The home buying process can be a daunting experience, and current homebuyers face a unique set of challenges. The U.S. real estate market is currently struggling to keep up with the rising demand for houses, with frantic buyers even skipping out on standard contingencies like home inspections.
So once you find your dream home, you’ll need to be able to move on it quickly. Failing to do so could result in you losing out on the house altogether or ending up in a bidding war with another buyer.
And while mortgage rates are still relatively low, they have been steadily rising since the beginning of the year. According to Freddie Mac, the average rate for a 30-year mortgage is 2.96%, up from 2.65% in January. You can use an online loan marketplace like Credible to shop around for the lowest mortgage rate on a home loan and get a mortgage preapproval.
How to prepare your finances for the home buying process
Whether you’re a first-time homebuyer or a seasoned homeowner, here are three ways you can get there while making smart financial decisions:
- Utilize your savings
- Borrow money from investments
- Use bridge financing
Utilize your savings
For many people, a down payment is one of the most significant barriers to buying a home. It can be challenging to come up with a 20% down payment. For instance, if you want to purchase a $300,000 house, that means you’ll need a $60,000 down payment.
If you're a first-time home buyer, you may be able to secure a significantly lower down payment with FHA loans, but forgoing a down payment altogether can be an expensive choice. Not only will you pay more for your monthly payments, but you’ll get stuck with private mortgage insurance (PMI) as well.
Your best bet is to utilize your personal savings for a down payment on a new home. According to a survey by the National Association of Realtors (NAR), the median down payment for all home buyers was 20%. The median down payment for first-time homebuyers was 10%.
You can experiment with how a lower or higher down payment would affect your monthly mortgage payment with an online mortgage calculator, like this one offered by Credible. While you're there, you can also shop around for a home loan for your dream home.
Borrow money from investments
Instead of selling your investments, it might make more sense to borrow from them to fund the down payment on your home. You can do this by taking out a margin loan, which allows you to borrow against the securities you already own.
This interest-bearing loan allows you to access your investment funds and put them toward the purchase of your home. It gives you access to the cash you need without having to sell your investments. And typically, there are no closing costs or annual fees to worry about.
However, there are risks to consider. If your securities go down in price, you could end up losing more than you initially deposited. And if you’re unable to meet a margin call, then you may be forced to sell the assets in your account. Overall, a margin loan makes the most sense if you plan to pay it off quickly in large monthly payments.
And finally, if you’ve built up quite a bit of equity in your home, you can use that equity to fund the down payment on your next home. Bridge financing like a home equity loan is a good option if you’re planning on buying and selling a home at the same time.
Bridge financing could help your offer stand out from other homebuyers since the purchase isn’t contingent on selling your current home. However, bridge loans come with higher interest rates than a traditional mortgage, and you could get stuck with origination fees.
Plus, you’ll need at least 20% equity in your home and an excellent credit score for this to even be an option. You can check your credit score and monitor it for free on Credible.
The bottom line
Mortgage rates are slowly going up and fewer houses are available on the market, but getting a mortgage today is relatively easy. In a competitive housing market, buying your perfect home requires some strategic thinking.
Take some time to consider the real estate financing options that are right for you so that you’ll be ready to act when the time comes. If you want more information about the home buying process, visit Credible to get in touch with experienced mortgage brokers and get your questions answered.
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