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Why You Should Shop Below Your Pre-Approval Price Range
Whether you are in the market for an affordable starter home or shopping for your dream property, you need to carefully calculate how much you have to spend. Getting pre-approved for a mortgage and working within that predetermined range will simplify the buying process and help you avoid making a costly mistake. But simply knowing how much you can afford to spend does not necessarily tell you how much you should spend on your new home.
If you shop at the top edge of your pre-approval range, even a small setback could leave you house rich but cash poor. Worse yet, a sudden drop in housing prices could find you upside down – owing more on your mortgage than your home is currently worth.
The best way to avoid those unhappy, and financially untenable, scenarios is to shop below your pre-approved price range. Here are some big advantages to thinking small.
Breathe Easier by Building in Some Breathing Room
When you shop at the lower end of your pre-approval range, or completely below that target price range, you give yourself some breathing room. Instead of hoping that you will get that next promotion and stretching to make the monthly payments, you can rest assured you will have the cash you need even if everything does not go according to plan.
The amount of breathing room you give yourself will vary depending on how much home you buy and what kind of financial resources you have. And while this alone may not save you from an extended period of unemployment, it could help you recover more quickly. At the very least, this strategy could stop a temporary financial setback from becoming a permanent financial catastrophe.
Buy the Worst Home in the Best Neighborhood
Buying a home is more than just investing in a piece of property. When you purchase a home, you also buy into the neighborhood. From the safety of the streets to the quality of the public schools, the nature of the area will play a major role in your overall satisfaction.
In the world of real estate, the quality of the neighborhood typically has a direct bearing on the prices of the homes within its borders. But there are still bargains to be had, especially if you are willing to buy the worst home in the best part of town.
By shopping below your target price range, you could snag yourself a serious bargain. And even if the home you end up with needs a bit of TLC, simply living there entitles you to all the neighborhood amenities, from the great park down the street to the public school with the best test scores in the state. Best of all, paying a lower price means you still have the cash you need to make those upgrades. Before you know it, your bargain basement home will be the envy of the neighborhood.
Greater Potential for Price Appreciation
If you are able to drive a hard bargain and buy a home that is below your means, you could end up with a bigger profit down the line. Lower priced homes often have further to run than their higher priced counterparts, especially in a positive housing market.
The potential for appreciation is one of the biggest benefits of home ownership, and shopping smart can boost that advantage even more. So do yourself a favor and shop smart – your wallet will thank you when it comes time to sell.
A Bigger Down Payment Means a Smaller Mortgage Payment
You may be tempted to buy a bigger and better home, especially if you are eligible for a low down payment. Keep in mind, however, that a smaller down payment will mean a bigger monthly mortgage payment – and the additional expense of private mortgage insurance.
The opposite is also true, of course. If you are able to make a larger down payment, you could sharply reduce the size of your monthly mortgage, freeing up cash for home improvements, upgrades, furnishings and other essentials. By shopping in the lower reaches of your price range, you can afford a bigger down payment – and a smaller monthly mortgage commitment.
It does not matter what kind of home you are looking for or how much you have to spend. Shopping at the lower end of your pre-approved price range can give you a number of important benefits. When you shop smart for your next home, you can rest easy knowing you can truly afford the roof over your head.