Bidding War: How to Survive
When looking for a new home you may find yourself facing the all dreaded bidding war. Bidding wars occur when there are multiple offers on a house. You are competing with another buyer (or buyers) who are just as passionate about your dream home as you are. If that isn’t stressful enough, you are also ‘blind’ to the other offers being handed to the seller. Even worse, the seller can take any offer handed to them, the winning bid doesn’t even have to be the highest offer, but could have better conditions laid out than what you’re proposing.
Do’s and Don’ts
Be careful not to let multiple bids steer you into a spiral of “ignorant bidding” (i.e. bidding higher than you normally would without understanding the consequences of your decision). Do your financial homework and know your limits in terms of how much you can afford before even heading to the open house. This may be your “dream home”, but the payments coming out of your pocket could be more like a nightmare if you’re not prepared.
So before you go head-to-head in a bidding war, it’s important to go in with a clear understanding (and your emotions in check) of what each bid will end up costing you in the long run as every extra $1,000 you bid can ultimately add up to a price you can’t afford.
How to Determine if your Bid Fits your Budget
For example, let’s say that your budget for a home is $400,000.
Step One: Determine how Much your Monthly Payments will Be
After using our mortgage rate comparison tool, let’s say the best five year variable closed rate, amortized over 25 years is only 2.15%, making your monthly mortgage payments $1722.90.
Based on those numbers alone, you may think you can bid higher and go up to $465,000, by re-entering the new mortgage value into our tool, you calculate your monthly payments to be $2002.87. That $279.97 difference per month might look like an increase you can afford – but how much will it cost you in the long run?
Step Two: Determine how Much it will Cost you in the Long Run
Using our Mortgage Calculator, you determine that with a $465,000 mortgage, at 2.15%, you’ll be paying a total of $600,860.46 over your 25 year amortization period. While with the $400,000 mortgage, you’ll be paying a total of $516,869.11.
That’s a difference of $83,991.35, not just $65,000. Yikes!
The above paragraphs are summarized in the table below:
|Total Payment after 25 Years at 2.15%|
|Original mortgage budget||$400,000||$1,722.90||$516,869.11|
|Final bid amount||$465,000||$2,002.87||$600,860.46|
Step Three: Determine what you can Afford
Seeing just much you’ll be paying over the long term with each bid you make is important. Look at the possible shifts in interest rates (as they’re sure to affect your monthly and long-term payments) and determine if you’ll be able to afford them or not.
For example, if you decide to put in an offer for $400,000 at 2.15%, since this is a variable mortgage, the rate could fluctuate. Those rates could shoot up to 3.75%, calculating your monthly payments at $1987.84. With a $465,000 mortgage, you’re paying $2,310.87 per month. In the rate stays at 3.75% for a year, you would be paying an extra $3,876.36 for that year
Read all about the difference between a fixed or variable mortgage rate >
The charts below summarize the difference in possible bids at 3.75%:
|Mortgage Value||Monthly Payments at 2.15%||Monthly Payments
|Original Mortgage Budget||$400,000||$1,722.90||$1,987.84|
|Final Bid Amount||$465,000||$2,002.87||$2,310.|
While entering into a bidding war is stressful, getting into a mortgage you cannot afford will make it difficult for you to enjoy that dream home. Before entering into a bid and getting caught up in all of the excitement, be sure you have a clear understanding of the maximum mortgage you can afford.