Friday, July 7, 2006

Adventures in First-Time Homebuying #1: Buy Now or Later?

Author: Nick
Category: Money

yay, another reason to use the monopoly house icon

I’ve touched on various homebuying topics before, but I think it’s time I start a new series to track our progress toward homeownership. In the last few months, I have learned more about real estate, mortgages, and settlements than I think I learned about computers in college (remember, I was a computer science major). Hopefully this self-education will pay off and help make the homebuying process as smooth as possible.

But first, it’s time to answer the classic Question Numero Uno of every first-time homebuyer: Am I ready to buy a home? There are many reasons a person may answer no to this question:

Some Reasons People Say No to Homebuying

  • They feel more comfortable renting.
  • It’s a lot of work to buy a house.
  • They’re not planning to stay in the area long.
  • They think they can’t afford it.

And those are, for the most part, all perfectly valid reasons. Some of them are stupid valid reasons, but at least they’re all valid. Of course, probably the most common reason to turn away from the idea of homeownership is the question of affordability. If you rent, in order to buy a home of similar size and quality to your apartment, you’re likely going to be paying more in a mortgage each month than you do renting. That is, the check you write each month for your own home will be bigger than if you were sending that check to a landlord.

But consider what goes into a payment check for a rental unit versus a mortgage. When you rent, your payment certainly keeps a roof over your head–but you don’t own the roof. When you own your own home, it builds your net worth over time through equity (either on its own as the house appreciates or with the help of payments to your mortgage principle). So that mortgage check might seem bigger, but you’re really paying a lot less than its face value when you take into consideration things like rising home value and loan interest tax deductions.

Even once a person realizes that owning a home works out to be a better financial decision (a realization we’ve already made, thankfully), the question of readiness to buy a home still presents itself–specifically, the issue of affordability remains. How much home can I afford? Can I afford a home where I live? Can I afford a home I really like? These questions are especially difficult to answer for first-time homebuyers like me. Obstacles like no money for a down payment or insufficient credit history and score to obtain a good mortgage interest rate might scare away some folks. Personally I wouldn’t mind if it did; that just means fewer people trying to buy the same home I’m after!

The Capital newspaper (via The Housing Bubble Blog) reported today that the median home price in almost-neighboring Anne Arundel County dropped from $360,000 in May 2006 to $351,750 in June 2006. I certainly wouldn’t mind seeing that sort of dip in Rockville where last year’s median price was $377,084. Still, from real estate agents I’ve spoken to over the last couple of weeks, it seems that home prices in my area have been holding more or less steady in the last month or two. And that trend may continue… or it may not.

One trend that likely will continue in coming months is the rapid rise in mortgage interest rates. But at the same time, the size of my bank account should also rise a bit. With absolutely no other debt payments to make, we should be able to sock away a few thousand extra dollars toward our modest down payment funds. (Or do we even want to make a down payment? More questions! Eek!) For us, the question isn’t a matter of if we should buy a home. It isn’t even really a question of when. Instead, we must consider whether it’s a good idea to buy a home as soon as possible or to wait a few months.

But what difference could a few months make? Possibly a big one, especially taking into account all of the variable factors that could change between today and then.

Homebuying Factors That Can Change in Just a Few Months

  • Home prices. Obviously the price of a home can go up or down over even small amounts of time. It looks like prices in this part of the woods are stable for the time being, but who knows what tomorrow will bring?
  • Loan interest rates. These are going up for the next few months at least, no doubt about it. In turn this could push home prices a bit lower, but who’s to say the adjustment will completely offset the rate hike?
  • Credit score. I wish this darn thing would make up its mind already. Mine has been hovering right around where I know the borderline is for good loan rates and even better rates. Unfortunately since we don’t really carry month-to-month balances, there’s not much I can do to help my score except make sure I don’t over-utilize my cards–or at least pay them monthly before the utilization gets reported to the credit bureaus. A couple more months added to my relatively young credit history certainly wouldn’t hurt either.
  • Available down payment. We have enough right now to put a modest (i.e. not 20%) down payment on a home, but I wouldn’t mind saving a little more if it means we could afford a nicer home or become eligible for better loan programs.
  • Inventory. Generally there are far more homes available for purchase in the warm summer months than in the fall and winter. If we wait a few months, we’ll be looking at more of a fall inventory than a mid-summer lineup of homes. That might mean slightly reduced prices, but it also means fewer properties from which to choose.
  • Personal timing. An often ignored but still important factor in homebuying that can change with just a few months is the timing of the process. I know right now that things will be pretty busy for myself and my wife in the fall–she’ll have her classes, and I’ll be starting mine. That doesn’t mean we wouldn’t be able to make the time for house-hunting and paper-signing; it would just make for some rather busy schedules. I’ll try not to let this issue influence our decision too much.

We still haven’t decided 100% on waiting a bit or pushing forward now, but I’m seriously leaning toward jumping in right away. I guess you’ll find out when Adventures in First-Time Homebuying #2 is released either in a couple of weeks or months down the road.

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