Over the past few years, many articles I’ve read have repeated the same mantra: “Now is the time to buy real estate.” Interest rates were low and they couldn’t go any lower, whoops, they did. Since purchasing my condo in 2010, I’ve re-financed twice due to mortgage interest rates dropping and although we’re getting closer to 0% than where rates were at 5 years ago, I don’t see any big turnaround in sight.
The question to buy a new house shouldn’t be taken lightly though, there are quite a few steps to go through before you make your purchase. Additionally, the process of buying a home is pretty tough right now. Lenders have gotten more stringent with their lending requirements and you’ll have to provide a lot more information than ever before. Here’s a good overview of the mortgage process that most lenders follow so you know what to expect.
Competition Abound
Even after meeting these stringent loan requirements, you’ll face daunting competition. The supply of houses available is very low right now, most properties in metropolitan areas are receiving multiple offers within the first week. I even hired a realtor to come out and give me an estimate of what he thought my place could sell for(good news: my value has gone up around 20% in 3 years).
While competition is good for sellers, buyers need to be patient and understand that it may take 10-20 offers or more before one even gets accepted. Don’t feel the need to go outside your budget just because you’re getting outbid. In my area, there are a lot of cash offers coming in and in real estate cash is king.
Interest Rates
A lot of people spend time debating on ARM vs Fixed mortgage but for first time homebuyers, I think the choice is pretty simple. The average length of homeownership for all homebuyers is only 7 years, so why would you pay more than you have to? I went with a 7/1 ARM at 3.125% and haven’t looked back since.
Make Mistakes While You’re Young
When you’re young, time is on your side. You can buy an overpriced condo, move after a couple years and maybe only lose a few thousand dollars after all is said and done. Since you’re not making as much when you’re young you can’t buy as much and therefore can’t lose as much.
But as you grow older, you need to be more conservative with the real estate choices you make. Maybe it’s a good idea to rent in a certain area before you buy a 1 million dollar house. Or maybe you should save up 20% instead of going with a FHA loan at 3.5% down in order to better absorb market fluctuations.
I’m glad I bought when and where I did but I’ve learned a lot from my purchase. All of the following are specific to my situation but you should do a similar analysis for yourself. Here’s what I’ve learned(some good, some bad):
- It’s a lot easier to do renovations before you move in than periodically after you’ve moved in.
- I like properties that have a lot of natural light, mine doesn’t(How did I not know this before? haha).
- Even though I have a balcony, I don’t get to sit out there and enjoy it as much as I would like since it’s facing the street. Next time I’ll buy one facing the courtyard.
- Having side by side parking spaces is awesome. A lot of the units in my building have tandem spots and it would be a big pain to have to move cars all the time. I didn’t even consider this when I bought the place.
- We don’t need a second bedroom but it’s nice to have for guests, office work and storage.
- Even though my HOA’s are high at $390/mo. it’s really nice having a pool and jacuzzi. I use it all the time after I work out or go to the beach.
Starter Home or Final Home
If you’re in the market for a starter home, make sure that you have the capacity to save up for another down payment if you plan on upgrading. Remember that if the value of your home goes up, so will your next home. Since the equity you put into a starter home may not be enough for your dream home downpayment, you may want to consider buying less house in the first place. Banks will give you a number they’re comfortable loaning but you need to check and make sure that number jives with your own budget.
Readers, where do you think mortgage interest rates are headed? Up, down or stay the same? Have your opinions on buying real estate changed in the past few years? Had any luck buying or selling your house?
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In the near term I can’t say where mortgage rates are going, but over the next 5 years they’re going to trend up… they have to. Once the economy starts recovering, the fed removes stimulus and slowly starts raising rates you’ll never see rates in the 2-4% for a long long time… unless we nose dive into another recession. No one has a crystal ball.
People have been saying that exact thing for 5 years 🙂 But rates don’t have to do anything, the economy doesn’t have to do anything. Why have bond funds done so well? Although mathematically they won’t be able to sustain the returns of the past decade they can definitely still keep making money.
Plus, the FED has publicly stated they are going to keep rates low for a while so although I can’t predict the future, if I had to guess I’d say rates will stay the same.
I can’t imagine interest rates being able to stay this low for much longer. They really have seemed to bottom out. It’s impossible to tell the future, but lower interest rates would be too good to be true!
I agree with you, there is obviously a mathematical limit to how low interest rates can go but I think it’s a mistake to assume that they must go up. People have been saying that for 5 years and anyone who’s bet against that has made a lot of money.
