A friend called to ask if the low interest rates on mortgages that we’re seeing now means it’s a good time for his son, Joe, to buy a home. In Joe’s case, he and his wife are thinking of buying their first house, but the same question can apply to a co-op or condo.
Decisions like this don’t have one clear answer. Low rates might make you think the answer is an easy one. Plus Joe is worried about missing out on these low rates, since at any time they might head up. He’s missed out before and doesn’t want to let it happen again.
What buy-decision factors should Joe look at?
There are a couple of key factors that might make the obvious “buy now” choice less obvious:
- First and foremost, low rates or not, you have to be able to truly afford home ownership, even if mortgage bankers tell you that you can. As if lessons had not been learned, mortgage lenders are once again offering very low down-payments and weakened qualifying criteria.
- At this time, low rates in many areas are counterbalanced by high home prices. So your payment may still be pretty high. And there is even talk of a bubble again. Not to scare anyone off from buying a home they really want, just don’t assume it will keep going up in price — or even retain its current value — as it has lately. It might. Just no guarantee.
Let’s look at Joe’s financial picture
Things are tight. He and his wife have tried to save, but something always seems to come up, and they only have about $18,000 in actual savings. They do also have about $25,000 in retirement accounts. Not a lot of cushion, but they are tired of “throwing money out the window” paying rent.
They found a house they like for about $235,000. And despite their so-so credit history, they qualify for a special program where they only have to put 3.5% down, plus closing costs and an extra annual fee. (These add up.) They also sees a 3% down mortgage they might qualify for, with extra cost factors there, too. (We don’t need to do the complete calculations here.)
So for less than $10,000 down, he can get a mortgage with payments a little over $1,000 a month, plus an extra $150 a month. Oh … and then there are the property taxes of about $300 a month. And the increase in electric, gas, water, etc. from the smaller place they live in now.
Hmmm … their rent isn’t looking so bad now. But a house increases in value which is just like savings, doesn’t it? Not always, as too many people can tell you. And there are additional costs for things like maintenance, repairs, unforeseen huge expenses, even more furniture than a smaller place.
So how should Joe look at his decision to buy?
He and his wife still feel like they want a solid home they can raise a family in. And the low rates seem to tempting too let go. And I get that. Plus, they figure they can always use their retirement funds for an emergency.
Here’s my take on it. The years fly faster than you can imagine. And if you haven’t found way to save yet, there is a good chance some habits that are getting in the way now won’t magically change when you buy the house — with even more things you can spend on.
Buying now could leave them in a financial position with no cushion to fall back on (they hardly have one now) in the event of a house, job, or health emergency. Low rates may call, but starting off in a way that could soon see their credit cards filling up (and their retirement plans drained), isn’t creating a foundation for them or for their future family.
A few more thoughts
Owning your home sounds like a great thing — it is after all part of the American dream. But some careful analysis and planning now can keep that dream from becoming a nightmare. If home ownership is what you really want, then it is also worth waiting for and working for.
Decide now to start saving more. You can even make it a game to find ways to save! Also clean up any credit issues, so they aren’t a millstone around your financial neck. The same new habits you’re creating will help get you to a home you can own — and not one that will own you!
Oh … as for missing out on those oh-so tempting low rates, when rates finally do start to rise, there’s a good chance hot housing prices will have cooled. Higher rates can help that. And even if there is some missing out going on, there’s no joy in constant financial crisis. Planning now for a happier tomorrow can really pay off in the end.
Of course, not all people are in Joe’s financial shoes. If you have the money and good financial habits and decide that home ownership is right for you, great. Still, count on lots of unexpected expenses. 🙂
Good luck whatever you decide!
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