What are Current Interest Rates?
In the December 3, 2008 “MarketWatch” column of The Wall Street
Journal, columnist Amy Hoak stated the average rate on 30-year fixed
mortgages, for the week ending November 30, 2008, was 5.47%,
according to the Mortgage Bankers’ Association weekly survey. There
would be some variations for other loan vehicles, but, using the
30-year fixed as the benchmark, that is about where the market is
today. By recent comparison, it is quite low.
Is that Historically Low?
No, it is not, but it is close, at least for the recent past. Only in March of 2004 (@ 5.45%) and June of 2003 (@ 5.23%) have rates been at a lower monthly average in the past 35 years. Whether the rates are going to trend lower or higher, though, is an interesting question, since they are being pulled in opposite directions by two conflicting forces. On one hand, you have the lenders, scared witless of more “toxic” loans, who will want to tighten credit. On the other hand, you have the public, more and more reluctant to buy a home in today’s uncertain real estate market, unless induced to do so, which should work to drive rates down. Because of these competing forces, any change in interest rates may not be altogether radical.
Do I Need a Down Payment? How Much?
In general, you do. If you are eligible for a V.A. (Veterans Administration) Loan, you can purchase a home without a down payment and without extortionate credit terms being offered, but there is a limit to how much you can borrow and you must be a veteran or in the military, as well as creditworthy. You can still possibly get a zero-down payment mortgage if you are not a veteran, but at what cost? There are advertisements for such instruments, and they all assume that you are a deadbeat of the lowest order from whom the condescending lender is going to feel entitled to extort the last nickel he can from you, in return for granting you the mortgage with no money down. (Of course the ads will not say such a thing. What they’ll say is more like, “Bad credit? No credit? No problem!”). If you have good credit and a good job, get the respectful treatment you deserve and make the down payment.
As to how much you should put down, the old rule used to be 20%, and, after the backlash of the foreclosure crisis, most conventional lenders will want to go back to that benchmark. In addition to the aforementioned VA loan, there are FHA loans (available only to occupant home purchasers, not speculators or buyers of rental property), which, presently allow for a down payment of 3%, but, like the VA loan, have a limit on how much you can borrow, which may be well below the amount needed to purchase a home.
Video: FHA Program Information
If you are required to put down the 20%, but cannot do so, the lender will still be able to work with you. The most conventional way is to require you to purchase Private Mortgage Insurance and maintain it until your down payment and loan payments equal 20% equity in the real estate unit. By a recent law, the lender is now required to notify the borrower when the 20% threshold has been reached, whereupon the borrower has the option to cancel the insurance. There are other plans involving “piggyback” mortgages, the smaller, piggybacked ones representing the difference between the 20% expected down payment and the amount actually tendered by the borrower. Those smaller mortgages are typically at higher rates and do not represent much of a savings, if any, over a PMI policy.
The Pros and Cons of Buying a Home While Property Values are Dropping
A saying that was new in Wall Street a few years ago, but has now become a cliché, is that you don’t want to try to “catch a falling knife.” Meaning, it is foolish to by an asset that is plummeting in price, thinking you are going to get in at the bottom. Certainly there is some wisdom to that concept. For example, in 1961 Brunswick, the company that makes bowling balls and other recreational equipment, was a darling of the Dow, until it began to nose-dive. When it had dropped from 72 to 42, it might have seemed like a real bargain. Unfortunately, it kept on dropping to about 13. On the other hand, you can be so afraid of falling prices that you miss out. Someone today might lament, “Why didn’t I buy gold in 1985, when it had fallen (from over $800) to below $300 an ounce?” Today, it is pushing the four figures. There were no guarantees the price was not going to sink even lower in 1985, of course, but there comes a time when you have to step in and buy, unless you were happy with the very high price of a given investment before it began to fall. The same applies to the housing market, but with a difference. You can’t live inside an ingot. If all you are looking to do is “flip” a house, then you might as well be speculating in bowling balls or precious metals. But, when you factor in that you are considering the purchase of that which will give you shelter and comfort, at the very least, for several years—possibly the rest of your life—then profit and loss are not quite as urgent a concern, if, indeed, they are a concern at all. If you are looking to buy a home where you plan to live, possibly for good, then the primary question should be, am I getting my money’s worth, not am I getting the best deal. If you wait, you may get a better deal, but you may miss out too. Here is something else to keep in mind. If you were too late to bid on this 100 shares of IBM, you will have no problem picking up the next 100 shares of IBM at virtually the same price. If you were too late to bid on the house you wanted, then you lost it. There may not be another quite like it.
Video: Pros and cons of buying a
home in the current economy
How Will You Get the Down Payment to Buy the Home?
The best way is to set the money aside in savings, while you are renting. A lender wants to see that you have a down payment, for a variety of reasons, but one of them is that it shows you have demonstrated the discipline of thrift, which will translate well into the discipline of prompt payment. Another reason in favor of the substantial down payment that favors both you and the lender is that it represents substantial equity in the property from the start. That’s good for you for obvious reasons, but it’s good for the lender because it shows you have a substantial stake in the property, so that foreclosure becomes a more daunting option.
Getting back to the thrift aspect, the lender will be willing to talk to you if you are able to put up a down payment, but will be more willing to talk to you about a better loan on better terms if it appears you saved up the money yourself. If you got the funds as a gift from your parents or, worse yet, borrowed the money, you will not be in as good a position, and, bear in mind, the decision to grant a mortgage loan is still a subjective one on the part of the mortgagee. If you happen to be an older parent of an adult child, in a position to help him or her with a down payment, providing the funds just prior to the application process will be less helpful than if you had given your child the money several months or even years earlier, so that it would not be considered suspect by the lending institution. (At least the applicant had the discipline to hold onto it).
Housing Market Trends
The Pollyannas will want to tell you that market stabilization is right around the corner, and the doom-sayers are predicting the 12th of never, but most experts that The Wall Street Journal has questioned do not see any substantial upward trend until at least the third quarter of 2009, and that would be for the markets that were orderly to begin with. In the case of the wilder, more speculative markets, such as the Las Vegas and Los Angeles areas, expect an even longer wait. But, bear in mind, these are only guesses, however educated they may be, and they could be knocked even further askew by political developments. Nobody has a crystal ball. If it is your intent to turn a property for a quick profit (and there is nothing wrong with making a profit), then you need to be careful, because you are playing in a very volatile game, every bit as much as the stock market or even the commodities exchange, and real estate was never meant to be that chancy. If you are buying rental property, then, worry less about, whether you can get the best deal today or tomorrow and consider, not only whether your rental income will provide you with a decent profit, but, how attractive a rental property are you buying at the rent you plan to charge. And, finally, if you are looking for a home, if you love it and can afford it—that is, really afford it, not maybe, sort of afford it—then buy it and be happy.
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