I'm a Mortgage Advisor: 4 Homebuying Risks Gen Z Should Avoid for the Next Year
It's not your imagination; younger buyers face an increasingly uphill battle to become homeowners.
Fortune recently cited a National Association of Realtors (NAR) study that found the average homebuyer in the U.S. today is 59 years old. Perhaps even worse, NAR reported that the average first-time buyer is 40, a record high.
Act Now: 19 Best Texas Cities With Home Values Under $250K
Boom Time: 7 Low-Risk Accounts Proven to Grow Your Money Up to 13x Faster
Meanwhile, first-time buyers make up a record low percentage of homebuyers at just 21%. Watch out for the following risks, as you explore buying a home over the next 12 months.
Setting Yourself up for 'House Poor'
When first-time buyers get preapproved for a mortgage, the lender gives them an upper limit. Most then go out and shop for homes around that upper limit, rather than setting their price limit based on a comfortable monthly budget.
“The statement I hear most from new homeowners is that they bought at the limit of their budget and now they regret it,” explains Cody Schuiteboer, mortgage lender with Best Interest Financial. “I tell my clients that they should pretend they make 10%-15% less than they actually do, to avoid a mortgage payment that prevents discretionary spending.”
Remember, homes come with expenses beyond the monthly payment. Expect to pay 1%-3% of the home’s value in maintenance and repairs each year. For a $400,000 house, that means $4,000-$12,000.
And that's to say nothing of rising escrow costs.
Assuming Today’s Taxes & Insurance
Many first-time buyers don’t realize their property tax assessment will go up, based on the new purchase price. That means you can’t budget based on what the seller currently pays in taxes — you need to budget based on the property tax rate multiplied by the new purchase price.
Imagine you go to buy a house for $400,000, where the county charges 1.5% in property taxes. If the current assessment is $300,000, the seller’s only paying $4,500, but you’ll pay $6,000 once the county reassesses the value based on the new transaction.
Insurance premiums can shoot up even faster. Insurance expert Mason Comerford of Eventual said that companies often under-quote homebuyers to reel them in, only to raise premiums on them:
“The carrier starts slowly with around a 5% increase in Year 1 and then more consistent 20% increases by Years 3 and 4, knowing clients usually stay because switching is a hassle.”
Again, buy far below what you can technically afford, because higher costs will come for you.
Skipping Home Inspections
Don’t forego home inspections. They exist to protect you from nasty surprises once you move into the house.
“I had a client who used their life savings to buy a house and three weeks later had to pay for a new HVAC system out of pocket,” said Schuiteboer. He highlights that story not just to illustrate the importance of inspections, but also why buyers need to keep some cash in reserve.
Don’t empty your emergency savings, because homes add more risk of emergencies, rather than mitigating it.
Buying for Under 5 Years
To get in and out of a home, you take two rounds of losses: closing costs from both buying and selling. They add up to tens of thousands of dollars, typically 2%-5% for buying and 6%-10% for selling. For a $400,000 home, that’s $8,000-$20,000 for buying and $24,000-$40,000 for selling.
Over time, homeowners can come out ahead through appreciation and paying down their mortgage balance. But that takes years.
“Buy a home that will fit your lifestyle for at least the next five years, as a hedge against homebuying regret,” said real estate expert Sain Rhodes with Clever Offers.
And that's if you beat the risk of a housing correction, like we’ve seen in many markets over the last few years.
“If buyers outgrow their homes in two years and have to sell in a slow market, they could come out of pocket by 8%-10% of the home's value, not including closing costs,” Rhodes said.
Homeownership is a long game. Buy for the long haul so that you can put appreciation and debt amortization to work for you, rather than setting yourself up to sell again in a few short years.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: