“Who can afford to buy a home right now?” It might sound like a rhetorical question to highlight how challenging the market is right now, but in fact, it’s a completely legitimate query. Here at Guiding Wealth, we’ve been hearing this question often from people of all ages who are wondering whether it’s possible for them to buy a home this year.

The answer can be complicated. Whether it’s the right time for you to buy a home depends on more than just the market — your unique financial situation is a significant factor as well. It might seem like the easiest way to decide whether homeownership is right for you is to use an online mortgage calculator. Most of these tools claim they can show you exactly how buying a home would impact your budget.

Unfortunately, most of these tools are overly simplified. They can’t really factor in all the facets of your personal finances. Additionally, they only show you how much you can expect your mortgage payment to be. However, there are many other financial aspects of owning a home, from property taxes and insurance to maintenance costs. 

So let’s look at some of the crucial factors you and your partner should consider if you’re trying to decide whether to buy a home this year.

Home Buying Consideration #1: Interest Rates

One of the first things to research is the current interest rates for mortgage loans. While mortgage rates dropped in the aftermath of the COVID-19 pandemic, they’ve been steadily climbing back up since early 2022. Rates during the first quarter of 2024 are higher than they’ve been for the past two decades. 

Why do interest rates matter? They determine how much your monthly mortgage payments cost. Higher interest rates mean higher payments, which can impact your budget when it comes to looking for a house. At Guiding Wealth, we have worked with clients who have needed to move and have moved from similarly priced homes. However, due to the change in interest rates, they have seen a dramatic increase in their monthly payments. For a rough example, for a $500,000 mortgage at 3% interest, you would owe $15,000 over the course of the year in interest. For the same $500,000 mortgage at 7% interest, you would owe an additional $20,000 or $35,000 in interest for the same loan.

As interest rates continue to rise or even stay steady, you may need to drop your target price point or make significant changes to your budget to accommodate your monthly payments because paying too much for a home can have a significant impact on your personal financial situation and be a difficult situation to work yourself out of.

It’s important to remember that interest rates can change slightly from day to day and they may go down in the future. They can also vary between different types of mortgages. Generally, the interest rate is proportional to the loan term — mortgages with longer terms typically have higher interest rates. For example, a 30-year fixed mortgage loan will usually have a higher interest rate than a 15-year loan.

If interest rates were to decrease in the future, anyone who bought a home with a higher interest rate should be able to refinance their home at a lower interest level and then decrease their monthly mortgage payment.

Home Buying Consideration #2: Inflation

Inflation is another factor that can impact your decision to buy a home. The U.S. has experienced high inflation over the past few years, which means the cost of living has risen substantially. Inflation affects many different aspects of your budget, causing you to spend more on everything from groceries and utilities to childcare, transportation, and “nonessential” purchases.

Many factors contribute to inflation, and it never goes away entirely. The U.S. government usually tries to keep inflation around the 2% mark, but it’s been significantly higher since 2020. 

How to cope with inflation 

Because you can’t expect inflation to ever drop down to 0%, it’s crucial to factor it into your financial plans. Here are some ways you can ensure that inflation has a minimal impact on your financial stability:

  • Keep your income on track: Unless your income rises at the same rate as inflation, you essentially lose money. Many employers offer cost-of-living adjustments (COLA), but they’re not always on pace with inflation. If your recent income adjustments haven’t kept up with inflation, consider asking your employer for a raise or looking for a new job.
  • Pay attention to your expenses: If you don’t track each purchase individually or you use a “high-level” budgeting approach, it might be good to take a closer look at your purchases over the last several months (or years). You might not have realized exactly how much rising costs have impacted your overall spending amounts.

  • Understand how inflation impacts homeownership: One of the biggest benefits of buying a home is locking in the cost of your monthly mortgage payment or “rent.” But it can still impact many other expenses, such as the cost of utilities, repairs, and property taxes. If you don’t own a home yet, consider how inflation affects your prospects right now and in the future. Yes, prices are high right now, but even if inflation gets back “under control,” things will still continue to cost more each year. Make sure you consider that information when you’re deciding whether to buy now or wait a few years.

The best way to cope with inflation is to understand how it impacts your entire financial picture. Once you know that, you can adjust your short- and long-term plans accordingly.

