Buyers
Posted by: WHCHomes.com
IS NOW THE RIGHT TIME TO BUY?
The real estate market is closely tied to the economy in general, and the economy, afterall, is uncertain. Some people are understandably nervous. Relax. You can buy a house while protecting yourself against market fluctuations. Here are top strategies for “defensive buying:”
1.Don’t over-extend yourself – How big of a home do you need? Some folks try to get the biggest, most expensive house they can, really straining their finances in the process. They are forced to devote a huge portion of their income to the mortgage payments and upkeep costs, leaving themselves vulnerable to a potential downturn in the economy. If the economy goes south and their income shrinks, they may not be able to afford the high monthly payments, and then they are forced to sell during a slow market. Avoid this by making sure that your monthly payment is at a comfortable level for you so that you can afford it even if your income takes a hit. Financial experts generally advise that your monthly housing payments should not be more than 36 percent of your income (and hopefully less).
2. Pick your mortgage carefully. – The most expensive part of purchasing a home is the mortgage. Therefore, it should be picked carefully. As the interest rates are slowly ticking up, the lenders will likely become more competitive trying to earn your business, so don’t be afraid to shop around for best rates and terms. If you are buying for the long haul (and more about this shortly), a fixed-rate loan is the safest choice. Adjustable Rate Mortgages (ARMs) may sound great thanks to the low introductory rate, but they adjust (as their name aptly suggests) and usually upwards, not downwards. And now we have another type of mortgage that’s increasingly popular—the interest-only loan. Instead of one portion of your payment going towards the principal and one towards the interest, you pay for the interest only. The idea here is to keep your monthly payments lower, but people usually use it to qualify for a more expensive house instead. Risky business. Your loan balance does not decrease over the life of the loan, and if the market dips, you may find that you owe more than your house is worth.
3. Increase your equity. – Your home equity is the difference between the value of your home and the balance of your mortgage. Normally homeowners hope that their homes will increase in value, thus increasing the equity. However, the value increase is only one part of the equation; decreasing your mortgage balance is the other. If possible, don’t go with the zero or ultra-low down payment loan when buying your home, but consider putting a bigger down payment to get a head start on building your equity. Once you purchase the home, pay down your mortgage as your finances allow. The more equity you have in your home, the safer you are in case of a market correction. And what’s the most common equity killer? Not the “bursting bubbles” as some would have you believe, but home equity loans and lines of credit. If at all possible, stay away from additional debt, unless you plan to spend the
money on home improvements that will increase your home’s value. Buy for the long haul.
Which way will the market go in the next six months or a year? I don’t know, and neither does anyone else. But I do know which way it will go over the next ten years—up, the same way it always goes long term. Short term, there are peaks and valleys. But if you do not have to sell, this does not affect you. If the market dips at some point, you won’t lose any money unless you sell. So when buying a home, consider your family’s long-term needs, and choose a home you won’t outgrow soon. That way if there is a market “correction,” you can ride it out and the market will eventually pick up again.