May 11, 2022

Interest rates just one part of homebuying equation

When buying a home, the purchase price and mortgage interest rate – as well as the accompanying monthly payments - always receive the lion’s share of attention.

With mortgage interest rates reaching three-year highs, a buyer of a median-priced home today faces a mortgage payment about $290 per month higher than a year ago. With home prices at historic highs and the price of everything else rising amid record inflation, many home shoppers may have to rein in their budgets.

The psychological pressure of everything being in flux often tempts buyers to jump in to a home purchase without thinking about the full picture. It is easy to lose focus.

Many forget to factor in ongoing costs of homeownership, as well as the one-time fees that are usually paid to various parties during the homebuying transaction.

According to a recent study by Fannie Mae, ongoing, non-mortgage costs account for about half of total borrower costs over a standard ownership period (set at 7 years). These include utilities, property taxes, and home improvement expenses. By comparison, the typical mortgage accounts for roughly 40% of the total.

Guaranty fees, inclusive of the loan-level price adjustments (LLPAs) charged by the government-sponsored enterprises (Fannie Mae and Freddie Mac), comprise approximately 4% of the total cost of homeownership. Lastly, is private mortgage insurance (PMI), ranging from 1 to 3%.

Before you hit the open-house circuit, assess not just what you can spend but what you should spend, and all the potential costs down the road.

Financial experts suggest spending no more than 28% of your gross income on the sum total of your housing expenses - mortgage payments, property taxes and insurance - plus and additional 1 to 2% for repairs and maintenance.

Real estate prices are local. In many metropolitan markets and other high-cost areas, those strict limitations obviously aren't going to work for everyone, but they can still serve as a solid rule of thumb.

To be sure, homeownership is still widely recognized as the leading source of net worth among families. Housing wealth itself is primarily achieved by price appreciation gains, and the nation has seen home prices accelerate at a record pace over the last decade.

The average homeowner who purchased a home at the median price just five years ago has accumulated $146,200 in housing wealth.

At the same time, experts strongly caution home buyers to conduct due diligence. With the rising price of materials and contractors to do the work, a "fixer-upper" home many not be the bargain it appears to be. Similarly, forgoing home inspection contingencies to make a bid more competitive may end up costing more down the road.