Lance makes a decent point. Got to be optimistic about it. Right now, my wife and I are still renting and are getting quite sick of it. As soon as we’ve saved up I think we’ll be buying regardless of rates.
Jamie, thanks for stopping by. Why do you have to be optimistic about it? Why not a realist about things?
As for renting, I know how you feel. It sucks to pay money to a landlord every month and know that you’ll never see a penny of it again. My current condo would conservatively rent out for about $1,700. I pay $1,600 a month which includes everything(mortgage, prop tax, insurance and hoa) but I get back about $500 of that through the tax deductions and principal contributions plus any increase in prop. value(+30% in 3 years – very lucky).
The mortgage rates I’ve been looking at have actually gone up slightly since I locked in my refinance rate back in November. I haven’t tried selling my place, but when I bought it, it had multiple offers within a week. I think that mortgage rates will keep going up.
I love how much natural light my place has! I don’t really need to turn any lights on other than in the bathrooms during daylight hours, which is great! My primary regret about my place is only having one parking spot. I also miss having a U-shaped kitchen.
I didn’t really care about interest rates that much when I was looking at buying since I knew I could afford the mortgage payment no matter what.
Yea that’s the one thing I didn’t consider that really makes a difference in a condo. I think most houses get decent natural light but condos are sometimes a little too dark. Oh well, live and learn.
I was in the same boat as you. I didn’t care about interest rates either since I knew I was ready to buy and pay a mortgage instead of rent. It was a nice bonus though that they were low and have remained low.
My bf is a realtor and he’s repeatedly commented how low the supply is lately – in the last newsletter he sent, I think it was ~75% decrease since 2006. The housing prices and school issues are the main reasons we’re considering living out of state (though it’s so nice to only have to wear closed toe shoes for 3-4 months tops!).
Hey Anna, you are right. Supply is extremely low right now and that’s one of the main reasons why I’m considering listing my place. I paid 280k three years ago and I could sell for 350k today, that is a ridiculous increase. The only problem with selling right now is that if you plan on buying another place, you have to pay those inflated prices.
I think the rates will go up in the mid to long term but will stay low for a few more years. In the meanwhile your income should have increased and absorb the mortgage raise. I love real estate as a leverage to build wealth and think it is as good a time as any to buy.
I completely agree. Real estate is the best tool on earth to build wealth, I mean just look at all the richest people in the world and you’ll see that most of them made money off real estate. In what other investment do you only need to put up 20-30% as a down payment, yet you get 100% of the returns. Enough said!
Interest rates are at 60 year lows, but prices are heating up. In southern California, it is a seller’s market! You still need to find the right property and prices are going up thanks to low inventory.
SoCal is on fire right now! haha mainly because there’s no inventory. I think I’m going to hold off for a while before listing and see where housing prices go. A lot of money to be made though, very exciting times.
Harry, YES! I also think it’s worth mentioning that housing prices are also relatively low as well. I’m not sure where you live but I’m across the river from NYC and after putting 20% down I’m paying a mortgage of $1,447 for a place that previously rented for $2,100.
Borrowing money is as cheap as it’s going to get and if you’ve been smart to save during the downturn, using that cash for a downpayment can put you “in the money” from day one. Especially if you’re going to eventually rent that place out!
Hey Andrew, you’re right, the rent vs buy spread is at an all time high right now in favor of buying. Housing prices are still low here, but they’re definitely going up since supply is so low. I’d like to keep my place and buy another one to start getting some cash on cash return on my real estate investments.
FED will continue printing, dollars will continue decreasing in value, the value of your home won’t rise, but the money required to buy it will. Think about this. People who say house prices are rising 5% every year forget that their money is losing value by X% every year, they assume it’s profitable somehow. Property is a safe investment in that I would say it is neither terribly risky or terribly profitable on a small scale. It’s just another safe way to store your funds, people will always need land and homes in good areas. I’m talking about the national / global housing prices here, of course there are times when the prices rise 50% in X region and it’s a great investment, but in general buying a home isn’t too bad an idea, I personally don’t because I prefer riskier & more profitable ways to use my money; stocks etc.
Kari, thanks for commenting. But I think you’re forgetting the fact that housing is part of your non-dsicretionary income. You have to live somewhere and the price to rent ratio will nearly always favor buying and even more so the longer you stay somewhere. First hand example: my condo payment(incl. mortgage, tax, hoa, etc) is $1615. I rent it out(as of last month) for $1,900 so I would have to pay that amount if I was renting. Is the opportunity cost of my down payment($50k) greater than $285/mo x 12 months every year?
$3,420/$50,000 = 6.84% guaranteed return. I’ll take that over any equities investment(and the risk) any day.