There are pros and cons to stretching financially to buy a home. An advantage of pushing the limit of what you can afford to pay is that you may save in the long run if this means that you move less often in the future. The fees involved with buying and selling homes can add up to tens of thousands of dollars, or more. Also, moving takes time and energy. Less moving means less disruption.
On the other hand, if you make a big leap monetarily, lose your job and can’t afford to make the monthly mortgage payments, you could lose the house and jeopardize your good credit. Buyers who stretch to buy a new home and count on a big payout from the home they’ll be selling may be vulnerable in the current market if they’re depending on a large sum and the property sells for less than what they expected.
Despite the risks, there are compelling reasons for many buyers to move now to a home that better suits their long-term needs: There is less competition from other buyers; competition tends to drive prices higher; and interest rates are still in the mid-6 percent range for 30-year fixed-rate financing — low by historical standards.
However, buyers who need the equity from their current home should give serious thought to selling before buying a more expensive home, particularly if there’s no margin for error. Some buyers who recently bought first have had difficulty selling their old home.
Real estate is a local business. There is a lot of variability from one market to another. In some areas, well-priced homes are selling relatively quickly and in other areas listings are sitting for months. The longer your home sits on the market, the more it ultimately costs to make the move.
Pricing right for the market is the key to success. It’s difficult for most sellers to hear that they won’t be able to sell their home for as much as they’d hoped. And, unfortunately, there are some real estate agents who are willing to tell sellers what they want to hear to obtain a listing.
HOUSE HUNTING TIP: Don’t get carried away by an agent’s enthusiasm for your home. Ask for solid information about the probable selling price for your home. The most reliable comparable sales will be the ones that sold most recently, not those that sold six months ago when the market was different.
Tapping equity before you sell is easy enough. There are plenty of lenders who will give you an equity line of credit secured against the home you’re selling, often based simply on your estimate of the property’s value and a drive-by appraisal. Even so, it’s best to be conservative about the value of your home. In this market, you won’t know for sure how much cash you’ll net from the sale until the property is sold.
Most buyers stretch to buy, banking on the fact that their financial situation will improve within a few years. There are mortgage products designed to help you buy over your immediate affordability. One such product is the interest-only mortgage, which enables you to make lower, interest-only payments for up to 10 or so years.
These mortgages serve a purpose. But, they can become problematic if your financial future doesn’t turn out as planned and you don’t have the resources to pay the much higher mortgage payments that could follow when the initial interest-only payment period expires.
THE CLOSING: Buying a home you can grow in to over time is a great idea as long as you fully understand the risks and rewards involved before you make the commitment.
Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.