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The 2010 Home Buying Marketplace
Opening doors for smart buyers
Article contributed by Affinity Federal Credit Union from their quarterly magazine, Affinity Connections. For more information about Affinity or to view Affinity Connections in its entirety, visit www.affinityfcu.org/ connections. |
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THE UPS – particularly for buyers – AND DOWNS – as in home prices – of today’s real estate market are enough to make anyone dizzy. To have a clear head when it comes to buying a home, all you have to do is follow some simple guidelines.
BE AWARE OF MARKET CONDITIONS
The past five years have seen a steady decline in housing values. According to real estate appraiser Jeffrey Otteau of Otteau Valuation Group, New Jersey home prices have fallen about 13 percent since the market peaked in 2006. This is in line with the 12 percent national average.
Fewer home purchases in the past few years have created pent-up demand, especially among first-time Gen-Y homebuyers. This generation is now maturing into prime home buying age (28) at a staggering rate of 11,000 per day in the U.S. Such a large influx is one reason why Otteau and other experts are forecasting more buyers to enter the market in 2010. The National Association of Realtors (NAR) predicts a surge in home buying this spring, partly due to the tax credit ($8,000 for first-time home buyers; $6,500 for existing-home owners) being extended to April 30, 2010.1 This will be the beginning of moderate growth – estimated to be a 2–3 percent rise in home values over the next few years.2 If these predictions ring true, home values will not return to the peak levels experienced in 2006 until 2016.
LOW PRICES MEAN MORE FOR YOUR MONEY
The window of opportunity to get a good deal on a new home remains open. Though the demand is increasing, (sales volume rose 4.9 percent in 20093) there remain plenty of good deals. If you are looking to buy a home you currently have two key advantages:- Home prices have dropped and are now stabilizing at a lower level. The U.S. median home sale price in 2009 was $172,500, according to the NAR. You have to go all the way back to 2002 to find an annual median price that is lower.4 This has put home prices in equilibrium with income levels and, therefore, within reach for more people.
- Interest rates are still at historic lows. They have fallen from 5.32 percent in June, 2009 to 4.71 percent at the end of December, 2009.
GET THE BEST MORTGAGE NOW
To make sure your dream home doesn’t become a financial nightmare, be sure to have a mortgage that is affordable and doesn’t put you in an unfavorable position further down the road. Mortgage calculators can be found at affinityfcu.org to determine what fits in your budget. You can also employ a few tips that can help secure the best mortgage rate, such as the following
IMPROVE YOUR CREDIT SCORE
Before the housing crisis, you could qualify for a loan with a 650 credit score. Today, to get the lowest mortgage rates, you’ll probably need 730 or better.5 A higher score and no late payments or defaults can get you a lower interest rate, resulting in huge savings over the life of the loan.
Half a percentage point in interest may not seem like much at closing, but over 30 years it equals $17,837.21 on a $160,000 mortgage. Additionally, if your credit score is 680 or less you may be categorized in the subprime market. Not only will you suffer from a higher interest rate, you may become a target of predatory lenders who use unscrupulous tactics – including adding credit insurance and other unnecessary products to your loan, pressuring you to refinance frequently, and charging extra fees – increasing your costs beyond your budget.
BIGGER DOWN PAYMENTS MEAN LESS COST
Banks, sellers and real estate agents look more favorably at buyers who have larger down payments, offering the best loan rates to those with 20 percent or more down payments. Loans are still available to borrowers with less than 20 percent down but will require the additional cost of private mortgage insurance (PMI). In the long term, a lower interest rate along with a smaller loan amount will save you tens of thousands of dollars over the life of the loan.
GET PRE-APPROVED BEFORE YOU SHOP
Knowing how much you can afford before you attend your first open house can help you find the home that’s right for you and your budget. Apply to at least three lenders to make sure you get the best rate possible, and be aware of the contingencies attached, such as the rate period and your responsibility to prove your income.
LEARN IMPORTANT ACRONYMS
Understand terms such as DTI, LTV and PMI, and what they mean to your bottom line. DTI is Debt-To-Income ratio and is used to help determine how much home you can afford. Typically, lenders will approve a mortgage whose payment is less than 36 percent of your total household monthly income. LTV (Loan-To-Value) is the ratio of the home loan compared to the home’s appraised market value. If your mortgage is
more than 80 percent of the home value, you will have to pay PMI (Private Mortgage Insurance). Figured as a percentage of the total loan, PMI is an extra cost you must pay to help offset the risk taken by the lender.
KNOW THE “REAL” COST OF YOUR DREAM HOME
There is more to consider than your monthly mortgage payment that factors into your total monthly costs. Take into account transportation costs associated with commuting from your new home. Also, estimate your home energy costs. For every 1,000 square feet, you can figure an average increase in energy cost of $830/year.6
START YOUR SEARCH NOW
Buying a home in today’s market offers an opportunity to get a great deal – if you’re careful. Work on improving your credit score, get a pre-approved mortgage and consider all the costs of that new house so you can stay within budget and enjoy your dream home for years to come.
References:
1 www.federalhousingtaxcredit.com
2 www.otteau.com
3 www.realtor.org
4 www.realestatedecline.com
5 www.realtown.com/davidgoldstein/blog/buying-first-home-2010
6 www.eia.doe.gov/emeu/recs/recs2005/c&e/summary/pdf/tableus1part1.pdf
Sources:
www.marketwatch.com/story/existing-home-salesplummet-167-in-december-2010-01-25-10100?reflink=MW_news_stmp
www.eia.doe.gov/cneaf/electricity/esr/table5.xls
April 16, 2010
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