You may have heard that the housing market is hot right now and that many homes are getting multiple offers above the asking price. This can be frustrating for buyers who have to compete with other eager buyers, some of whom may even have all-cash offers. You may wonder if it’s worth it to overbid for a home by tens of thousands of dollars, and how that will impact your monthly payments and your overall mortgage cost.
First of all, you need to know how much house you can afford and stick to your budget. Don’t let emotions get the best of you and bid more than you can comfortably pay. You can use online calculators or talk to a lender to get a fully underwritten pre-approval. This will also show the seller that you are serious and have had your finances thoroughly qualified.
Second, you need to consider the list price vs the actual market value of the home. The list price doesn’t necessarily translate to the actual market value of that home. Sometimes, the list price is strategically set lower to entice the maximum amount of buyers to offer on the home. The market will dictate the value of the home.
Third, consider the appraisal process if using a loan. If you overbid for a home and the appraisal comes in lower than your offer, you may have to make up the difference in cash or renegotiate with the seller. The lender will only lend you based on the appraised value, not the purchase price. So be prepared for this possibility and have some extra cash on hand.
Fourth, you need to weigh the pros and cons of overbidding for a home. On one hand, overbidding may help you win a bidding war and secure your dream home in a desirable neighborhood. It may also pay off in the long run if the home appreciates in value over time. On the other hand, overbidding may increase your monthly payments and your interest cost over the life of the loan. It may also reduce your equity and your return on investment if you sell the home in the future.
To illustrate this point, let’s look at an example. Suppose you want to buy a home that is listed for $300,000, but you end up bidding $350,000 to beat out other offers. Assuming you put 5% down and get a 30-year fixed mortgage at a 6% interest rate, here’s how your numbers would look like:
– If you buy a home for $300,000, your monthly payment would be $1,827 and your total interest cost would be $330,139.
– If you buy the home for $350,000, your monthly payment would be $2,132 and your total interest cost would be $385,162.
That means by over-bidding $50,000 for the home, you would pay $305 more per month and $55,023 more in interest over the life of the loan. In the grand scheme of things, that’s not a huge difference, but it’s still something to consider. Of course, these numbers are just estimates and they don’t take into account other costs such as taxes, insurance, maintenance, and closing costs. They also don’t factor in any potential appreciation or depreciation of the home’s value. So you should do your own research and consult with a professional before making any final decisions.
Finally, if you think that your agent is telling you to offer more just so they can get paid more. Here’s an estimated difference in how much they would earn between each offer price based on the previous example and a commission payout of 3%.
– If you buy a home for $300,000, your buyer agent would receive a commission of $9,000.
– If you buy the home for $350,000, your buyer agent would receive a commission of $10,500.
That means they would get paid another $1,500. Is a commission of this much that significant to your agent that they would intentionally influence you to purchase a home at $50,000 over the list price just to earn another $1,500?
I hope this blog post has given you some useful information on over-bidding for a home and how it affects your mortgage. As you can see there are minimal impacts to your mortgage if you decide to offer a bit higher. I always say, bid a max price that you are both comfortable paying and won’t regret if you lose out. Simply submitting an offer without any intention to be competitive to win is often a waste of time. Your chances are slim to none. The first thing sellers use to filter out offers is PRICE! If your offer doesn’t make the first cut, price, they likely won’t look further into your terms of the offer.
In this hot seller’s market, you must be intentional and have the will to fight for the home that you really want. If not, that’s going to be someone else’s home. If you have any questions or comments, feel free to leave them below. And if you need any help with buying or selling a home in this competitive market, don’t hesitate to contact me. I’m here to help!