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Published on: Dec 13, 2015 17:29:30
Purchasing a home is the biggest investment that anyone can make. To get the best ROI, there are several variables to consider. They include the housing market, interest rates, government programs, and buyer’s financial status. The ideal scenario would be to take advantage of each one. However, reality may only allow a few to be used. Here is a look at their impact on when to buy a house.
Following the housing market is the first step to homeownership. When markets are in a downturn, home prices will have built-in equity. For example, the crash of 2008 showed a significant dip in the price of a $300,000 home. Mortgage balances were higher than the appraised value.
This is considered underwater in real estate circles. In some parts of the country, it was more than 50%, although all homes suffered to some degree. This was also when the term short sale became more than a buzz word, but a fact of life until the crisis passed.
To continue with the 2008 crash scenario, interest rates plummeted in an effort to encourage individuals to buy a home. Interest rates affect the principal and therefore, monthly payment. Consider how 1% of a $300,000 mortgage equates to $3,000 compounded annually over the loan’s lifecycle.
This is the APR figure used to calculate the final amount paid by homeowners to lenders. Buyers can review promissory notes to ascertain the exact figure paid at the end of a 15, 20, 30, and even 40 years loan. While the customary loan term is 30 years, shorter 15 and 20 years are available. The 40 years terms were introduced with government plans.
The biggest investor in the housing market is the federal government. This can be seen with HUD, Fannie Mae, Freddie Mac, and VA. Each has a role in providing first-time buyers programs and loans to eligible borrowers to buy a home. In fact, Fannie Mae and Freddie Mac are the largest mortgage holders in the country. During the 2008 crisis, a variety of programs were developed to stem the tide in falling home prices. HARP is an example where some interest rates were as low as 2% with 40 year mortgage terms.
The buyer’s financial status is the last component that dictates when to buy a home. The debt to income ratio, FICO, and employment history are factored in by lenders during the pre-qualifying phase. When underwriting mortgages, they are more lenient with borrowers that have stellar records. This is probably the one item individuals have the most control over.
When these variables line-up, borrowers will have low monthly payments. A caveat is a credit rating in the 700 range that garners more advantageous offers. Above all, timing and planning will be the best incentives for those in the market to buy a house.