Should I buy a house in 2021?
With low interest rates and high demand driving home prices up, is 2021 the right time to buy a house? (iStock)
The 2021 housing market is a perfect storm of the good (really low interest rates), the bad (high demand for houses), and the ugly (bidding wars and escalating home prices).
If you’re wondering, "Should I buy a house in 2021?" it’s tough to say for sure. Buying a house in 2021 could either be a great idea or a potential financial nightmare.
Everyone’s situation is different, so it’s important to understand what’s going on in the housing market, the probable future of interest rates, and all the pros and cons of buying in 2021 before taking action.
What to know about the 2021 housing market
The housing market in 2021 is far from normal. As of July 2021, the number of properties being actively marketed for sale was down 31% from the same period in 2020, according to Realtor.com.
At the same time, a rebounding economy, historically low mortgage interest rates, and a large number of Millennials in their peak homebuying years are all factors driving demand in the real estate market. That combination of low inventory and high demand creates a highly competitive seller’s market, with double-digit increases in asking prices.
Home prices increased 15.4% from May 2020 to May 2021 and are expected to increase by another 3.4% in the coming year, according to data analytics company CoreLogic. And an analysis by the Federal Reserve Bank of St. Louis indicates that as of the second quarter of 2021, the national average home sales price is $434,200.
An experienced real estate agent can help you understand home prices in your area. Credible makes it easy to connect with top real estate agents.
4 reasons to consider buying a house in 2021
Despite 2021 being a difficult year for prospective homebuyers, there are some arguments for buying a house this year.
Historically low interest rates
As of July 29, 2021, the average interest rate on a 30-year fixed-rate mortgage is just 2.8%, according to Freddie Mac. This year’s homebuyers can take advantage of some of the lowest mortgage interest rates of all time, which can make buying a home more affordable.
Rates are likely to go up in the near future
All good things must come to an end — including low interest rates. Many mortgage experts are predicting interest rates will rise next year. And while it’s impossible to predict how quickly and how high they could rise, it’s not unreasonable to think rates could exceed 4% by the end of 2022.
Rising home values create equity
With home values expected to continue rising in the coming year, buyers in 2021 have a chance to accelerate the buildup of equity in their homes.
It might make sense for personal reasons
There are plenty of reasons to buy a home beyond financial considerations. Maybe your family is growing and you need more space. Maybe a job relocation requires a move or you want to live in a certain school district. Any of these factors might make 2021 the right time to buy.
3 reasons to consider waiting to buy
If you don’t need to buy a home right away, there are some good arguments in favor of waiting until 2022 (or perhaps longer) to buy a home.
Less competition
Imagine finding a home you love and making an offer, only to find out someone outbid you by several thousand dollars. Unfortunately, that’s a situation many shoppers face today.
Sixty-five percent of homebuyers faced at least one competing bid in June 2021, down from a high of 74.1% in April, according to Redfin. Waiting to buy until demand calms down may help you avoid a bidding war and get a better deal on the house you want.
Easier to qualify
Many mortgage lenders tightened their qualification requirements during the pandemic. With many people losing jobs, lenders wanted to see higher credit scores and larger cash reserves, and perform extra income and employment verifications before approving a mortgage.
If demand for mortgages eases, lenders may loosen their standards, making it easier to qualify. So waiting could be a smart move if you’re worried about your chances of being approved for a loan.
More time to get your finances in shape
The best time to buy a home is when you have a good credit score, steady income, low debt, and plenty of savings to cover a down payment and closing costs.
If you’re not quite there yet, waiting to buy a home will give you more time to improve your finances. This will make you a stronger borrower and help you qualify for a better interest rate, which could help compensate for a higher purchase price.
How to buy a house in 2021
If you decide now is the right time to buy a home, here are tips for purchasing a house in 2021.
Calculate how much home you can afford
Before you start shopping, get a realistic idea of how much a lender might let you borrow. That way, you won’t fall in love with a house that’s simply out of your price range.
Freddie Mac’s Home Affordability Calculator is a good place to start. Just enter your annual gross income, monthly debt payments, down payment, and anticipated mortgage term and interest rate. The calculator will give you an idea of your budget.
