Jeremy Mateo, 27, is a real estate broker in Hawaii and bought his first home, a one-bedroom condo for $560,000 in Honolulu, right before the coronavirus pandemic upended life in the U.S.
Since Mateo closed on his home in March 2020, the real estate market has been on a tear. At first, the pandemic shut down the entire market. By summer, he says buyer demand soared once the Federal Reserve announced it would hold benchmark interest rates near zero through 2022 and mortgage rates sunk to historic lows, "and that's when all of real estate just started going crazy here in Hawaii."
First, the basics: Mateo says buyers should make sure they have a good credit score in order to qualify for a home loan at a favorable interest rate. Generally, the higher your credit score, the lower the interest rate on your mortgage. A lower interest rate can mean significantly lower monthly payments.
A strong credit history can also improve your odds of winning a bidding war or getting a mortgage pre-approval.
But it can take time to build credit or improve a low score, which takes into account your payment history, amounts owed, length of credit history, new credit and credit mix.
With that said, financial experts stress that mortgage rates are set to remain low for the next two to three years if you need time to improve your financial picture.
It can take years to save up for the down payment on a home, but that's not the only number to be thinking about.
For example, Mateo put down 10% on his home, or $56,000 due upfront, and pays an extra $185 for private mortgage insurance every month. (Financial experts recommend saving at least 20% of the home's value for the down payment to avoid a recurring PMI.)
Closing costs, which can include home inspection costs, loan application and origination fees and even two months' worth of property taxes, can range from about 2% to 5% of the loan amount, and they're due at the time of purchase. As a real estate agent, Mateo earned a commission to cover his closing costs, but without that, it would have come out to an extra $7,800 on the day of signing.
Most buyers should also consider recurring expenses like homeowners insurance, property taxes, and repairs and maintenance. These can add up to 1% to 2% of the purchase price each year. For example, Mateo's mortgage and PMI are $2,833. He pays an additional $1,010 per month in homeowners association fees, maintenance fees, taxes and insurance — bringing his total housing expenses to around $3,843 per month.
Then, after Mateo bought his home, he went over his original renovations and furnishings budget and ended up spending about $100,000 to make his place feel like home.
With upfront fees and move-in costs in mind, Mateo says overestimating your savings to buy a home is crucial: "If you think you have a number in mind to save, save more than that, because you just never know what unexpected costs you might have."
Mateo says finding a good realtor to walk you through the buying process — and absorb some of the logistical headaches — is worth taking the time to research. Over the years, he's built a young clientele base of first-time buyers through his YouTube and Instagram pages. There, he posts listings as well as educational content for new buyers to learn about the process and prepare their finances for a first-time purchase.
He recommends buyers visit an agent's social media profiles to check out their personality and see if their communication styles match up.
"Any real estate agent can put out a nice commercial, but you don't really know how well they work or how helpful they will be for you," Mateo says. On social media, clients can take a peek at a realtor's behind-the-scenes moments throughout the buying and closing journey. You may also hear from other buyers themselves through an online video or written review of their experience working with the agent.
You might also want to know that the agent has been through the homebuying experience for themselves and can offer that perspective. For example, Mateo has shared the ups and downs of his own buying experience, including going over budget on his renovations, hoping to demystify the process for other young buyers and prevent common mistakes.