Millennials make up the largest share of homebuyers at 38%, according to the National Association of Realtors’ 2019 Home Buyers and Sellers Generational Trends Report. Even when excluding younger millennials (those between the ages of 21 and 28), this generation still made up the largest share of homebuyers. Older millennials (those between the ages of 29 and 38), in fact, comprised 26% of homebuyers alone.
Despite millennials’ progression into buying homes, they are still met with many challenges. The 2008 financial crisis coupled with the economic effects of the COVID-19 pandemic has made entering the real estate market particularly difficult for this generation. When compared with previous generations, millennials aren’t buying homes nearly as often as their baby boomer counterparts did when they were in their 20s and 30s.
The following information serves to ease the process of buying your first home.
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Tips for Entering a Competitive Market
If there’s anything to take away from the State of the Nation’s Housing report of 2019, it is that competition for homes is steep. There simply are not enough homes to go around. Utilize the following tips when taking your first steps into today’s competitive real estate market.
Get Preapproved for a Mortgage
The first thing you should do is get preapproved for your mortgage. This way you can find a lender you like and they can give you a budget for when you’re actually looking at houses. Be aware, though, a credit check is needed for you to get pre-approved.
Once you find a house you like, you’ll have to inquire with a realtor and put an offer down on the house. If and when the offer is accepted, you’ll want to have the house inspected, which can cost a couple hundred dollars, depending on where you go.
Check with your realtor and seller before you make an inspection, they will let you know the last time it was done. This will ensure you of the house’s value and that you are paying a fair price. If the house needs repairs, your realtor should negotiate with the seller and get them to pay for at least some of the repairs in order to close on the sale.
Have Your Home Appraised
Next, the lender will arrange for your home to be appraised. This can cost several hundred more. Sometimes, your lender will cover this cost for you or it may be included in the closing costs, but you should be ready to spend money on a good appraiser to ensure you get an accurate appraisal on your potential home.
How Much Money Should I Have Saved Before Buying a Home?
Before buying a home, millennials must be sure they are saving enough money to afford it. Not only must you make the initial down payment and pay closing costs, you also must take into consideration all prospective payments. Homeowners will have to pay their monthly mortgage, utility bills, and perform any and all maintenance the house may need over the years.
Down Payment
Your lender will tell you what an acceptable down payment is according to your loan, but it’s suggested that you put a 15 to 20% down payment on your home. Your lender might not ask for that much, but the reason this is a great idea is you’ll pay less in interest.
At the beginning of a loan, the amortization schedule will require you to pay more towards the principal until you’ve paid off a certain amount, during which time you’re also paying interest. Once you pay off a certain percentage of the loan, your lender will charge you less in monthly payments toward the principal. A bigger down payment allows you to reach this point sooner. t.
Closing Costs
Your loan will need to be created and funded and you’ll have to wait for “closing” on the home. Closing consists of signing your paperwork, paying the closing costs and filing all the documents. The closing costs vary depending on the price of your home, but on average you’ll pay between 2 and 5% of the total cost of your home in closing fees.
So, if you’re buying a $200,000 home, you can expect to pay about $7,000 in closing costs at a rate of 3.5%. However, it’s not uncommon for homeowners to offer to pay the buyer’s closing costs, but you shouldn’t expect this to happen. Sellers are already paying other costs on their end just by trying to sell their house.
Maintenance, Repairs, and Utilities
Costs continue even after buying your first home. When considering how much money you should have saved up, you must take into consideration maintenance, repairs, and utilities. Each of these helps build home equity.
Home equity is how much money you’ve put into the home versus how much your home is worth. For example, if you purchase a home at $200,000 and pay it off for 10 years, let’s say you’ve paid $80,000 of the principal. That’s $80,000 in equity that you now own. You can use this amount towards the purchase of a new home if you decide to move.
Now, let’s say your home has also increased in value. If your house is worth $250,000 about 10 years later, your equity went up without you having to do anything. You can now sell your house for a higher price than you bought it. You’ll have your $80,000 that you put into it, plus an extra $50,000 just because your home went up in value.
You’re also going to have to figure in regular upkeep. Things are going to break and you may want to do renovations at some point. While you can always take a loan out for home renovations, upkeep is something you’ll need to budget for. A good budget should have 10 to 20% of your yearly income stored away.
Mortgage
Your mortgage is the home loan with a monthly payment you’ll need to make to keep a roof over your head. This monthly cost covers a couple aspects of your loan, such as principal and interest — to name a few.
The principal cost of your loan is the flat rate that your home costs, the price you’re paying to purchase it. Interest is money you pay to your lender as you pay off your loan. It’s their fee for lending you thousands of dollars. You’ll also be paying property taxes and insurance on your home, which will make up a much smaller, but still significant, portion of your fees.
The average annual interest rate (or APR) for a home fluctuates quite a bit depending on where you live. You’re responsible for paying a fixed, variable, or adjustable interest rate according to your mortgage, so make sure you are aware of that before you sign. Interest rates are a necessary evil if you want to own a home or take out a loan on anything for that matter. You’ll have to weigh out the pros and cons of having equity and decide what makes the most sense for you.
Will I Save Money in the Long Run?
In short, you will save money in the long term. By putting your money into equity instead of just paying a landlord, you are saving money. Any money that you put into a home will come back to you when you decide to sell it — unless your house significantly depreciates in value.
As to how much money you’ll save total, this is a complicated question because the cost of homeownership isn’t entirely one flat rate. When you sign your mortgage, you’ll have to start budgeting for potential repairs and maybe even re-models that need attention throughout your ownership.
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