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Buying a Home While Inflation Is Rising

Buying a Home While Inflation Is Rising

The summer of 2022 saw inflation in the United States hit levels not seen since December 1981. Not since the days of disco have Americans seen their dollars buy less at the grocery store, the gas pump, and in the housing market. Despite the challenging and unfamiliar economic climate, it is still an excellent time to purchase a new home.

Home prices have soared in the last few years, rising 14% between February 2021 and February 2022. High mortgage rates can make it difficult to afford your dream home. However, with some planning and an understanding of the market, this can be an excellent time to purchase a home that will ride the wave of rising home prices and become a solid investment in your future.

Current Climate

Making a major purchase like a home in the current economic climate can seem daunting, but understanding the situation can help you navigate and benefit from this unique financial era.

Interest rates rising To control inflation, the Federal Reserve Bank has raised its interest rates. This is the rate at which banks can get loans from the Fed, usually passed on to consumers through higher mortgage, credit card, and loan interest rates.

Home prices leveling out – After explosive growth at the end of the pandemic, many areas of the nation are seeing a plateau in home prices. The market seems to have adjusted and is stabilizing at more reasonable levels, and the pendulum is swinging in favor of buyers once more, giving you more negotiating power.

Inflation – Inflation hit 9.1% in June of 2022, which translates to lower purchasing power across the board, and a weaker dollar trying to buy more expensive goods, which affects every aspect of the housing market, from construction to renovation to resale.

The Financial Benefits of Buying a Home

Purchasing a home is one of the best ways to build personal wealth. The average homeowner has a net worth 40 times that of a renter, and owning a home is the most secure way to pass wealth between generations. In addition to the long-term benefits, shorter-term perks include:

Rental prices are rising faster than home prices – Instead of paying a landlord an ever-increasing monthly rent, paying a mortgage builds your personal equity.

Mortgage interest deductions – The current US federal tax structure favors homeowners, and owning a home can significantly lower your tax bill.

Home appreciation – A home will appreciate an average of 3.5-3.8% in value over a 10-year period, which is profit in your pocket whenever you decide to sell.

Perspective on Rising Interest Rates

Even with the current interest rate hikes, they are still far lower than in decades past and with more mortgage options.

Rates are still at historic lows – Compared with historical data, current Fed and mortgage interest rates are significantly lower than 20 or 30 years ago.

Look at alternative mortgage options like an ARM – An ARM (adjustable rate mortgage) has a variable instead of a fixed interest rate. Generally, the interest is lower for the first 3, 5, or 10 years, then increases over the loan’s lifetime. A variable rate can be a more cost-effective option for those planning to move before the full term of their mortgage.

Option to refinance in the future – Even if your initial mortgage interest rate is unfavorable, it will be possible to refinance in the future when the economy is in a different place, and interest rates are better. Don’t let your initial mortgage terms deter you; it is just one step in a long process.

Know What You Can Afford When Buying a Home

In bullish times there is always a temptation to go above your current budget. However, in more uncertain times, it is essential to:

Be willing to adjust your price – Having a budget is a good idea, but your budget needs to correspond with financial reality. Generally, aim for a monthly mortgage repayment that equals approximately 28% of your monthly gross income.

Expand search areas to emerging neighborhoods, smaller properties, or townhouses. Living in a more economical neighborhood, smaller home, or a townhouse in your preferred community can translate into significant savings while still giving you a great home and a good investment.

Improve your credit score by paying down debt and correcting any errors in your credit report. Loan officers use your credit score to determine the terms of your loan and your interest rate. Pay as much debt as possible before seeking a mortgage to lower your debt-to-income ratio and secure a lower mortgage interest rate. If there are errors in your credit report, correct them before applying for a loan.

Consider All Home Buying Options

If your dream home is unaffordable now, it doesn’t mean you should give up on owning a house. You can find deals if you expand your search to all types of homes. Consider these factors when searching for your new home:

Fixer-upper – You can get a great deal on a fixer-upper or as-is home. However, inflation will affect renovation costs, so allow for that in your budget. Construction materials and labor costs are all highly dependent on inflation and increase over time.

Flipped houses over new builds – Opting for a flipped home rather than building your own house means there will be no surprise costs. A flipped house ensures all the heavy lifting is complete, and you can enjoy an upgraded home. Newly renovated homes will have all structural issues addressed and all the latest technology added while maintaining the classic design.

Be patient – Finding the right home for you could take time. The average home buyer will take eight weeks and visit nine houses before choosing the home they want.

Big State Construction Can Help You Design or Upgrade Your Next Home

Big State Construction is your resource in the Houston and Gulf Coast area for new and renovated homes. We can help you turn a fixer-upper into a dream home or make small changes that make a great house perfect.

Whether it is a small or large renovation if you need help finding a fixer-upper or understanding how to make it better, contact us today to learn more.

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