Is a home purchase on your to-do list over the next two years? You'll have plenty of competition finding your new home, according to the latest PenFed Credit Union National Mortgage Survey.
The survey found that 37% of American adults are planning to purchase a home within the next two years. Over half (52%) of the millennial generation plan to buy within that timeframe, with many looking forward to their first home purchase.
Millennials will need all the resources they can muster to get that starter home. Demand continues to outpace supply, pushing home prices upward and out of reach for an increasing number of Americans. The current home supply increased to 6.2 months, near the 6-month level considered a healthy balance – but affordable starter homes are still in short supply in many markets.
According to the National Association of Realtors (NAR), first-time buyers need nearly 23% of their income to afford the average entry-level home. That's the highest level in a decade, before the full extent of the housing crisis became apparent.
If you are planning to join the home buying crowd, consider these housing purchase myths and potential mistakes highlighted by the PenFed survey.
Approximately 44% of respondents think that the best mortgage is the one with the lowest rate. That certainly can be true – but it's not a given. You must look at the total package, including auxiliary costs (closing costs, etc.) and the overall loan terms. Are you better off keeping your monthly payments low or the overall loan costs low?
Similarly, 58% of respondents assume that adjustable-rate mortgages (ARMs) are designed for risk-taking buyers. We're in a period of historically low interest rates, meaning that ARMs are very likely to rise – but typically, ARMs offer an initial fixed-rate period along with a cap on future rate rises.
If you're only going to stay in the home for a short period of time – before adjustable rates can make your payment unmanageable – you may be better off with the typically lower fixed-rate portion of the ARM. There's some risk involved, since you're assuming you can sell your home and buy another at the right time without market forces or other life circumstances changing your plans. However, an ARM could still be the most sensible, lowest-risk proposal for your situation.
Just under half of respondents (48%) knew that loan pre-qualification and loan pre-approval are not the same thing. Pre-qualification is a simple analysis intended to determine how much you can afford to spend for a home, while pre-approval is a more extensive check that increases your likelihood of qualifying for a mortgage loan.
We wish all the potential homebuyers good luck – but it will take more than knowledge and luck to land that dream home.
Start by shopping around early for mortgage loan options. A surprising 65% of homeowners in the PenFed survey didn't shop around for a mortgage. How can you spot a good deal if you have no frame of reference?
Prepare for mortgage shopping by doing a thorough assessment of your finances. Check your credit report for any errors or areas for improvement – a lower credit score translates to higher interest rate offers. You can check your credit score and read your credit report for free within minutes by joining MoneyTips. Make all payments on time to keep your credit score high. Keep your overall debt load low to keep your credit utilization high and your debt-to-income ratio low.
In short, keep your finances in order so you'll be ready when that elusive affordable home comes along.
MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.