If you find a house you love and other potential buyers are also interested, you may find yourself in a bidding war. You may be tempted to make a high offer to get your dream house, but that might be a bad idea.
The amount a lender will loan you is based on the appraised value of a house. If you agree to a sale price that’s less than the appraised value, you’ll have to pay the difference out of pocket. That may be a struggle if you’re already strapped by a down payment, closing costs and moving expenses.
If the purchase agreement contains an appraisal contingency, the seller may have to negotiate with you to get the sale price within a specific percentage of the appraised value. If you don’t have an appraisal contingency, you will have to decide whether to pay more out of pocket or walk away.
Higher Overall Cost
If you agree to a high price, you may have to make a larger down payment than you were planning to meet your lender’s requirements and you will have to pay more in closing costs, since they are based on a percentage of the mortgage amount. Borrowing more money also means you will pay more in interest over the life of the loan.
Lack of Equity
If you pay more than a house is worth now, it may not appreciate or gain value quickly enough to catch up to the amount you paid. It may even lose value in the future due to neighborhood changes and the overall real estate market. If you don’t gain equity, you won’t be able to eliminate private mortgage insurance or use equity for renovations and other expenses.
How to Approach the Home-Buying Process
Get preapproved before you begin shopping for a house, but don’t plan to borrow the full amount you qualify for. A lender may not consider all your expenses and long-term goals, such as saving for retirement and your childrens’ college education. Figure out the absolute maximum you’re willing and able to pay before you begin looking for a house. Hold firm so you don’t make a decision you will regret.
Make sure you know what is a fair price for a house you are considering. Your real estate agent can tell you how much comparable properties in the area have sold for recently.
If you want to buy a house to live in for a long period of time, overpaying a bit may not necessarily be a bad idea. You might be able to sell it eventually and get back what you paid, and then some, if the house is in a desirable neighborhood with stable or rising home values.
You should always shop around to get the best mortgage terms you can. Even a small difference in the interest rate can mean a difference of thousands of dollars over the length of the mortgage.