Get mortgage pre-approval
To get pre-approved for a mortgage, you complete a mortgage application, authorize the lender to check your credit, and provide basic information on your income and assets. If the lender pre-approves you, they’ll issue a pre-approval letter, which is an offer to loan you a certain amount. This pre-approval letter is typically good for 30 to 90 days.
Pre-approval shows sellers that you’re a serious buyer and can secure a home loan. This makes a seller more likely to consider your offer.
Find a real estate agent to work with
A real estate agent makes the homebuying process easier by setting up viewings on your behalf and providing information on houses you’re interested in. But perhaps more importantly, an agent can help you negotiate the best price on a home you want to purchase.
Family and friends can be great sources for finding a real estate agent. You can also visit Credible to find an expert real estate agent in your market.
Look for houses
Once you tell your agent your price range and the type of home you’re looking for, your agent will show you homes that fit your criteria. Finding a house you love at a price you can afford can take some time, so don’t get discouraged if the process takes longer than anticipated.
Make an offer
When you find a house you want, your agent will help you submit a written offer. You may also need to put down an earnest money deposit, which is usually 1% to 2% of the purchase price. This deposit will go toward your down payment and closing costs if your offer is accepted and you buy the home. However, if you agree to buy the home and later cancel, you lose your deposit.
From here, the seller will either accept your offer, reject your offer, or come back with a counteroffer.
If you’re worried about getting into a bidding war for the home, your real estate agent can write an escalation clause into your offer. This clause essentially says you’ll pay a certain dollar amount over another offer, up to your budget amount. That way, you can outbid other potential buyers and improve your chances of having your offer accepted.
Apply for a mortgage
Once your offer is accepted, it’s time to get your financing in order. Return to the lender that provided your pre-approval to let them know you’re ready to move ahead. You may need to provide additional documentation for the loan underwriter to verify your income, assets, and employment. This process can take 30 days or more and may involve a lot of back and forth, so respond to any requests from the lender quickly to keep your application moving.
Get a home inspection and appraisal
The lender may order an appraisal to confirm the value of the property. It’s usually a good idea to also get a home inspection. During the inspection, a trained inspector goes over the property specifically looking for problems, such as faulty wiring or plumbing, a damaged roof, lead paint or mold, structural damage, and more. The inspector will provide a report outlining all the problems found on the property.
Every home has some issues, so it’s helpful to read through the report with your agent and ask whether they see any major red flags. If the home has major structural damage, you may want to reconsider buying it.
Negotiate with the seller for any needed repairs
You can ask the seller to correct some of the problems found during the inspection. Determine which items you want the seller to repair, and your real estate agent will handle the negotiations.
If the seller agrees to chip in for some of the repairs, they may handle the repairs themselves, hire a contractor to complete them, or offer a credit toward your closing costs to cover the cost of repairs after you close.
Close
Three days before closing, your lender will send you a Closing Disclosure, which summarizes the loan details. Read over the Closing Disclosure carefully to ensure the numbers don’t vary too much from your loan estimate.
Your lender will also schedule a closing meeting. You’ll need to bring a photo ID and your closing costs — usually in the form of a cashier’s check or proof of wire transfer. At the closing meeting, you’ll sign your mortgage note, deed of trust, and a pile of other paperwork. After closing finishes, you’re officially a homeowner.
Alternatives to buying a house in 2021
If you already own a home, you don’t have to buy a new house to take advantage of low interest rates. Consider refinancing your current mortgage instead.
When you refinance, you essentially apply for a new loan to pay off your existing mortgage. Refinancing may allow you to reduce your interest rate, lower your monthly payments, or change your loan term.
Just keep in mind that refinancing involves paying expenses such as new closing costs, which can run anywhere from 3% to 6% of your loan balance. For that reason, it’s important to consider whether refinancing into a lower interest rate will generate enough savings to offset the cost of refinancing. A refinance calculator can help you evaluate your options.
When you’re ready to move into a new house, start your search for a real estate agent with Credible.