Archive for the ‘buy a home’ Category

Thinking of Homeownership? Ask Yourself These 5 Questions.

Monday, October 24th, 2011

There are plenty of reasons why a person would want to own his very own home. Homeownership actually translates to stability, security and even sense of achievement. This is perhaps the reason why it has always been considered a part of the great American dream.

Thinking of Homeownership? Ask Yourself These 5 Questions.

If you think about it, the act of buying a home is easy. All you need to do is to find one which fits your budget as well as meets your preferences and needs. However, before you even start the search for the perfect home, you need to know for sure you are ready to become a homeowner. After all, homeownership comes with a myriad of responsibilities, most of which you have not even thought of.

In order to help you determine if you are ready to take on the challenges of being a proud homeowner, consider asking yourself these 5 questions:

  1. Are you ready to stay in a particular location for at least 5 years? It would certainly not be practical to buy a home if you plan on moving around a lot. Moving can be quite expensive and selling your home and buying another one will certainly consume time and resources.
  2. How is your credit? Unless you are planning on paying for your home purchase in cash, you will need a good credit score and a stellar credit history to get approved for a mortgage loan.
  3. How much can you afford? You should be careful in setting a budget for there are plenty of hidden costs which might surprise you along the way. Make an effort to avoid underestimating cost of buying a home and overestimating your financial capacity.
  4. Can you afford the down payment? Most lenders require about 20 to 25 percent of the total home price as down payment. Of course, all your cash should not be used for this purpose for you have to deal with other costs such as moving, buying furniture, payment for services such as lawyer’s fees, insurances, etc.
  5. Are you pre-approved? Most home sellers choose to accept offers from buyers who can prove their capability to pay for the home by showing a pre-approval letter from a lender. You would certainly want to enjoy such advantage especially if the home is attracting much buyer attention.

It is important you answer all these questions truthfully for they will help you assess whether or not you are fit and ready to become a homeowner.

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Waiting to Buy a Home? It Could Cost You

Wednesday, May 19th, 2010
Despite the expiration of the Home Buyer Tax Credit, waiting to buy a home could cost you tens of thousands of dollars.  “Why?” you ask.

Home Values

Perhaps you are on the fence because you think home values are going to drop further.  You may be right, but there is mounting evidence that most markets are stabilizing, and some markets are starting to show appreciation vs. this time last year.  Below is a chart showing the average US Home Values since 1975.

Average US Home Values

As you will see, home values are stabilizing and there are some major US markets that have seen appreciation compared to this time last year. 

What does this mean for you?  If you are waiting for home values to fall further, you may be waiting forever.

At least one expert thinks home values are going to go up.  John Paulson, who made billions by correctly predicting the housing crash, had this to say on Reuters. 

Mortgage Rates

We have enjoyed mortgage rates for over a year that are the lowest since World War II.  That’s the war that took place in the 1940’s, before TV was widely available for most households.

The prospect of rates dropping significantly more is unlikely.  Although we might see a slight decline, it would not be enough to warrant waiting to just to lock in that “perfect” rate.  30 year fixed rates are currently below 5% which is an incredible bargain.  

The chart to the right shows bond prices over the past 2 years. 

FNMA 4.5% Coupon Chart 5-19-2010

This is an illustration of the price of the Fannie Mae 4.5% 30 year coupon, which is one of the key indicators of mortgage rates.  Tracking this bond on a daily basis can give great insight as to what mortgage rates are doing and what kind of trends we can expect.

The pink line shows the 200 day moving average, an important trend line.  Higher bond prices result in lower mortgage rates.  The price of a bond is in basic terms tied to supply and demand.  More demand = higher prices and vice-versa.

Note that on November 25, 2008, the Federal Reserve announced a plan to purchase $1.25 trillion in Mortgage-Backed Securities (MBS), and the bond markets  immediately rallied.  Bond prices have not come out of that general trading range ever since, hence the resulting low rates we have experienced. 

The Fed exited their MBS program on March 31, 2010, and there was widespread speculation that rates would then go up.  This hasn’t happened- yet.  Rates have stayed low due to uncertainty in the economy and low inflation.  Recent news of trouble in Europe has led to even better rates in recent weeks.  Any time there is uncertainty in the market, investors tend to buy safer investments with guaranteed rates of return (MBS fall into this category).  We have seen this ”flight to safety” especially in the past couple weeks with the global fears of a European collapse.  This added demand has driven bond prices up and mortgage rates down.

However, if you are waiting for lower rates before you buy, don’t.  Most experts still believe that rates will go up, and likely this year.  One of the key drivers of mortgage rates is inflation, and with the Fed financing record stimulus packages by essentially printing money, inflation will come, it’s just a matter of time.  More money in circulation = lower currency values = more dollars to buy the same item.

Inflation is the arch-enemy of long term investments because it erodes returns, which means yields must rise (and mortgage rates with it).  and they are not alone in this opinion.

As soon as inflation arrives and/or the world economy appears to be stabalizing, bond prices will return to the levels we had  prior to November 25, 2008, which means rates back in the 6%’s at least.

What does all of this mean?

If  home values trend up, and mortgage rates do the same, you will certainly lose tens if not hundreds of thousands by waiting to  buy a home.  Even if home values drop more,  but rates go up, you will lose a significant amount of money by waiting.

Buying Now vs Buying Later with rate increase of 1%

The chart to the left shows the net savings of buying a home now vs. buying later, assuming a 1% increase in mortgage rates.  Column 2 assumes  that  home values continue to fall, and column 3 assumes  home values remain the same.

Note that your total after-tax mortgage payment will be higher at a 6% rate, even if home prices fall by 10% more.  If home values stay the same and rates go up by 1%, your after-tax mortgage payment will be $134/mo higher if you wait to buy and rates go up by 1%.

Even scarier- What if rates go up to 7.5%?  This is where Morgan Stanley predicted rates will be at the end of this year. 

Buying a Home Now vs. Later- Increase in Rates to 7.5%

The net result?  You would lose over $140,000 over the life of your mortgage and your payment would be a staggering $353/ mo higher, and that is assuming home prices don’t go up.

Tax Advantages

All of this is not even taking into consideration the lost tax advantages you would lose over the months you are waiting to buy a home.  All of the mortgage interest over the next 6-12 months while you are waiting will not be available to you as a tax deduction  if you wait.

Why wait?

Home affordability is at an all time high, and with mortgage rates at extremely low levels and home values  deflated, it makes sense to buy a home now, even though the home buyer tax credit has expired. 

It is impossible to time the market exactly at the bottom, and if we are not there, we are close.

Don’t miss out on an incredible opportunity to  buy a home at one of the best times in history.

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