Considerations for future Homeowners
Guest post by Melanie Taylor of Loan specialists Think Money.
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These are strange times for would-be homeowners. On one hand, property prices have dropped, bringing the dream of homeownership within the grasp of many who couldn’t afford prices at their peak. On the other hand, no-one knows how much further they’ll fall, so buying property does take a certain amount of courage – assuming you can get a mortgage.
At a time like this, in other words, ‘knowing your stuff’ is more important than ever.
You might feel there’s no way you can keep on top of all the news in the housing market, but the good news is you don’t have to. Get a handle on just four areas and you should be able to make an informed choice.
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The housing market’s future
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Your future
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Renting vs. buying
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Interest rates
1. The housing market’s future
The house price speculation you hear in the news every day is largely that – speculation. No-one can really know where prices are headed, partly because prices depend partly on confidence, so the very act of publishing predictions (as long as they’re from credible sources) can have a positive or negative effect on them.
Anyone can see trends in prices once they’re underway, but spotting a high or low is a different matter altogether – and that’s what everyone really wants to know, as selling property in a slump or buying in a boom can cost you a frightening amount of money.
Anyway, even owning a crystal ball wouldn’t necessarily mean you’d benefit from house price changes. Even if you knew when prices would bottom out, you might be unable to get the right mortgage at the right time at the right price. (The same is true when you’re selling a house – even if you knew when prices were going to peak, there’s no guarantee you’d be able to find a buyer at the right time.)
Your future
In all probability, you’ll have a clearer idea about your own future than the housing market’s. If you’re thinking about buying, maybe you should pay less attention to housing market hearsay and more attention to your own finances:
Income
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Work. Is your job secure? Are you expecting a promotion / pay-rise?
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Benefits. Do you receive anything from the government? Could you? Is this likely to change for any reason?
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Windfalls. Any one-off sums of money coming your way (inheritance, sale of assets, insurance pay-outs, etc.)?
Expenditure
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Debts. Do you owe money? How soon will it be repaid – and how much extra will you have to spend when it is? Could you do it any faster?
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Spending. Is there anywhere you could cut back? Could you cut back enough to save up for a deposit and / or create a buffer against negative equity and fluctuations in mortgage costs?
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Change. Any major lifestyle changes coming up? Marriage, divorce, starting a family… Would it make sense to assess their impact before you think about buying?
You can’t know what’ll happen to your finances in the next year, but your own future’s probably more predictable than the housing market’s. It’ll probably have more of an impact on you, too: losing $15,000 on a house might be bad news, but losing your job / having a baby / getting married could have a much larger impact on your lifestyle – and your finances. Plus, that $15,000 wouldn’t really be ‘lost’ unless you were forced to sell before the housing market picks up again.
Renting vs. buying
You might be worried about losing money by buying property in a slump. It’s a valid concern, but these two questions could help you make your mind up:
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How much am I paying in rent per month?
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How much are house prices in my area going down per month?
There’s no guarantee that prices won’t start dropping faster, but if you keep on renting, you know you’ll be losing money. Property slumps don’t last forever, so house prices will go up again – it’s just a question of when. On the other hand, a mortgage is a big commitment, so if your own future’s looking uncertain it might make more sense to rent for a while longer.
Interest rates
If you do decide to buy, understanding interest rates is absolutely crucial, as your mortgage’s interest rate determines how much your monthly payments will cost you.
Never underestimate the difference 1% can make. Remember that 6% is actually 20% higher than 5% – not 1%. Given the size of most mortgages, and the sheer number of years you’ll be paying interest, that extra 20% can make a huge difference.
Say you take out a $200,000, 20-year mortgage*. The interest on:
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a 5% mortgage deal might be around $117,000
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a 6% mortgage deal might be around $144,000
In other words, that 1% makes a difference of around $27,000 – over $100 per month.
* You probably won’t take out a single 20-year mortgage. Most homeowners sign up to a succession of shorter deals (often two or five years), which lets them reassess the situation when economic conditions change. But sometimes, when interest rates are really low, it can make sense to sign up to a 20-year fixed-rate mortgage – guaranteeing yourself 20 years of (relatively) low payments!
Guest post by Melanie Taylor of Loan specialists Think Money
[...] great article on Financial Dominance – with some considerations for future home owners. Well worth a browse. These are strange times for [...]
[...] Posted on August 19th, 2008. Filed under: Credit Crunch, Finance, Mortgage | Tags: buying a new house, buying a new house now, editorial, get a mortgage, home prices, house prices, Mortgage, mortgages, new home, new house, property prices, remortgage, thinking, would-be homeowners | Excellent editorial article with some financial considerations one may wish to take before buying a new house right now. [...]
I like your style Melanie short, sweet and to the point and you never mentioned the credit crunch once.
Something else that should most likely be noted in this article would be credit. I don’t think there has ever been a time when credit was more important. Due to a downward shift in the market and decline in the economy, I have recently started paying great attention my credit. I wanted to be sure it is in top notch condition if I needed it. I’m glad that I did too because after looking into my credit I was stumped to find numerous issues on my report that did not belong to me. They had been reported on my credit report by a collection agency that, in my opinion, was just looking to make a quick buck. I decided to do some research on the collection agency and found a ton of information on them. I was even able to find information on the web that stated this particular collection agency was known for trying to collect debt that did not belong to them. I would highly recommend that all consumers stay on top of their credit reports and… If you find that collection agencies are reporting negative marks on your report, look them up on this site before moving forward. You’ll be happy that you did.
Getting into debt is easy but getting out of it really a difficult task. This holds good for any kind of debt and includes credit card debt too. Credit card debt reduction needs planning and discipline in the way you spend money.
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What has Debt Settlement ! got to do with considerations for future homeowners?
Your absolutely right Melanie with the four areas you pointed out. Homeowners should be prepared for the future.
Due to a downward shift in the market and decline in the economy, I have recently started paying great attention my credit. I wanted to be sure it is in top notch condition if I needed it. I’m glad that I did too because after looking into my credit I was stumped to find numerous issues on my report that did not belong to me.
Christian raises a great point about watching your credit. If the capital markets tighten, it could be hard to get money. You will need better credit during this time.
I agree that watching your credit is key. I feel that the millennium-generation only just learning how important credit is.
“Renting vs. buying”
Good comparision. I always prefer for buying rather than renting. You can take a home loan and give the installment per month (like you are giving rental) and at the end of the day, you would be the owner of your house.
In my opinion house prices in US have a long way to go before they hit the bottom. With all the bailouts (read: money printing) interest rates are bound to go significantly higher in not too distant future, which will further erode housing affordability.