Saturday, October 27, 2012

Affordable Homes

It’s the Best of Times
Any Realtor you bump into will tell you that now is a great time to make a move into the real estate market.  So if you are thinking about buying a house, the selection, price and interest rates on mortgages could not be better.  Sometimes I hear mystics say that “the stars are in apogee, and this portends great things”.  Well my friends if you want a house, this time you’re in luck.
I can’t recall interest rates ever being lower than they are today.  So when you read that they are at historic lows, believe.  Compare today's 30-year fixed-rate average of between 3% and 4% to those days only a few years ago when 6-7% was the norm—or better yet back in the 1980’s when I personally got a mortgage at 18.5%!  So now can you see why everyone is buzzing about the great deals to be had!
Home are now at their most affordable on record. These low prices upset sellers and tax collectors—but they delight buyers.  As a buyer, you should be thrilled that home values have dropped across much of the nation. There is also a huge supply of distressed properties on the market, which sell for steep discounts.
With all these great deals it's easy to get carried away, nobody wants that, in fact a good Realtor will help you curb your enthusiasm. The bitter lesson, often learned too late by millions of foreclosed homeowners is to buy within your means, and don’t get a mortgage that can adjust itself out of your affordability range. It’s too easy to ratchet up a notch and over buy. Just because you're approved for an X dollar amount doesn't mean you should spend that much.
Actually, it all comes back to affordability.  Realtors say that home prices are affordable when the median price of the homes in your market is less than three times the median annual earnings in that market.  Meaning if the median annual income is $50,000, and the median price of homes is $150,000 or less, then the market is affordable.  So, how much home can you really afford? Consider the following.
If you have a salaried job, this can be as simple to calculate as looking at your earning statement, but if you work on commission and tips, it's important you consider both high income and low-income months.  Your friendly banker will do all of this math for you—and will consider your credit score as well.  If that’s acceptable, they will probably be willing to loan you about 3x you annual earnings.
Consider your monthly expenses, not just now, but what they might be after you’ve found your dream house. If you’re chasing a fixer upper, factor in the costs of the “fix” and then double that cost.  And don’t forget monthly cost of child support, alimony, student loans, credit cards payments, car loans, and other debts that must be paid each month.  And besides your monthly debt load there are extra expenses including: cable, Internet, cell phone, gas, food, entertainment, clothes, travel, etc.
If you are applying for a 30-year mortgage, don’t plan to sell the house in only a year or two. Homes just aren't appreciating fast enough for you to use the appreciation as your personal piggy bank. You will probably need to stay put for at least five years before you would break even on a sale.  If you think moving up or out the next 3-5 years is in your personal future, look for a home that will have strong resale appeal, and either consider a 10 year mortgage—they’re a little more expensive, or make 13 monthly payments each year, applying the 13th payment to the principle—which will put you in better shape when you sell.
Today's job market is still a little shaky. While the unemployment rate has improved a tiny bit, many still struggle to find jobs. What would happen if you were to lose your job? Would you still be able to pay your mortgage?  You may be interested to know that about 65% of the homes that sold in Sarasota County last month sold for cash—they transferred with no mortgages at all.
Lenders expect today's buyers to have at least 20 percent to put down in addition to closing costs. So a $200,000 house will require a $40,000 down payment. If you have this money (in addition to an emergency fund) call me today. If not, you might want to consider a less expensive house or possibly suggesting to the seller that he take back the mortgage to get you into the house with a future refinance to pay him off; you last option is simply saving more money and waiting to buy.
Dane Hahn is a real estate professional practicing in Charlotte and Sarasota Counties, reach him at 941-681-0312 or

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