Home Buying Consideration #3: Your Financial Situation

Now it’s time to look at how your current financial circumstances could impact your ability to buy a home. For example, if you already have a high debt-to-income ratio, a lender may not want to approve you for a big mortgage loan. 

 You also need to consider some other aspects. For example, do you have any retirement savings? If not, you might want to adjust your budget to start saving for the future before you allocate every bit of available income to a mortgage. When looking at long-term goals like buying a home and saving for retirement, it is wise to figure out how those goals can co-exist instead of exclusively focusing on one over the other.

Challenges for first-time buyers

If you’ve never owned a home before, you might face some additional hurdles. Here are some questions to consider:

  • How is your credit score? 
  • Do you have a long, positive credit history you can show to potential lenders? 
  • Do you have any cash saved for a down payment?
  • Have you looked at the difference between the cost of homeowners’ insurance vs. renters’ insurance?

There are some programs out there designed to help first-time homebuyers. You might want to see whether you’d be eligible for an FHA or USDA loan, both of which usually have low down payment requirements. If you or your partner served in the military, you may qualify for a VA loan.

Challenges for current homeowners

If you’re currently a homeowner and looking to move, you may also experience some unique challenges when it comes to buying a home.  The primary concern for many, including many of Guiding Wealh’s clients, is moving and having to give up a low-interest rate on their home for a higher interest rate. Moving to a comparable home would require a substantial increase in the monthly payment because of interest alone. This has resulted in many people feeling “stuck” in their current home, but more specifically their current mortgage.

Additionally, because the inventory of available homes is low in several parts of the country, it might be difficult to find a smaller home that meets your needs. Often, when you are looking for a second home, you have a much clearer idea of what you want and don’t want in a home, and those more specific criteria can be more challenging, especially if there are fewer homes available for sale. If you can’t find something that fits your criteria, it might be better to stay in your current home for a while.

If you own your home outright, that might be a significant factor in your net worth and your decision to move to a new home. Often the timing of buying and selling a home can bring added stress as most people do not have cash to cover the difference. There are several solutions from finding a bridge loan, contingency offers on homes to a security-backed line of credit. 

Home Buying Consideration #4: Budgeting

If you’ve considered all the factors and decided that now is a good time for you to buy a home, it’s time to figure out what your budget should be. This is where a mortgage calculator can be helpful. It gives you a quick way to see what your mortgage payments would be based on the cost of a home, how much you put down, and what the interest rate is on your loan.

Remember, a mortgage calculator probably won’t tell you how much you’ll need to pay for insurance or property taxes. It also can’t predict other expenses, like repairs or renovation projects. And it won’t factor in other financial goals, like having an emergency fund or saving for retirement. So when you input those potential monthly payments into your budget, don’t forget to consider all the other aspects. 

It’s important to be realistic about what you can afford in your monthly budget. One of the common struggles families face is buying a home and having a high fixed expense that is not sustainable for the long term. A simple way to test this is to “practice” having a higher mortgage payment now and see if you are able to save that amount now without struggle, or if there is a struggle, you get to decide if this is something that’s sustainable for the long-term or if you want to re-evaluate your options.

Prepare Your Finances for Homeownership

Buying a home is a big decision, and there are several factors that can affect your options. High inflation and interest rates continue to make things challenging for many buyers, from aspiring first-time homeowners to retirees. Depending on your unique financial situation and goals, you may decide that 2024 is not the right time for you to buy a home.

Whether you decide you want to buy a home this year or wait for a little longer, it’s crucial to prepare your finances as much as possible. That may include making a plan to save for a down payment and altering your budget to accommodate a mortgage payment along with other crucial expenses, like property taxes and maintenance. Even if you plan to wait a couple of years to buy, start planning now to make things as easy as possible for you and your family.

If you want to get your finances in place to buy a home (and make sure you haven’t overlooked anything), we can help. Our Home Buying Budget is a one-off financial planning service that gives you all the guidance you need to buy a home. 

With help from a financial planner, you’ll learn how much house you can afford without compromising your other financial goals. Plus, you’ll get a realistic plan to save for a down payment and prepare for ongoing expenses, like your mortgage payment and insurance.

You can get your Home Buying Budget financial plan for just a single affordable payment. You won’t have to commit to long-term financial planning sessions or monthly fees.