Beating Broke

Personal Finance from the Broke Perspective

Is the Housing Market Making a Comeback?

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The housing market has been in a slump, since it crashed in 2008.  Here we are, three plus years later, and it just might be showing signs of making a bit of a comeback.

I’ve got to admit that, here in North Dakota, we never really directly felt the housing market crash.  With all the oil flowing in the western half of the state, and the resulting high demand for housing, our market has remained pretty close to level.  In the western part of the state, there’s such a demand for housing that the home builders can’t keep up, and prices have gone up by quite a bit.  Here in the eastern half, our market has kept steady, with only some minimal gains, but the number of homes available has stayed low.

Other parts of the country weren’t as lucky to have an oil boom going on at the same time as a major market correction, however, and certainly felt the crash a whole lot more than we did.  Recently, I’ve read several articles on the increase in inventory churn in some key areas.

Housing Market Key Factors

I’m no expert in the housing market, but I think that there are several key factors that might be contributing to a market comeback.  Interest rates remain low around the country, with many qualified buyers getting home loans with loans that are below 4%.  As a comparison, the home loan rates in Australia are near 6%.  As a further comparison, when my wife and I bought our house in 2004, the rate we got on the house was almost 7%.  Another key factor, in my opinion, has been the rising of new home construction.  As the market crashed, the rates dropped, but the number of people who still qualified under new, stricter lending policies dropped too.  The lower number of qualified buyers meant that there were less houses being bought, and built.  Rates are still low, but the number of new homes constructed has gone up several months in a row.  The people who survived the crash without bankruptcy are building homes.  That also means that they are likely selling their old homes, if they have them, and putting more lower cost houses into the market.  Those lower cost houses in the market could lead to more people buying houses and becoming first time homeowners.  The final factor that I think is contributing to a resurgent housing market is the leveling off of the job market.  With several months of gains in the job market, the employment situation appears to have leveled off some which should make people feel more secure in their employment situation and decide to make the jump into home-ownership.

Should you Buy a House?

Anytime we start talking about the housing market, the inevitable question comes up of whether a person should buy a house now or not.  I’m not trying to avoid the question, but it really comes down to your personal situation.  Your primary home still isn’t an investment.  Your local market should also be taken into account.  What are the rental rates in your area?  What would the mortgage payment on a house be?  Is the rent for a similar house more or less?  Is your financial situation stable?  Do you have savings for a down payment?  With enough left over to pay closing costs?  Do you have an emergency fund in place to pay for any unforeseen emergencies that might occur after you move in?  Spending thousands of dollars isn’t something that anyone should rush into.  Run the numbers on your financial situation, then run them again.  Sleep on it for a while, and then decide if now is a good time for you to consider buying a house.

What’s the housing market like in your area?  Did your market feel the crash?

Saving on Home Loans

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One of the biggest purchases you will make over your lifetime is the purchase of a house.  Some will argue that purchasing a house is an investment.  But, if it’s your primary house that you intend to live in, it’s not an investment.  Sorry, it just isn’t.  If you intend to rent the house out, that’s another story, but your primary residence is just a purchase.  Even so, it’s a very large purchase.  It makes sense, then, that we will want to find as many ways as we can to save money on the purchase of our home.

Saving before a home purchase

I’ll discuss how to save on your home once you’ve already purchased it a bit further down, but you’ll find yourself a good bit ahead of the game if you start thinking about how you can save money on your home purchase before you make the purchase.

  1. Improve your credit, improve your rate – The rate at which you borrow the money to buy your home is a big deal.  A half a point on the rate can translate to thousands of dollars more in interest over the life of the loan.  The best way to guarantee that you get the best rate available is to have excellent credit.  Depending on how far you improve your credit, you could shave as much as two or three points off the interest rate of the loan.  Not only will that reduce the payment you’ll make, but it will reduce the amortized amount of the loan by tens of thousands.  Want to know what makes an impact on your credit score?  Read the Beating Broke Guide to Your Credit.
  2. Compare home loans – I mentioned how this will likely be one of the biggest purchases of your life, right?  Well, why on Earth wouldn’t you compare the loans available to make sure you were getting the best deal?  You’ve got to compare those loans!  Different lenders will have different policies, rates, and even lengths of loans.  Not only will failing to compare the home loans available cost you money, but it could cause you a lot of stress over the life of the loan.
  3. 20% down or more – If you’ve got the savings for it, put at least 20% down on the home.  Why?  Well, it reduces the amount of the loan, for one.  The less you have to borrow the better, right?  More importantly, 80% is the normal cutoff for when a lender will require you to add Private Mortgage Insurance to the loan.  It can add a hefty bit to the monthly payment, and it doesn’t go anywhere but into the insurer’s pocket.

