Top 4 Considerations When Starting the Homebuying Journey

Jessica Decker, Relationship Manager, First Republic Bank
October 9, 2019

  • Homebuying comes with many challenges, but it also comes with advantages like building equity with the money you’re putting toward rent.
  • From the current economic climate to potential taxes and fees, there are a number of factors to determine if the time is right to buy a home.
  • Here are the top four considerations to determine whether now is the right time for you.

Homeownership may still be the cornerstone of the American dream, but buying a house isn’t easy. In today’s market, there are very real challenges to homebuying, including saving for a down payment, juggling other financial responsibilities (like student loan debt and family) and planning for long-term savings.

Still, the advantages of homeownership, such as building equity in a home with the money you were putting toward rent, often outweigh any stresses. Additionally, purchasing a house is considered a pivotal personal financial milestone for many. If you’ve been thinking about buying a home in the near future, here’s how you can tell if it’s a particularly good time to start making moves.

1. It’s a good time to lock in an interest rate.

The Federal Reserve (the Fed), the central banking system of the United States, sets the rate at which banks can borrow money according to what’s happening with the economy. Why does the Fed adjust its rates? The reasons are many and nuanced but can be examined by looking at down and strong economies.

In a down economy, the Fed may lower this rate to encourage economic growth by setting the stage for access to cheaper funds. In turn, banks may offer lower interest rates on products like mortgages, credit cards or personal loans. When this happens, you’ll want to closely monitor rates before locking in so that you can take advantage of savings.

Conversely, when the economy is going strong, the Fed may raise the cost of borrowing with the intention to stave off inflation. Since banks must spend more in order to borrow money during these times, they may raise interest rates on their loans, credit cards or personal loans. In a rising interest rate environment, it’s to your advantage to lock in your rate as soon as possible so that you can secure a rate that’s still relatively low.

2. Your current eligible deductions work in your favor.

It’s no secret that many people are confused by elements of the tax law. Depending on whom you talk to, it’s either the best or worst time to make moves with your money. While the tax code limits tax savings with regard to homeownership (like the $10,000 cap on the deduction for state income, sales, local and property taxes combined), other tax laws (like the child tax credit of $3,600 per child under age 6 and 2023 standard deduction of $13,850 for single taxpayers and $27,700 for married couples filing jointly) could help compensate for any of those other losses.

3. You’ll be able to write off enough mortgage interest.

For most Americans, deducting mortgage interest on their taxes is a viable way to cut back on the costs of homeownership. As of 2023, homeowners can deduct mortgage interest on loan balances up to $750,000, which means the average American buying a modest home can fully deduct their mortgage interest. However, it’s worth noting that since deductible mortgage interest is capped at $750,000, having the ability to write off enough mortgage interest may be a concern for people looking to buy in cities like New York or San Francisco, where property values are higher. Remember that all of these deductions only factor into your taxes if you decide to itemize on your tax return.

4. You have sufficient savings for your down payment, closing costs and reserves.

The last step toward knowing whether or not it’s the right time to buy a home is taking a look at your savings. There’s no getting around the fact that buying a home requires you to spend money up front. Namely, there are three big costs to consider: your down payment, closing costs and reserves.

In terms of what size down payment is required, experts recommend aiming to have saved at least 20% of the home’s purchase price. While putting that much down isn’t always a requirement, it will keep you from having to pay extraneous fees like private mortgage insurance (PMI). Your closing costs will likely amount to another 2%–5% of the purchase price, depending on where you’ve purchased. In New York City, for example, closing costs are typically 2-4% of the purchase pric due to its mortgage recording and mansion taxes.

You must also consider reserves, which refer to the amount of money you still have left in the bank after closing on your new home. Most lenders prefer that you have at least six months’ worth of mortgage payments in reserves at the time of closing.

At the end of the day, the right time to buy a house depends on a number of factors. Jumping into homeownership is a big step and one that shouldn’t be taken lightly. Outside of personal financial considerations, it’s important to gauge the current economic climate and be as knowledgeable as possible about which taxes and fees you might owe. If you need help determining whether now is a good time to buy a home based on your current financial situation, speak with a financial planner.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.