Is 2017 going to be the year when you will finally buy your dream home?
Everybody is talking about historically low mortgage rates, recovering housing markets, turnaround in the economy and robust job sector, but these are generic factors that don’t address your personal financial situation specifically. While these ‘external’ factors should influence your decision with regard to homeownership, you’ll also have to take a closer look at your personal financial situation. It will help determine whether or not you should purchase a home this year.
Here are various aspects of the economy and personal finance that should go into your decision to buy a home in 2017:
This is one of the biggest factors to influence your decision to buy a home in 2017.
30-year fixed mortgage rates hovered around 4.30% in the last couple months of 2016. It was significantly higher than the rates in the first half of the year when it was nearly 3.50 percent to 4 percent.
The agencies like Fannie Mae, Freddie Mac, Mortgage Bankers Association and the National Association of Realtors predict that rates will continue to go up in 2017. The direction of rates will largely depend on whether or not the economic recovery is real or smoke and mirrors. If it’s the former, rates will move higher. If it’s the latter, they will remain low.
The Fed recently raised interest rates a quarter of a percentage point — only the second rise in 10 years. Experts predict that it may spur people to buy. Even though interest rates may go up a little, you may still be able to afford a home and pay less than rent.
There are two types of loans you can take out to purchase a home: Fixed-rate and adjustable rate. If you go for a fixed rate mortgage, the interest rate is fixed when you take out the loan. It means that the rate will not change over the lifetime of the loan. If you choose an adjustable rate mortgage (ARM), the interest rate may go up or down.
If the interest rate changes only one percent, you will end up paying thousands of dollars extra over the lifetime of the loan. Studies suggest that only .5 percent (one-half) percent increase in interest rate can bring down your purchasing power may 4 to 5 percent.
Your Credit Score
If you are like most buyers, you will need to take out a mortgage to finance your home deal. What interest rate and how much amount of loan you will be able to secure will depend on your credit rating.
If you have a good credit score, you will get the best mortgage rates. Lenders will also be more flexible with regard to loan-to-value ratio (the ratio of a loan to the value of an asset purchased), requiring you to put lower amount of money down.
If you don’t have a good credit score, your first priority should be to fix it. It can take a lot of time if there is a foreclosure, short sale or bankruptcy on your credit report. Find out the reasons that are having a negative impact on your credit rating. Pay your credit card bills on time, refinance your auto loan and take other necessary steps to improve the credit score.
Property Acquisition Costs
It’s not just the purchase price you pay when you buy a home. You will need to factor in many other costs associated with homeownership. For example, you will need to pay homeownership insurance premiums, property taxes, utilities, and ongoing home maintenance costs. You should make sure that you can comfortably budget for these costs and won’t be in over your head.
Whether you are living in a college dorm or a rental property, the jump from renting to owning is a huge financial step. Apart from requiring a hefty down payment and a good credit score, you will need to make sure that your decision to buy a home makes sense financially.
You will have to crunch some numbers with regard to rents and appreciation in home prices in your area to determine whether you will save money by owning a home. Equity building, tax breaks and the possible increase or decrease in the value of investment are some of the metrics that you need to get familiar with before investing in a home.
As per the conventional wisdom, your monthly mortgage payment should not exceed 28 percent of your gross monthly income and your total monthly debt payments should not exceed 36 percent of your gross monthly income.
Renting may make sense due to the little scope for unexpected costs. As a homeowner, you may have to budget for unexpected maintenance issues.
Down Payment And Closing Costs
The biggest hurdle before most aspiring homeowners is to arrange for down payment. Various lenders may have different down payment requirements depending on your credit score, property’s value and other factors. You are ideally required to put down 20 percent of the property’s value, but if you are paying lower than 20 percent, most lenders will ask you to purchase private mortgage insurance (PMI) and charge higher amount of processing fee. Most lenders will also expect you to cover closing costs, which may be equivalent to about 3 percent to 5 percent of your loan amount. How much closing cost you pay will depend on the type of the property and the area you are buying in.
Lifestyle & Career Needs
What kind of a lifestyle you prefer will also have a great deal of impact on your decision. If you are planning to move around a lot and don’t want to stay in one place, you will find staying put in one place and maintaining a home very difficult and inconvenient.
If you think that you may have to move to a new place in the near future due to a job change, you should be prepared to sell your home at a short notice. Getting out of a year-long lease is a lot easier and less expensive than selling a home.
Local Housing Market And Economic Factors
The housing market in the U.S. may be booming overall, but you need to closely study the market where you are buying a property. You should consider the acquisition of a property as an investment. Based on various economic factors like job growth (which spurs migration and directly impacts a housing market), population growth, and the rate of rent increase, you should determine whether your decision to buy a home in a particular area will be financially rewarding in the long run.
Given the current economic situation, the housing markets in the U.S. promise a healthy growth in 2017. It’s a great time to realize your dream of owning a home, but you need to ensure you have all ducks in a row. Make sure that you have a good credit score so that you can get the best mortgage rates. Study the market where you are buying to ensure your decision will be financially rewarding in the long run.