Money Management

It’s a tricky time to buy a home right now. Check out four tips to help you stay within your budget if you’re intending to become a homeowner. 

Housing prices have skyrocketed over the last several years, in part due to there being fewer homes on the market. This has been great news for sellers, but it’s made life even more difficult for home buyers. The median real home value reached a record 4.6 times higher than the median real family income in 2022, according to the Federal Reserve’s latest Survey of Consumer Finances. That’s a tough pill to swallow if you’re already struggling to keep up with your bills.

Obviously, everyone’s situation is unique. But here are four things worth considering if you’re in the market for a new home right now.

1. Get pre-approved for a mortgage

A mortgage pre-approval is essentially where a bank looks at your finances and tells you how much it would allow you to borrow for a mortgage. It helps you in a few ways.

First, it gives you a good idea of what price range you should be looking in. If you know a home’s asking price is $200,000 over your pre-approval amount, you know it’s not worth your time to put in an offer on that house. But if the asking price is within $5,000 of your pre-approval amount, it might be worth pursuing.

Second, a mortgage pre-approval shows the seller that you’re serious and will be able to obtain the funds required to complete the sale if they decide to accept your offer. This might make your offer a little more appealing compared to another potential buyer who doesn’t have a pre-approval.

To get pre-approved, you’ll need to gather documentation regarding your income, like tax returns and pay stubs. You’ll also need to provide your Social Security number so the lender can check your credit score. Check with mortgage lenders to find out exactly what you need to apply.

Pre-approvals are typically valid for 60 to 90 days. After that, you can request a renewal if you don’t have a home yet.

2. Be more flexible with your search area

Location has a major effect on the price of a home. Some areas are more desirable than others because of their close proximity to a city center or a lake. These homes are typically more expensive than homes that are farther away.

If you can’t find a home you like in your target neighborhood, consider looking a little farther out. It might mean you have to settle for a longer commute to work or to the grocery store, but you may be able to get more home for your money.

3. Consider a fixer-upper

A fixer-upper might be more affordable than a home that’s been recently built or renovated. But you’re also taking on a project. That means you need extra time on your hands to do the work or extra money to pay someone to do it for you. You’ll also need money on hand for the materials.

You must weigh all these costs, plus the home price, against the cost of a home that’s move-in ready. If the price difference isn’t significant, you may prefer to go with the move-in ready home to save yourself the work. But if you could save tens of thousands of dollars, the fixer-upper might be worth it.

4. Wait it out

It might not be ideal, but if you can’t find anything to buy that suits you right now, waiting could be the best strategy. Home prices are beginning to come down, so more affordable options could open up for you in the future.

In the meantime, you can either remain in your existing home or seek out a rental that could accommodate you while you continue your search. Keep checking available homes periodically and act quickly if something within your budget comes up.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Kailey Hagen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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Mutual funds are commonly found in 401(k)s. But should you invest in them alone? Read on to find out. 

The money you’re saving for retirement shouldn’t just sit in cash. Rather, it should be invested in different assets so it grows into a larger sum over time.

Now, the nice thing about IRAs is that they allow you to invest your savings in different stocks. With a 401(k), that’s generally not possible. Rather, 401(k)s typically limit account holders to a mix of funds to choose from. Those commonly include target date funds, mutual funds, and index funds.

Mutual funds are a popular choice for investing in a 401(k). But you may want to think twice before putting all of your money into mutual funds.

Be wary of high fees

Mutual funds are actively managed funds that contain different asset mixes, depending on the fund’s strategy. Mutual funds have actual people behind the scenes picking investments for you to put your money into. And because of this, mutual funds charge pretty high fees to those who invest in them.

The problem, though, is that those higher fees can eat away at your 401(k)’s returns over time, leaving you with less money for retirement. So while it’s certainly not a bad thing to own some mutual funds, you may not want to only invest your 401(k) in mutual funds. Instead, you may want to put some of your money into index funds, since those tend to come with substantially lower fees.

Index funds are funds that are passively managed. They simply aim to match the performance of the market benchmarks they’re tied to.

An S&P 500 index fund, for example, will have the goal of performing comparably to the S&P 500 index itself. But because you don’t have a fund manager actively picking assets, you’re generally not going to be charged an expensive fee when you invest in an S&P 500 index fund.

In 2022, the Investment Company Institute found that the average fee, or expense ratio, for actively managed mutual funds was 0.68%, while the average expense ratio for index funds was just 0.06%. This means that for every $1,000 you put into mutual funds, you might lose $6.80 to fees, compared to just $0.60 with an index fund.

Ideally, your 401(k) balance will grow well beyond $1,000 since it’s supposed to serve as your retirement nest egg. So imagine you have $100,000 invested in mutual funds. That means you may be losing $6,800 to fees, as opposed to $600 for index funds, which is a much bigger deal.

Aim for a mix of funds

There’s definitely nothing wrong with buying mutual funds for your 401(k). But if you only stick to mutual funds, you might end up with a lower balance heading into retirement due to losing a lot of money to fees. Rather than resign yourself to that, consider a mix of mutual funds and index funds.

And if you’re worried that buying index funds will mean getting stuck with a lower return in your 401(k), you should know that for the five-year period ending Dec. 31, 2022, only 13.49% of actively managed mutual funds outperformed the S&P 500 index. So if you invest some of your retirement savings in an S&P 500 index fund, you might benefit from not just lower fees, but also, higher returns.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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