Young african woman holding home keys while hugging boyfriend in their new apartment after buying … [+]
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People ask me financial planner questions all the time. I’m a mortgage guy, ask me mortgage questions and I will try my hardest to get the answer right. But ask me questions outside of what I know about, and the wisdom you get back may be a little uneven. Divining when is the best time to buy a house with just the right down payment and forecasting when rates and property values will go up or down is a formula well above my pay grade. But people ask me anyway.
My best answer to the question; “when is the best time to buy a house” depends on your individual circumstances and goals. Everybody comes to the table with a different profile, what works for one, may not work for another. If you set a goal to save enough for a 20% down payment, and are fast approaching that goal, stay the course. Second guessing your original thinking because interest rates are rising or falling or because housing prices are rising or falling can derail your original 20% down payment goal. Forecasting interest rate movements and whether or not changing property values will affect your home buying plans are important, but these are external variables and beyond your ability to control or manage.
Mortgage interest rates trade every day, economic data, geo-political events, elections, even nature can have an immediate and significant impact on the direction that interest rates move. Wall Street people spend lots of their waking hours researching, analyzing and forecasting the financial goings-on that affect things like purchasing a home, and even they don’t get it right all the time. Setting a specific home buying goal is about staying focused on your dream. Do that and try to avoid the distractions that will keep you from crossing the finish line.
But if you must introduce ifs and buts into your home buying equation, here are some things to consider;
If you decide to buy a home with less than your 20% down savings goal, to take advantage of the current interest rate and property value environments, you will be introduced to PMI or Private Mortgage Insurance. PMI is not a bad thing, it allows you to buy a home with less than 20% down, but like everything else, there is a price to pay. PMI can take different shapes, the most common of which is adding the PMI to your overall monthly mortgage payment. For example; a 15% down payment on a $350,000 home, would add $106.60 (standard monthly PMI) to your overall monthly mortgage payment. Depending on the PMI carrier, you would live with this for 12-24 months before you could have an appraisal done to demonstrate 20% equity (some PMI companies require 22% equity), and have the PMI eliminated. If you have an FHA loan, you cannot do this, you will live with the MIP (FHA version of PMI), forever or at least until you refinance or sell your house.
Your down payment goal is important but maybe secondary. Keep your primary goal of becoming a homeowner in focus and go ahead and pull the home buying activity trigger. Go find a lender and get pre-approved for mortgage financing and then go find a Realtor to take you to see what homes in your price range look like. Explore towns and neighborhoods that fit your family, work and commuting life. Research demographics and school rankings or whatever it is that may be important to your decision to choose a community to plant roots in. Keep saving towards your down payment goal, watch interest rate trends but avoid tracking short term interest rate activity. Event influenced trading can cause interest rate volatility; focus on the overall trend not the results of the trading day.
Absent the ability to accurately forecast interest rates or predict the movement up or down of property values, chase your goal with the market snapshot you can see, and remember that you are buying a home and not just a house. Your family will grow and memories will be made in your home, a house is just an investment with an uncertain return. The best time to buy a home is when your individual financial/borrower profile intersects with the right house in the right neighborhood, that’s it, figure that out and go do it.