It can be hard to buy a home now because the market is so competitive. So many buyers are looking for homes, and the prices are rising quickly. The average prices of homes have reached a record high of over $420,000, making it hard for Americans to buy a home outright.
There are various reasons for these challenges in the market. First is the housing shortage.
The country is short over five million homes, creating a lot of demand and increasing prices. Another reason is that people live longer and healthier lives, waiting longer to retire and sell their homes. Additionally, the millennials are now reaching an age where they’re buying their first homes, increasing demand.
If you’re looking to buy a home in this market, it’s essential to be strategic about your financing. Below are five financing options to consider that can help make your purchase easier:
Set up a Tax-free Savings Account
You can use a Tax-free Savings Account (TFSA) to save for a home purchase. The money you contribute is not taxed so you can grow your savings more quickly. In addition, you can withdraw the money at any time without paying taxes or penalties.
This is a good option if you’re looking to buy a home in the near future and already have some savings set aside. However, this can only be acquired if you’re in Canada.
In the United States, you have other savings options which are tax deductible. These include 401Ks and IRAs.
40Ks are employer-sponsored retirement savings accounts. You can contribute pre-tax dollars to this account, which reduces your taxable income. The money in the account grows tax-deferred, and you don’t have to pay taxes on it until you retire and start withdrawing the funds.
IRAs are Individual Retirement Accounts that you open and fund yourself. Traditional IRAs and Roth IRAs are two different types of retirement accounts.
With a traditional IRA, you contribute pre-tax dollars, which reduces your taxable income. The money in the account grows tax-deferred, and you don’t have to pay taxes on it until you retire and start withdrawing the funds.
You contribute to a Roth IRA after you’ve paid taxes on your income. The money in the account grows tax-free, and you can withdraw it tax-free in retirement.
Both types of IRAs have contribution limits. For 2020, the limit is $6,000 per year (or $7,000 if you’re over 50).
Fix Your Credit Score
One of the most important factors in getting a mortgage is your credit score. Lenders use a number to assess your risk of defaulting on a loan. The higher your score, the lower your risk, and the better interest rate you’ll qualify for.
If your credit score is low, you can take steps to improve it. You can get a copy of your credit report from the three major credit bureaus (Equifax, TransUnion, and Experian) and dispute any errors you find. You can also start paying down your debt and make all your payments on time.
Making these changes can take time, so starting as soon as possible is essential if you’re looking to buy a home in the near future.
Get a Government-based Loan
Saving money for a home can be pretty challenging. Your safest option is getting an FHA home loan. It’s a very affordable loan, and it only requires you to have a credit score of 580.
The interest rate is lower, but you also have a smaller down payment of 3.5%. The government secures these loans, so the lender has less risk, and that’s passed on to you in the form of a lower interest rate. This is an excellent option if you have a low credit score or can’t generate a sizeable down payment.
Invest in Something With Good ROIs
If you’re planning to buy a home in the future, you have time to invest in an ROI-generating activity. This could be the stock market, real estate, or even cryptocurrency.
The key is to invest in something with an excellent potential return to grow your savings more quickly. Doing this will help you reach your goal of purchasing a home sooner than if you just saved money in a traditional savings account. Other options include starting a business or investing in high-yield bonds. If you want the safest option, invest in index funds. These are a collection of stocks that track a particular market index, such as the S&P 500.
Buying a home is a big financial decision. It’s important to consider all your options and choose the best financing option for your situation. By following the tips above, you’ll be in a much better position to buy the home of your dreams.