Mortgage Rate Update: Stable Rate Environment
Recent Site Updates: Buying a Home in a Changing Economy
This Month’s Tip: Maximizing Your Down payment
Welcome to the April edition of the Home Buyer’s Information Newsletter. Although both new home sales and existing home sales fell a bit in February, in an historical perspective the overall market remains fairly strong. Housing is one of the few bright spots in the current economic climate, a positive point for those looking to buy a home. Most of this activity appears to be related to the favorable mortgage rate situation (see the next story).
Mortgage Rate Update
Rates continue in a favorable range, with 30-year fixed rates averaging 6.91% in the March 29th national survey conducted by mortgage company Freddie Mac. Rates have remained fairly constant since the first of the year, averaging just under or just over the 7.00% figure. We’ve had a number of visitors to the site ask about the rate reductions made by the Federal Reserve thus far this year. There have been a total of 3 rate decreases, totaling 1.5%, since the first of the year. Why, then, have mortgage rates not fallen an equal 1.5%? This is due to the fact that the Fed Rate has little or nothing to do with mortgage rates (other than a largely psychological impact). If a buyer has been sitting on the fence waiting for the situation to improve they may be surprised to find interest rates increasing rather than declining as we enter the active spring and summer real estate market. Mortgage rates are currently at one of the lowest levels in 20 years. Waiting for more favorable conditions may be wishful thinking. For more information on mortgages, visit the Mortgage Section at: Mortgage Information
Recent Site Updates
Obviously, some of the biggest items in the news recently are the changes occurring in the economy. How does this affect you as a home buyer? See the special report on buying a home in a changing economy: Home Buying when the Economy Changes
You can always find out “Whats New” at the Home Buyer’s Information Center at the following location: Site Updates
In this volatile financial and interest rate environment getting as many loan comparisons as possible is crucial. At Lending Tree you can submit one simple loan request form and within a few business days get up to 4 bona-fide offers from lenders competing for your business.
Get more information here.
This Month’s Tip: Maximizing Your Down payment Over the years, investment in a personal, single-family home has been one of the safest harbors for your savings. Yes, there will be times that other types of investments may bring higher returns (the stock market or bonds for example) but your home is the only investment that can bring reasonable returns (through equity build-up) and that you can live in and enjoy (try doing that in your stock portfolio!)
A home buyer should understand, though, that a real estate investment can experience cycles. These will sometimes occur in the short term and will almost always occur in the long term. There will be periods of steady value increases (which we’ve seen clearly in the last few years), periods of stagnation (where there is little or no increase in value for a period of time) and times of value decreases (which has happened a number of times in the last 20 years). Just as there were millions of people who were convinced that there could be no downside to the stock market, many home buyers are certain that home values can go only one way–up.
As we look at some of the rapid (and, in some cases almost insane) increases in home values in the last few years, it is our opinion that there is a good possibility that these price increases will slow and perhaps even level off. In some areas, there may even be a decline in home values.
What is the best hedge against these potential down cycles? Having as much equity as possible in your home, which begins with finding as much down payment as possible.
The Advantages of Maximizing Your Down payment
Although the obvious advantage of a lower down payment is less money out of pocket, there are numerous advantages in pushing to maximize your down payment. One of the first advantages is the flexibility that a larger down payment offers. You’ll have a much wider choice in available mortgage programs. With a smaller down payment, you will be limited only to those programs that offer low down payment options. In addition, a larger amount down will give you access to those mortgages that have the best rates.
An immediate (and measurable) advantage of a down payment of 20% or more is the avoidance of Private Mortgage Insurance (PMI). The vast majority of conventional mortgages with less than 20% down will carry PMI–an insurance that protects the lender against a buyer’s default. PMI can add from $25 to $100 or more to the mortgage payment–starting with the first payment and continuing until the Loan to Value ratio is less than 80%. This can take many years in a 30 year mortgage, since the principal reduction comes very slowly in the early years of the loan.
With a larger downpayment (and the resulting increase in your equity position) you will also be puttting yourself in a more comfortable position should you want–or need– to sell your home. With a reasonable level of equity, you should be in a positive position no matter what turns– up, down, or sideways–the housing market takes. Those with little or no downpayment will find it very difficult to sell a home in the early years of a mortgage unless they reach into their pocket for selling expenses.
How to Maximize Your Down payment
If you have some time before your planned home purchase, there are things you can do to improve your position and raise the funds necessary for your downpayment.
Your Budget: If the down payment you want is not in hand, one of your first moves after deciding to buy a home is to get a firm grip on your budget. If you are like many of us, it may amaze you how much money you can save simply by taking some time to investigate where your money is going now and looking for ways to trim your expenses. More information on the site: Developing a Budget
Purchases: If you’ve made the home buying decision, put the clamps on your wallet! Large cash purchases mean less money for down payments and closing costs. Financed purchases negatively affect your qualifying ratios. Leave all large purchases for later, after you have bought your home and determined your new budget. More information on the site: Tips for Saving Money
Gifts: Within certain parameters, most mortgages allow for a certain percentage of your downpayment and closing costs to come from gifts. These generally will come from parents or relatives and will require a “gift letter” designating the money as a gift and not as a loan that must be repaid.
IRA Accounts: If this is your first home and you have access to an IRA retirement account, you can withdraw up to $10,000 for down payments and closing costs. If available, this can be a big boost to your down payment funds. More information on the site: IRA Funds for a First Home
In summary: The easiest way to purchase a home is with a minimal downpayment, but that translates into both a higher payment and a higher risk. Working to increase your downpayment may be more difficult, but the long-term and short-term benefits may well be worth the effort.
As always, if you have suggestions for improving the site, or topics you would like to see addressed in this newsletter (or, if you have used the Home Buyer’s Information Center to successfully purchase a home), drop us a quick line or access our feedback page at: HomeBuyers Information Center Feedback
A special thanks to all those who have written to let us know that they have found the Home Buyer’s Information Center a helpful resource in their buying process. Have a great month and good luck in your home buying process! The Team at the Home Buyer’s Information Center