When Should You Buy?
There’s a common question amongst potential home buyers: when is the best time to buy a home? The inevitable response from most is that spring is when the inventory is at its peak, giving buyers more options, and winter is when prices are somewhat lower, allowing buyers to get a discount. While spring may seem like the ideal time of year to find your dream home, it can actually put you at a disadvantage. If everyone is like you and looking for a home in the spring, chances are, the home you want will have multiple offers, putting you in a stressful bidding war and forcing you to pay top dollar for the house.
If you have to buy a house on contingency because you’re selling a house with a mortgage and someone else puts up an all-cash offer, guess who’s going to win? Home buying contingencies aren’t as attractive as cash offers because there’s the risk your house will take a long time to sell, forcing the seller to keep their house off the market. Not a good position to be in when the market is hot.
The Balance goes so far as to pinpoint an actual date on the calendar, saying the best time to buy a house is on Christmas Day, followed next by Easter Sunday. Their logic is that no one else is looking for a home on these holidays. While this may be true, your inventory is likely rather low during these holidays, particularly the week of Christmas. Not many people want strangers traipsing through their homes during the holidays. It isn’t fun to clean, stage and leave your home any time of the year, let alone during the holidays.
The Street takes a wider view, saying the November-December time period may get you the best deal on a home because any seller willing to sell during the holidays clearly needs to sell quickly. They also say January and February are ideal, with homes costing 8.4 percent less, on average. Beyond dates on the calendar, however, they cite the fact that interest rates are a good indicator. When rates go down, you’ll likely be able to take out a larger loan and afford more house. When rates go up, it might cause other buyer’s to delay their purchase, which means you could get a deal. You may also come into some money, improve your credit score or lower your debt – signaling a good time to get a mortgage.
No matter whose advice you heed, there are ways to put yourself in an ideal position to buy a home any time of year.
Buy with Cash but Not From Your 401k
The offers that win the most bids, despite it being a hot sellers’ or buyers’ market, are all-cash offers. These offers are not backed by a home, therefore, they are not contingent on you first selling your house to pay off your mortgage. Instead, the offer is backed by pure, hard cash. No contingency required. In fact, with all-cash offers, there is no need for a lengthy mortgage approval, so no worry about whether interest rates are high or low, either. Deals without contingencies close faster and with fewer potential hiccups, plus they can often save the buyer money. Any seller offered an all-cash deal jumps for joy because it’s a cleaner more certain offer. They may also be willing to negotiate the price down in exchange for that secure offer, saving the buyer even more money.
Not everyone has liquid cash to offer a home seller. Some people decide to tap into their retirement account, such as a 401k, to purchase a home with cash. This isn’t always a good option, however. According to U.S. News & World Report, “If you withdraw funds from a 401(k) to buy your home you will trigger steep penalties and taxes.” Even if you borrow from your 401k with the intent to repay the loan, you can only borrow up to “the lesser of $50,000 or half of your vested account balance,” they say.
Although you could borrow up to $50,000 from your 401k, Michael Maresh, senior vice president at Captrust, a leading national retirement advisory firm, warns against it. “If you leave your employer, either voluntarily or involuntarily, you have to pay back the balance of your 401k loan immediately,” he says. “If you can’t, you will be taxed on that loan as it is considered a distribution. Also, if you are under the age of 59 1/2 years old, you will have to pay a 10 percent penalty on that balance. Another downside with a 401k loan is that money is actually taxed twice. When you contribute to your 401k, it is a pretax contribution, so no taxes are paid. When you get the 401k loan, that is not a taxable event. But, as you pay yourself back the principal and interest, you are paying that back after-tax, essentially paying tax on that money as you put it back into the 401k plan. When you take that money out again in retirement, you’ll get hit again with a tax. Finally, when you withdraw that money from your 401k it is out of the market, so it’s no longer earning market return.”
Use Someone Else’s Cash
Now that you know the downsides of taking a loan from your 401k, what do you do if you don’t have liquid cash and don’t want to dip into retirement accounts? One option is go to a company like Homeward that has access to funds from institutional capital providers so it can make you a strong all-cash buyer with less red tape.
The problem with the traditional buying/selling of residential real estate is that you must sell your current home to access your home equity in order to buy your new home. Most banks won’t offer you credit for your home equity until your old home is under contract with a buyer. No matter what time of year, what the interest rate, or when you really want to move, you are stuck in a pretty common dilemma. You must sell first before you buy, putting you at risk for losing any house you want because your offer is contingent upon the sale of your current home.
When you use Homeward, however, you get credit for your home equity before you sell your existing home. They value your existing home during their approval process and then give you their cash to buy your new home before you sell. Your offer is all cash with no home buying contingencies, so your bid is highly-attractive to sellers. You save money and time without having to wait on bank appraisals or approvals. You can also stay in your existing home to make improvements to your new home, eliminating the need to move twice. With this solution, the best time to buy a home is when you are ready. Want to learn more? Check out Homeward’s How It Works.
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