you can afford. Or perhaps you’re trying to figure out how to nab that dream home without losing your shirt in the process. Quite simply, the best place to start is by revisiting your goals. Making a change right now can feel imperative, and maybe for you, it is. But don’t get lost in the hype of a break-neck housing market. Before you engage a realtor, tour a home, hire a contractor, or even open Zillow, you should know where you stand financially. Here are questions to consider before you take the next step:
- What can you afford? It can be easy to get swept up in the action of home buying. Multiple offers are commonplace in today’s market, and you’ll want to be as competitive as possible when the right home comes along. That’s why it is so important to start with an honest look at your financial situation before stepping foot in a potential space. What other debts do you have? Do you have access to liquid resources for the purchase or at least a down payment? What additional costs may come with the purchase? HOA fees, homeowner’s insurance premiums, real estate taxes, and even utility bills can be significant expenses that aren’t reflected in the asking price.
- Should you take out a mortgage, and if so, how much cash should you put down? “Cash is king!” Cash offers bring a clear advantage when it comes to today’s competitive housing market. While there are certainly advantages to buying your home outright, not everyone has the kind of liquid assets necessary to buy that dream home. Fortunately, extremely low interest rates and various financing options make mortgages an excellent alternative for many home buyers who aren’t willing or able to make such a steep cash outlay. When considering a mortgage, an important factor is private mortgage insurance (PMI). PMI allows a mortgage lender to lower their risk for borrowers who put down less than 20% of the purchase price. PMI will undoubtedly add to the monthly expense, but the rate can vary based on the down payment amount, your credit score, and other factors. There are programs available, especially for first-time home buyers, to avoid PMI. Otherwise, you’re better off putting down at least 20% if you can. Of course, it’s always important to review the terms and make sure the loan fits into your overall financial plan.
- How does purchasing a new home impact your other financial goals? Would buying this home delay your retirement? Will you have to forego family trips to make your monthly mortgage payments? It is essential to view the purchase through the lens of your overall financial life. There are opportunity costs associated with every major decision. You may need to consider what you’re willing to give up to make that next house a home.
- Are there construction loan options available to you? Whether you’re considering upgrades to your current home or buying a fixer-upper in need of an overhaul, construction loans can help bridge the gap between you and your newly renovated home. Many banks and institutions have construction loan offerings, but the terms may vary greatly, so it’s best to shop around. What are the interest rates offered on the loan? Will you have to complete multiple closings if you roll to a traditional mortgage? What requirements does the institution use to qualify you for the loan? These are all critical questions to ask before breaking ground on the project.
Knowing the answers to these questions will ensure you stay on the path to financial independence. Your RCG advisor can walk through this decision with you, step by step, to develop a plan and help you meet all of your goals for both the short and long term.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.