by Maurie Backman | Oct. 8, 2020
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There's a reason it's been difficult to buy a home in recent months.
Mortgage rates have been remarkably low since the summer, and for that reason alone, many prospective buyers have clamored to purchase homes. They're being tripped up, however, by soaring prices.
Home prices increased 5.9% nationally in August 2020, according to the CoreLogic Home Price Index, compared to a year prior. We have limited inventory to thank for that. The supply of available homes in August decreased by 17% from the previous year, leading to an uptick in demand and creating a housing market loaded with bidding wars as eager buyers compete to win contracts on the limited inventory.
The result? Many buyers are struggling to find homes, so they may not get to take advantage of the phenomenally low mortgage rates.
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Locking in a mortgage at a low rate could result in a world of savings -- but that assumes you don't grossly overpay for a home. While home prices climbed 5.9% in August on average, in some parts of the country, there's an even higher level of inflation in play. So what you save on mortgage interest by snagging a low rate, you'll pay for with a higher purchase price.
That said, depending on your local housing market, there may, in fact, be some deals. If you find a home with a listing price that's only slightly elevated, it could be worth it to buy.
Imagine you're looking at paying an extra $5,000 for a home now (compared to what prices looked like last year). That additional $5,000 only adds $21 a month in principal and interest on your mortgage payment if you snag a 30-year fixed loan at 3%. And given that the 30-year mortgage has been trending even lower than that, it could be worth the cost.
That said, what you shouldn't do is stretch your budget to pay for a home that's beyond your price range. If you go that route, you'll risk depleting your savings, falling behind on your housing payments, and potentially damaging your credit and/or losing your home. It's okay to consider a higher price if you can afford it, but be careful with how much you spend.
Finally, you may want to shy away from homes with inflated asking prices that also need a lot of work. In a normal housing market, you'd have every right to ask for seller concessions on a home in disarray, but nowadays, sellers have such an upper hand that they don't have to meet buyer demands -- even reasonable ones. But if you pay more for a home that also needs lots of repairs early on, you might run into financial struggles, and that's a bad way to kick off homeownership.
There's lots of demand for homes today and little supply, and that's what's pushing prices up. Chances are, if you wait things out a bit, inventory will open up in 2021. Of course, in that scenario, you're taking a chance on mortgage rates staying low, but given the state of the economy, they may be low for quite some time, so holding off on buying could pay off in the long run.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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