When Is the Right Time to Buy a House?
When investing in a property, many potential homebuyers attempt to predict if home values are rising or falling while also paying attention to mortgage rates. These are important metrics to follow to determine if the time is right to buy a house. However, the best time is when you can afford to.
How Buying a House Works?
The type of loan that a home buyer chooses affects the cost of the home over the long term. There are different options for mortgage loans, but a 30-year fixed mortgage rate is the most stable option for homebuyers. The interest rate will be higher than a 15-year loan (popular for refinancing), but the 30-year fixed presents no risk of future rate change shocks. Other types of mortgage loans include a prime rate mortgage, a subprime mortgage, and an “Alt-A” mortgage.
To qualify for a prime residential mortgage, a borrower must have a high credit score, typically 740 or higher, and be mostly free of debt, according to the Federal Reserve. This type of mortgage also requires a considerable down payment, 10 to 20%. Because borrowers with good credit scores and little debt are considered relatively low risk, this type of loan usually has a correspondently low-interest rate, which can save a borrower thousands of dollars over the life of the loan.
Subprime mortgages, on the other hand, are offered to borrowers with lower credit ratings and FICO credit scores below 640 depending on the lender. Because of the increased risk to lenders, the interest rates on these loans can be as high as 8% to 10%. Adjustable-rate mortgages (ARMs) fall into this category. ARMs often have an initial fixed-rate “teaser rate” at first, and then switch to a floating rate, plus margin, for the remainder of the loan. These loans often start with a low-interest rate, but the mortgage payments can increase dramatically once the loan switches to the higher variable rate.
Alt-A mortgages are typically low-doc or no-doc loans, which means that minimal documentation is required by the lender for the borrower to prove their ability to pay the loan. Alt-A borrowers typically have credit scores of at least 700. The loans tend to allow low down payments. These loans are useful for those who earn sufficient income but are unable to provide documentation because they earn it sporadically. Some self-employed people may fall into this category. Interest rates tend to be around 5.5% to 8%, depending on the lender and the borrower’s situation.
Buyers should know that if you are offered an Alt-A or subprime rate does not mean that you cannot qualify for a prime-rate mortgage with a different lender.
Affordability
The United States is currently experiencing an affordability crisis. According to Robert Dietz, chief economist of the National Association of Home Builders, the problem is exacerbated by a lack of available housing, construction labor shortage, and high land prices.
According to the NAHB/Wells Fargo Housing Opportunity Index, housing was most affordable in 2012 when 78% of new and existing home sales were affordable for a typical family based on their incomes and current interest rates. By the end of 2019, that score was 63.2%, meaning only 63% of home sales were affordable because home prices and mortgage rates are rising quicker than incomes.
According to Frank Nothaft, chief economist for CoreLogic, a data analytics company, monthly mortgage payments have increased by approximately 18% over the past year, but few families have seen their incomes rise by that amount.
Buy a Home When You Can Afford It
The best approach to deciding when to buy a home is to do so when you can afford it. Don’t attempt to time mortgage rates and home values. They are almost impossible to predict. If you find the home you want and you can afford to, buy it.
When you do buy that home, consider the following money-saving tips:
- If you plan to resell in the future, do not buy the biggest and/or most expensive home on the block. These homes usually appreciate the least and present the biggest challenge when attempting to find a seller. The smallest and/or least expensive home on the block often appreciates the most.
- Inquire about property taxes, utility costs, and home-owners association fees.
- Hire an inspector prior to purchasing a home. This will cost you hundreds and might save you thousands.
- Don’t make any large purchases (car, boat, etc.) or open a new credit card in the six months leading up to your home purchase. This might be seen as an increased risk to your lender.
- When you bid for the home you want, base it on comps on a price-per-square-foot basis. Use a specific number that will indicate to the seller that you did your homework in determining the value of the home.
Special Considerations When Purchasing a Home
There’s a saying on Wall Street: “Don’t try to time the market.” This also applies to real estate. The number one factor is your ability to afford a home without getting in over your head. That said, if you’re looking for an edge, interest rates are near historic lows, so now is a better time than most to purchase a home.