Note to young renters: It's a very good time to start thinking about buying your first house.
Sure, the housing market is in the dumper, and houses are still expensive - up almost a third from their prices at the start of the decade, with some markets considerably higher than that. Throw in reports of killer mortgages and rampant foreclosures, and it may seem scary to take the leap. But over the long term, owning your home is a great investment. It's one that will bring you tax breaks, financial gains, perhaps a little yard, and considerable joy . . . if it's done right.
Right now, the housing glut means sellers are motivated and prices are falling. The latest stimulus bill out of Washington raised the limits on decent, low-down-payment, government-guaranteed mortgages. Parents who may be inclined to help their kids with a down payment don't have great places to stash their money right now, with stocks and bonds both looking risky and unrewarding. And mortgage rates are low.
Here's how to get started. There's no need to rush, suggests Walt Molony of the National Association of Realtors. Nobody, not even the usually optimistic agents' group, is predicting increasing prices. You've got many months to educate yourself about the process and study your market. Check your credit score at myfico.com. If you're planning a house hunt, it makes sense to buy a full credit score report. The higher your score, the lower your interest rate on your mortgage, and that can mean hundreds of dollars a month in savings, for decades. A top score now can get you a 30-year fixed rate loan under 6 percent that will cost you around $1,775 a month to borrow $300,000. If your score is middling, that same loan can go for 7.192 and cost you $2,035 a month. A poor score can mean that you'll only qualify for a 10.25 percent loan that will cost you $2,688 a month. If your score is less than optimum, you can improve it by paying down credit card balances and making sure you always pay bills on time. Prequalify for a mortgage. Comparison shop online and call a reputable mortgage bank near you. Find out how much you can reasonably borrow, and what kind of rate you'll get. If you're serious about buying a home soon, you can go the distance and actually apply for the mortgage before you find the house. Then you'll have a good idea of your price range. Check out mortgages backed by the Federal Housing Authority. These are solid 30-year fixed loans, not those crazy interest only, negative amortization, resetting variable loans that caused so much trouble. They only require a 3 percent down payment. Depending on the prices in your local market, you can borrow as much as $729,750 on one of these loans with FHA backing. Work with a buyer's agent who only represents you, not the seller. Neophytes especially need someone who can help them analyze the local market, negotiate a good price, and close the deal. You can find an agent through the National Association of Exclusive Buyer Agents at naeba.org. Get something back from the seller, but don't expect a complete steal. Houses still cost a lot of money, but a motivated buyer might give you help where you need it most: with cash. A motivated seller might agree to pay closing costs out of his profits, suggests Molony. That could give you the advantage of being able to come up with less cash to get into the house. Think single-family house or duplex. A duplex makes for a great starter home: You can live in half and rent out the other half. Single-family houses also do well in most markets over the long term. Condominiums and co-ops: not so much. While luxury condos in popular locations have sold well, they tend to not perform as well in resale as do single-family homes. And there are condo fees to contend with, too. Don't buy a home without getting a home inspection. You wouldn't be the first newbie to buy a house and then discover the leaky roof, wet basement, termite damage, and antiquated electrical system. Put an inspection in your contract. If the inspector finds big, bad, problems, you can use them to negotiate a lower price or extricate yourself from a troubling deal. Don't overreach. It's not the time to get the biggest, baddest house you can find. There will be another time for upgrading down the road.
Linda Stern is a freelance columnist. She can be reached at email@example.com.
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