Buying a home can be intimidating – a costly goal with a complex buying process. But it’s especially scary in a seller’s market amid tightened lending standards, high prices, low supply, and a global pandemic. Even so, more properties changed hands in 2020 than in the past 14 years, and I was one of those who braved the headwind.
Since I’ve been a longtime NerdWallet writer and data analyst, you might not be surprised that I’ve played with the numbers for hours and made decisions that will ultimately save me thousands of dollars.
However, I am not sharing a complex spreadsheet system or secret formula for choosing a mortgage. Instead, the lessons I applied to my last home purchase – a giant Victorian in small town Kansas – prove that the best financial advice is a starting point, not an edict, to be applied through the lens of your personal circumstances.
Know how the market affects your circumstances
Active listings in November and December 2020 were down about 40% year-over-year nationwide, and that shortage of housing was certainly felt in the small North Carolina town that I’ve lived in for 15 years. I knew unloading my current home, despite its age (around 100 years) and all of its old house flavors (hello plaster walls!), As well as a shared driveway and aging HVAC system, wouldn’t be difficult. I spoke to two local real estate agents who agreed that I would likely have multiple listings in a matter of weeks, if not days.
The writer’s Victorian house, built in 1885 in a small Kansas town, has large oak stairs. (Courtesy photo by Elizabeth Renter)
Selling a home in this market might be a breeze, but buying a replacement could pose challenges. However, I knew I would buy a unique home in an area of lower demand so competition wouldn’t be quite as fierce.
Sidebar here to explain: The demand for my type of dream home is pretty low. I have a thing for big things old housesand not everyone is ready to take over a house built in the 19th century that needs TLC. My only requirement on site was that I was within an hour’s drive of my closest family members.
After deciding to move, it became an obsession to rummage through old house lists during my lunch. And when I stumbled across this – I managed to look past the seller’s furniture – I was fascinated. List price, which suited a tiny town in Kansas, certainly helped.
After taking a cell phone video tour from a local agent and sending family members to tour the house in person, I offered full price. Yes, even without seeing it in person. Just weeks after making a big move, I was under contract with an 1885 beauty with a grand oak staircase, 1960s carpeting, 1980s wallpaper, and countless treasures in the limestone cellar.
A week later, I accepted an offer for my home in North Carolina that was 43% more than what I would pay for my new home in Kansas.
If you think, “Well, congratulations, but I’m not sure what this Cinderella situation has to do with me.” I am not blaming you. While not every shopper has my flexibility or experience, there are some generally applicable takeaways.
What it means for other home buyers
It’s a great time for that sell a house. If you’ve been thinking about selling but are concerned that your home is in need of work now more than ever, you can possibly get away with minimal preparation. Talk to a local real estate agent (or two) to determine the potential for success if your home hits the market today.
There is little supply and competition is fierce at the moment, but not everywhere and not for all households. Buying your next home will be easier the more flexible you can be in terms of features, location and price. And if you are able to move from a hotter market to one with less competition, you can come out of it at a profit.
Follow the rules with caution
Collecting a down payment is usually one of the more difficult aspects of preparing for a home purchase. One way to get around this is to use the proceeds from the sale of your current home to buy your new home. Given the fast-paced, strong seller market we are in, I did not want to load my offer to buy with contingent liabilities that would make the transaction more complex and less attractive to the seller, and I wanted to act quickly.
The ornament of the house on the gable roof. (Courtesy photo by Elizabeth Renter)
To get the lowest mortgage rate, manageable monthly payments, and equity in my new home instantly, I knew I wanted to cut at least 20% on my purchase. I had about a third of that in usable savings. The remainder came from a 401 (k) loan. Cue the collective gasps of my colleagues.
Borrowing against your retirement is a risky move that could and generally is ruin your long-term financial health warned about it. It wasn’t a decision I made lightly: my paychecks would be lower by the time they were paid out, I would be missing out on any return that money would otherwise have made if I was safe in my account and if I lost my job Before the loan was repaid, I had to expedite the repayment or face taxation as income.
But I’ve carefully weighed those risks against the rewards – buying a home I loved in a place I really wanted to be – and the health of my personal financial situation, and found that I could handle it. I repaid this loan with the proceeds of my home sale approximately 45 days after the loan was closed.
What it means for other home buyers
Writing a great offer for a home is not just about the price you are offering. Given multiple offers, or knowing that more might come, a seller will reach out to those who can make the transaction as easy and painless as possible. An acceptable deadline, minimal contingent liabilities, and evidence of your ability to obtain funding are all part of a competitive offer.
Financial advice is not a one-size-fits-all solution. In making money decisions that involve risks, determine what those risks are specific to you. Think about the worst case scenario and the possible odds. Assess if you could weather this storm if it were.
Play with the numbers and then more with them
This is my third home purchase, and the previous two were for 30 year mortgages. This time around, between my larger down payment, the lower purchase price, the low mortgage rates, and selling my home in North Carolina for a profit, I had some flexibility with the repayment term. A 30 year loan would result in incredibly low payments, but a 20 or even 15 year loan would mean paying significantly less interest in the long run.
A younger version of me would probably have gone for lower payments and a longer term – all to cut my monthly bills. But the payments on the shorter term loan would still be manageable (which keeps me under the 36% guideline for debt to income ratio) and would save me tens of thousands of dollars in interest. The thought of owning my house freely and clearly in less than three decades was also very appealing.
I was shopping for a lender which I highly recommend. I chose one whose online platform made it easy to compare loans and gave me control and insight into the entire buying process. Between his tools and NerdWallet’s calculators, I’ve earned some serious miles this mortgage calculator – I spent several hours over several weeks comparing my options and only fully committed to a 15 year mortgage at the last minute.
What it means for other home buyers
Calculate several scenarios and weigh the costs and benefits of each scenario. If the payments on a 15-year fixed-rate mortgage continue to allow you to keep track of your other bills and long-term financial goals like retirement, you will save significantly in the long run. For example, financing $ 240,000 for 30 years at 3% would cost about $ 124,000 in interest, while a comparable 15 year mortgage would cost $ 44,000. If you want to take advantage of extremely low interest rates, then shorter term loans generally offer the lowest interest rates.
Look for a lender and a loan. You’re in the driver’s seat, so you’re buying your financial products versus buying a new car. Gone are the days when your neighborhood banker drew up your loan papers and you were only there to sign on the dotted line. You have options, and that power means finding a mortgage that fits your budget, lifestyle, and long-term financial goals.
While it’s a good time to be a home seller, soaring house prices and a lack of supply could discourage current owners from unloading their existing home for fear of joining the mass of competing buyers. But there are houses to buy – millions of Americans will buy houses successfully this year. You don’t need to expand your house search to include everything within a 1,500 mile radius to be among them. However, flexibility is crucial, as is knowing when and how to apply smart financial rules.