Saving after a home purchase

  1. Refinance – This may not be for all of you looking to save, but with the current rates, it bears looking into for some of you.  Refinancing a higher interest rate mortgage into a lower interest rate loan can save you thousands over the life of the loan.  Refinancing into a shorter term mortgage can also save you thousands, but beware that the mortgage payment is likely to be higher due to the shorter amortization period.
  2. Make extra payments – If refinancing isn’t in the cards for you, make sure that your lender will accept extra payments to principle and then start making them.  Reducing the principle will reduce the interest, and by simply making an extra payment a year, you can shave years off of your mortgage.

Whether you’re looking at buying a home, or already have, saving money on the biggest purchase of your life is always worth looking into.  A few minutes on the phone with your lender can sometimes save you more than you would cutting lattes every day.  With the higher number of defaulting mortgages recently, many banks are much more willing to help you save money on your payments and pay the loan off early.  They like getting their money back too!

What other ways have you used to save money on your mortgage?  What’s the most extreme example that you’ve heard of?

Line of Credit vs. Home Equity Loan

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If your mortgage isn’t one of the many that is now “underwater,” you’ve got a good thing going. Maybe you’ve lived in your home for a while, maybe you live in an area of the country that sidestepped most of the recent boom and bust, or maybe you’re just a savvy real estate investor. Either way, you should be breathing a sigh of relief that you don’t owe more on your mortgage than your house is actually worth.

By having more value in your home than you owe, you have what the real estate world calls “equity”. And equity means that you have options when it comes to borrowing for major expenses like college tuition or debt consolidation. Note that I didn’t mention luxury vacations or a boat – the days of using your home as an ATM are over. However, for more legitimate uses, there are two ways to get at your equity and use it to your financial advantage: (i) a home equity line of credit (HELOC), or (ii) a home equity loan.

Why use home equity?

Most bank loans are unsecured, including student loans, credit cards, and most personal loans.  Because there is no collateral to back these loans, the interest rates are higher. Mortgages, home equity loans and HELOCs, however, are backed by the value of your home.  If you default on these loans, the bank can claim your home, so they’re willing to charge you a lower interest rate. Plus the interest payments on loans that are tied to the value of your home are often tax deductible.  If you’re carrying enough debt, one of these loans is a lot better than balance transfer credit cards or other consolidation methods.

When choosing between an equity loan option, the similarity ends there. Both loan types are based on the current equity in your home, but they differ in how the money is distributed, how the interest is calculated, and how you repay them.

 

Loan Type Loan Term Interest Rate Payment Terms
HELOC Revolving line of credit like a credit card Varies Variable based on prime rate Flexible; you can repay as little as the interest due every month
Home Equity Loan Lump-sum amount Varies Can be fixed or variable Fixed monthly payment

 

Which to Choose?

A home equity loan provides a lump sum cash payment and is a good choice when you know how much money you need up front, for example when you’re using the money for debt consolidation. Like any other installment loan such as an auto loan, you make fixed monthly payments for a pre-defined time period, until the loan is completely paid off.

A HELOC doesn’t require you to decide on an amount upfront, but instead allows you to borrow funds as you need them, up to a pre-determined amount (which is your total “line of credit”). A line of credit is useful for funding ongoing needs like college tuition, or even home improvements. It can even serve as a substitute for a costly medical credit card, for major health care expenses. As you pay back the principle that you’ve borrowed, you can continue to redraw against the credit line.

Lenders have traditionally allowed homeowners to borrow up to 80% of a home’s appraised value. For example, if your home appraises at $300,000, you can borrow up to $240,000. So if you owe $200,000 on your mortgage, in theory you can borrow $40,000. Nowadays lending standards are a bit stricter though, so the amount you’re allowed to borrow is going to be closely tied to your credit rating and current outstanding debt.

Now before you run to the bank to sign up for one of these loans, remember that both a HELOC and home equity loan use your home as collateral. Just like a mortgage, failing to make payments could put your home at risk. So always make sure you can comfortably handle the monthly payments before signing on the dotted line.