I believe everyone is in agreement by now: this is a buyer’s market. Thanks to the economic crisis, the average mortgage interest rate is now sitting at an all time low.
Throughout the month of January, for example, one could easily find a thirty year fixed rate mortgage with an interest rate as little as 5 percent. On top of that, the prices of homes on which that 5 percent interest is being paid have dropped considerably. With most sizable homes now sitting at an average of $200,000, and numerous tax credits in place for buyers, including an unprecedented $7500 tax credit for first time homebuyers, things couldn’t be better. All in all, every single condition in our current market (besides, perhaps, the lack of jobs) favors buyers.
However, ideal conditions always invariably create zealous overreactions, which lead to catastrophic mistakes. It would be a real shame to find yourself in one of the most ideal buyer’s markets the country has ever seen, only to make the wrong decision, buy into the wrong home or the wrong mortgage, and end up regretting it in a few years when the market has stabilized. What can homebuyers do to safeguard themselves against bad decisions that will set them up to fall into debt in the future? What rules can be followed when it comes to mortgages to make sure that you’re making the right decision?
First of all, realize what question is really being asked here. With the market the way it is, the question is no longer about whether or not you should buy a home but rather how much of a home you should buy. How big of a home can you really afford, when it’s all said and done?
Remember the old adages about how much you should spend in contrast to your total income. The Federal Housing Administration does offer some valuable information in regards to this. The most lenient of home loan lenders, the FHA will approve loans to lenders for an amount that has them spending something like 30 percent of their total gross income. Therefore, even if you find the opportunity to procure a mortgage for an amount higher than 30% of your gross income, you probably shouldn’t take it. Even locking in at a fixed rate, you don’t want to find yourself paying much more than that each month or you’re simply not going to have any money to save, and that’s a bad situation to be in regardless of the state of the economy as a whole.
Another question to consider is how much you’re willing to pay as a down payment. Again, the FHA guidelines provide some useful information here, as they put the average down payment at somewhere around 3.5% of the total cost of a home. This opens up an interesting opportunity: the $7500 tax credit that first time homebuyers are getting this year would provide a handsome buffer to cover that down payment on the majority of homes that one might be considering purchasing. Besides the FHA, however, down payments usually come in somewhere around 5% to as much as 20%.
The main point is that, just because it’s a “buyer’s market” doesn’t mean that a buyer can act with impunity. You must always plan your major purchases carefully, regardless of how friendly the market seems. Guarding yourself against the future is the best way to ensure prosperity.
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