Home prices continue to hit record highs in some markets. For the first time ever, more than half of the homes sold in May 2021 went for more than the listing price, according to research.
Low inventory and high demand for homes has translated into a highly competitive real estate market, in which buyers must often make offers above the listing price to win contracts. While the situation is profitable for many sellers, it could result in long-term negative financial consequences if you’re a buyer who pays too much.
Why are so many people overpaying for homes?
In many markets across the country, it’s almost impossible to purchase a home without paying more than the listing price. Many buyers have made offers on multiple homes, only to be beat out by others who were willing to pay more.
Paying more than the list price doesn’t necessarily mean you’re overpaying. If the home is in a market where the value will continue to increase, paying a little more than the asking price now may not be a big deal.
But it’s not all about the price of the home. To be the winning bidder, many buyers are removing contingencies from their contracts, such as waiving appraisals and inspections. When you have an appraisal contingency in your contract, that means you can walk away if a professional appraiser deems the home’s value to be lower than your contracted price. And when you have an inspection contingency in your contract, you can get out of the deal if your inspector finds that the home needs costly repairs—and you and the seller can’t come to an agreement about how to handle them.
What’s wrong with overpaying for a home?
When you pay too much for a home, you’re unlikely to get your money back if you choose to sell. But that’s not all. If you get a mortgage loan to purchase that house, you’ll be using more credit—and more of your monthly income—than necessary when you overpay.
For example, say you’ve saved $40,000 for a down payment and you were planning to purchase a home for about $200,000. However, prices have gone up and because you keep getting outbid, you make a high offer and purchase a home in the same area for $300,000. If you borrow the remaining $260,000 at a 3 percent interest rate, your monthly payment will be about $1,096 and you’ll pay $134,621 in interest over 30 years. If you waited and could buy the same house next year for $200,000, at the same interest rate your payments would be $675 each month and you’d pay $82,844 in interest over 30 years. (This doesn’t include the cost of mortgage insurance, which most lenders will require if you borrow more than 80 percent of the cost of the home.)
Also, by skipping an inspection, you could purchase a home that has structural damage, a leaky roof, or needs other expensive repairs that you may not know about until after you’ve moved in. If you’re already overextended by paying a premium for the home, it may be difficult to access more credit to complete needed repairs.
How can I make sure I’m not overpaying?
You can take some proactive steps to make sure you’re not paying too much for a home and potentially damaging your financial situation for years to come. Start by taking these steps.
- Avoid skipping contingencies. Even if it’s more difficult to get a contract, requiring an appraisal and inspection can help protect you from overpaying and from getting into a money pit situation.
- Factor in the total cost when budgeting. Buying a home is more than making the monthly payment. The total cost of your home will include the cost of repairs (especially if you skip the inspection or avoid asking for repairs to win the contract), the need for additional credit to pay for those repairs, ongoing maintenance, and new furniture or appliances or other upgrades you may want to make to the house.
- Broaden your search. If you can’t find affordable homes in the exact neighborhood or area you want, consider looking in a broader area. Getting further away from the city center may provide more opportunities for a more affordable home.
- Wait until the market cools if possible. It’s difficult to wait when you want to buy a home, and as prices continue to rise, it may seem like waiting will just result in paying even more. But the market is bound to cool off eventually. In some markets, the pace of homebuying has already begun dropping; for instance, sales of newly built homes dropped 6.6 percent in June. If you can wait, you may end up getting a more reasonable price on your new home.
Overpaying for a home can use up more of your cash and your available credit than is necessary. To keep track of your credit scores, along with the factors that are influencing your scores, try a ScoreSense 7-day trial for free.
