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June may be National Homeownership Month, but housing is a perennial topic of interest. For most of us, our home is the largest investment we’ll ever make and housing is one of the biggest sectors influencing our national economy.
New housing starts and inventory data provide valuable insights into the economy. It may surprise some of us in the Midwest to learn that homes in Denver are moving in 8 days on average and 15 days in Seattle!
Home ownership has been called the American Dream, but what’s the right time to invest in that “dream”? Conventional wisdom has long suggested that buyers purchase a home as soon as they can meet the financial obligations of a down payment, monthly mortgage payment and of course, settle on a location. But these aren’t the only issues to consider.
We advise prospective buyers to be reasonably certain they will live in the home for at least seven years. On top of the recurring mortgage payments, insurance and taxes that come with home ownership, there are “carrying costs” such as yard work, replacing water heaters or roofs and general upkeep. And of course there are transactional costs involved in the buying and selling process.
If a prospective buyer intends to reside in an area for some time, is comfortable with the costs and has the desire and means to buy, the next question often becomes, “How much house can I afford?”
Qualifying for the monthly payment is usually the starting point in the buying process. Mortgage companies use a formula called debt-to-income ratio to calculate a monthly payment. The bankers add up all of an individual’s existing monthly obligations (car payments, minimum monthly payments due on credit cards, monthly student debt obligations, etc.) and divide the debt by the borrower’s monthly income. Including the new potential mortgage payment, the debt-to-income ratio should be lower than 40% and ideally less than 27-36%.
Meeting a specific down payment amount can help buyers avoid paying for Private Mortgage Insurance (PMI) that provides the lender default protection. Generally, lenders will require buyers to put down between 10% and 20% to avoid mandatory PMI. When considering how much to spend on the down payment, it’s important to take PMI into account.
A buyer’s credit score helps to determine the loan terms available. Lenders typically offer homebuyers fixed loans with the option to repay over 15 or 30 years. The 30-year option usually requires a little higher interest rate but less of a monthly payment. Lenders may also offer homebuyers an adjustable rate mortgage (ARM). An ARM specifies a fixed rate for a certain number of years, but then the rate adjusts up or down based on future economic conditions.
Becoming a homeowner and embarking on the American Dream is an exciting time, but there are many serious decisions to ponder. In addition to the items noted above, don’t forget about the cost to move in, the furniture and hooking up the utilities. Happy National Home Ownership Month!
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]