Tips for Buying a House in a high-Inflation Environment
Admittedly, it is often difficult and expensive to buy a home during high-inflation. It is, however, not impossible! Experts in the industry believe that there are several techniques that can help lessen the impact of high inflation on your investment plan.
Here is what you can do if you really want to buy a house this year despite high inflation:
1. Purchase a home as soon as possible
With additional Fed rate hikes and higher costs on the horizon, experts advise that purchasers should act quickly if they want to avoid more price increases.
According to Rob Heck, Vice President of Mortgage at Morty, (a mortgage lending marketplace), says:
rising inflation means that cash now holds more value than it will be in the future, assuming inflation continues to grow. Buying now could be less expensive than buying later, especially if housing prices continue to rise.
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Simply put, if you buy now, you will get a price and a mortgage payment in today's dollars, not the future's less valuable dollars. By purchasing early, consumers can also avoid ballooning rent prices, which are rising faster than property prices in many areas. According to Realtor.com, the median asking rent in March 2021 was up by 17% from the previous month.
2. Adjust your house budget — and factor in other higher costs too
"Buyers should examine their total budget and figure out what their final home price will be," Lindsey Bell, Chief Markets and Money Strategist at Ally, advises. "Basically, they need to be able to tell when it's time to leave."
If you wish to spend more than you did before, you'll need to account for a larger down payment (20% of a $400,000 house is a lot more than 20% of a $350,000 house), greater living costs, and rising prices of ancillary items and services, such as moving and home upkeep and repairs.
"Movers, renovation costs, utilities, property taxes, and insurance will all increase," says Dennis Duban, CPA and founder of DLD Accountancy. "Buyers should be mindful of these expenditures as well when making a budget."
3. Broaden your search for a home
You might want to rethink your house-hunting strategy once you've adjusted your budget. Looking at smaller properties or townhomes, seeking in more rural, less in-demand places, or just shopping in lesser price ranges could all be examples of this.
If you choose the latter, proceed with caution, especially if you're looking at a fixer-upper. Because the cost of building materials and labor is growing, repairing or upgrading a home will be more expensive than previously.
“Prices for materials needed to renovate a home are likely to go up too and take longer to arrive than expected,” says Steven Gottlieb, a real estate agent with Coldwell Banker Warburg in New York. “Buyers need to plan accordingly, even for a minor facelift in a new home.”
4. Make your credit score and financial situation better
Qualifying for the lowest interest rates feasible would assist in reducing monthly spending to a minimal in a higher-cost market. However, you will need a good credit score to do so - often a 740 or more, depending on your lender.
"Keeping your credit score as high as possible can earn you the greatest mortgage rate, lowering your payment," adds Duban.
You may improve your credit score by paying down bills, avoiding late payments, and correcting any inaccuracies on your credit report.
You could also wish to bring a larger deposit to the table. As a result, the lender's risk is reduced, and you may be rewarded with a cheaper interest rate. It also safeguards you in the event that home prices fall over time.
"A larger down payment functions as a greater buffer against real estate value reductions," Bell explains. "The more money put down, the less likely it is that a modest drop in the market will leave buyers owing more than their future property is worth."
5. Consider alternatives to a 30-year fixed-rate mortgage
Finally, if you want to save money in the face of inflation, you should carefully select your home loan. "There are many various options available that could work well for you as a buyer," says Heck, "and putting 20% down and having a 30-year mortgage is not always the greatest fit."
For certain buyers, an adjustable-rate mortgage (ARM) may be a better alternative. These have reduced interest rates for the first few years of the loan period — usually three, five, or seven years — and then the rate can adjust. These could be a good option for buyers who know they won't be staying in the house for long.
"An ARM allows a buyer to lock in a lower-than-average mortgage rate for a specified period of time," says Kimberly Jay of Compass in New York. "If a buyer does not intend to live in the home for an extended period of time, this can save them money."
There are also loans with low down payment requirements and no mortgage insurance fees, which may help qualifying buyers weather the inflationary storm. Before you start looking for a property, go to a loan officer or mortgage broker to see what financing programs you might qualify for, and shop around. The rates and terms of a mortgage might differ dramatically from one lender to the next.