With interest rates still low, many people remain interested in purchasing a home whether it’s their first one or second. The cost of doing so can be affordable and in a recent North Shore Bank/GMAR Home Affordability Report, shoppers in the second quarter could still buy a home with a small monthly payment as compared to late in 2013.
Maybe it’s getting more for your money with a new home or becoming a first-time homeowner, these home transactions have taken place thanks in large part to lower interest rates. But before you seek these out and jump on the bandwagon, you may want to ask yourself, is it really a good time to buy a home?
Consider these factors before doing so.
You’re Already a Homeowner
Ok, you already own a home but you want to trade in your current dwelling and embrace the mantra of getting more for less with a larger home. Or, maybe you want a more desirable location. Once you do make the leap, you could then face the challenge of paying a higher mortgage rate with your new home.
Thanks to the current marketplace having millions of homeowners locked in at near historic lows for their mortgage rates, you could face the potential challenge of either buying that new home later (as it takes time to sell your current one) when rates could potentially double or even pay a greater monthly amount for a home that’s not too different than what you’re in now.
This is referred to as a “mortgage rate lock” and its possible effect has been discussed a lot as it could impact many by the middle of 2015, according to the Mortgage Bankers Association. This group has predicted rates on a 30-year, fixed rate mortgage will increase to 5.1% by this time next year. Should this occur, the “mortgage rate lock” will challenge the housing market as it could cut home sales by around 4 percent from today’s levels.
You could also find yourself stuck, unable to sell your home. Do you really want to carry two mortgages?
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Shortage of Homes for Sale
But home sales may already be on the decline, even if you can afford a new one. You may not be able to find what you’re looking for as there’s a greater demand than supply.
Prospective home buyers as well as realtors and bankers are facing inventory challenges thanks to a shortage of for-sale homes to choose from.
According to Mike Riedmann, president of residential sales for Omaha’s NP Dodge Real Estate, “The market is suffering from a lack of inventory. That’s the No. 1 issue.”
In Omaha, its Area Board of Realtors recently reported that the number of homes currently on the market is off 9 percent as compared to the previous year.
“People aren’t moving up because first-time buyers aren’t coming into the market to buy their properties,” said Joe Valenti, president and CEO of CBSHome.
One reason is the high costs to make a down payment.
Down Payments Cost More
As for these first-time buyers being absent, a monthly mortgage payment could be affordable these days—sometimes cheaper than paying rent—but your down payment is likely on the rise; this could be a deterrent to entering the marketplace.
According to the brokerage firm Redfin Corp., in 2013, the median down payment for the lowest 25 percent of properties sold was $9,480 as compared to 2007’s $6,037. This represented data from the 25 largest metro areas.
Young adults have been affected most by this increase. This group has been spending their early professional years living with their parents as they pay off student loans, face a tough job market and struggle to save money—much less make any.
Susan Wachter, a real estate and finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, recently said of this group, “The numbers tell the story of why we have millions of potential homeowners who are renters or living with their parents. What has changed is the ability to become an owner. And that’s changed through a down payment that’s more than doubled.”
Adding more fuel to this fire is the fees that borrowers must also tack onto their down payments thanks to tighter borrowing requirements. There’s now a 1.75 percent upfront fee of the loan balance and up to 1.35 percentage points for annual mortgage-insurance premiums.
Combine this together and these costs add up pretty quickly, keeping people away.
As you consider a home purchase in this tempting low-rate environment, be sure to honestly assess your situation and understand these low rates may be nearing their end soon. Think about your answers to the following questions, can I afford higher mortgage payment in the future and will I really be making a purchase that will make me happy?
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