Rent v. Buy in 2015
In many cases, the amount of money a renter spends on rent can be about the same as or less than the amount a homeowner spends on a mortgage. The savings can be significant, especially with the tax benefit for homeowners. The following link from the New York Times provides support for this hypothesis: Rent v. Buy
Preparing to take out a Home Loan?
Key number 1: Assess your strengths and weaknessesFor the purpose of obtaining a mortgage, your financial position consists of three components:
- Your income, which gives you the ability to make your monthly payments
- Your savings, which allow you to make a down payment, cover closing costs, and keep some cash reserves to cover unexpected expenses
- Your management of other credit, such as car loans and credit card balances
- Your strengths and weaknesses can be gauged by looking at these components relative to one another.
A. Savings relative to income
The first relationship to look at as is your savings relative to your income. Add up all of the savings that you have available for a down payment, including savings accounts, mutual fund shares that you plan to redeem, and gifts from relatives that will go toward a down payment. Then take this as a percent of your annual income, as in the calculator below:
If your savings amount to less than 25 percent of your income, then your savings are relatively deficient. For the maximum purchasing power, you probably will require a loan with a down payment of less than 5 percent, such as those offered by the Veterans Administration (VA) or the Federal Housing Authority (FHA). Alternatively, if you believe that you have the capacity to add to your savings in the next year or two, then it may pay to wait before buying a home.
If your savings amount to more than 25 percent of your income but less than 75 percent of your income, then your savings are adequate. You probably can put down at least 5 percent of the purchase price of your home. However, for the maximum purchasing power, you probably will require a loan with Private Mortgage Insurance (PMI), which adds to the cost of a mortgage.
If your savings amount to more than 75 percent of your income, then you probably can make a down payment of 20 percent of the purchase price of your home. This will allow you to avoid paying the cost of PMI.
B. Debt relative to income
One way to assess your management of credit is to look at the ratio of debt payments to income. Debt payments consist of car payments, student loan payments, alimony, required payments on installment loans, required payments on credit cards where you are paying interest, and other obligations. They do not include rent, utility bills, the mortgage payment on a house that you are selling to buy a new home, or payments on credit card balances where you pay at the end of the month without owing interest.
You want to look at your monthly debt payments as a percent of monthly income, which means taking your annual income and dividing it by 12, as in the calculator below.
If your monthly debt payments are more than 10 percent of your income, then debt is an area of concern. If along with this high debt ratio you have a history of sometimes missing your monthly payments, then you may have difficulty qualifying for the best mortgage rates. Even if your payment history is clean, you might benefit by paying down some of your debts before you take on the additional burden of a mortgage.
If your monthly debt payments are between 5 and 10 percent of your income, then this should not prevent you from obtaining a standard mortgage. However, you probably could benefit from reducing your debt payments, and you might be able to reduce your interest costs by taking out a larger mortgage and paying off some of your other debt. If your monthly payments are less than 5 percent of your income, then your debts should not cause a problem with respect to obtaining a mortgage.
Key number 2: Choose a standard product to fit your time horizon
When you look for a mortgage, you might encounter a lender who offers a “unique” mortgage product. When this happens, you should be wary.
It is difficult, if not impossible, to invent a new mortgage product that is clearly better than the standard products that exist. Typically, there is a trade-off. For example, you may find that a mortgage with a prepayment penalty offers a lower interest rate. However, if interest rates tumble after you take out the mortgage, the prepayment penalty will make it more difficult for you to realize the potential savings from refinancing.
My concern with “unique” products is that they take away your bargaining power. If the product truly is unique to that lender, then you cannot obtain a comparable quote from another lender, which weakens your bargaining power. For that reason, I recommend that you stick with mortgage products where you can get competing quotes from different lenders. That is what I mean by a standard product.
It is important to realize that the 30-year fixed-rate mortgage is not the only standard mortgage product. You can obtain quotes from many different lenders on 5-year and 7-year balloons, 1-year, 3-year, and 5-year adjustable rate mortgages (ARMs) tied to the one-year Treasury index, and 6-month and one-year ARMs tied to the COFI index (these latter loans are more prevalent in California than elsewhere).
Rent Back Pitfalls
In today’s market with low inventory and high demand many sellers are requesting to rent back from the potential buyer in order to have time to look for their new home. Due to the competition buyers are facing, many buyers are willing to just that. In most cases for free!
What are the pros? For buyers: It can make your offer much more appealing.
For seller’s: You are living in your house for free and you have all of your equity in hand to put down on your next home. Plus, you have the advantage of being able to put in an offer that is not contingent upon the sale of your home.
What are the cons? For buyers: If they are paying you a rent back that is the equivalent to your PITI (principal, interest, taxes and insurance) then you are break even, but if you offered a free rent back, then you are paying a mortgage payment for the home that someone else is living in. Furthermore, if you own your current home or are renting, you are now making double payments.
Another issue can be damage that occurs while the seller remains in the home. Most sellers are conscientious about taking good care of the home they just sold you…but, what if the dishwasher breaks? Whose issue is this now?
What if you agree to a time frame (30 days for example)? You of course plan your move, repairs, give notice to your landlord…what if the seller can’t move out in time?
For sellers: If you are renting back because you are waiting for the home you already have in contract to close this is a great help to you, but if you are asking for a rent back to shop for your new home you may end up making a rash decision since the “clock is ticking”.
You ARE NOT insured! Many seller’s cancel their home owner’s policy when the home closes since the buyer now has coverage without talking with their agent about carrying a renter’s policy or personal property coverage.
My advice, use rent back situations only if absolutely necessary. Talk with your agent to make sure that both parties benefit and can meet the terms of the rent back agreement. Make sure the proper forms are being used so there is no question about who pays for what and for how long. Ask all of the questions you need answers to and make sure you have a plan incase something doesn’t go as planned!
Housing Market Cool Off??? Maybe not,
Americans are becoming more optimistic about buying a home, with 67% of people saying they plan on purchasing a home, and of that amount, 32% are looking to buy within the next two years.
The PulteGroup (PHM) Home Index surveyed 1,004 adults on their sentiment about the U.S. economy and how current housing conditions are impacting future home buyers.
According to the survey results, 74% of adults feel the economy has remained steady or improved in the last year.
As a result, 57% of adults think now is a good or excellent time to purchase items they want or need, especially when it comes to entering the housing market.
Millennials and move-up buyers are the most engaged consumer segments, with 85% and 71%, respectively, intending to purchase a home in the future.
There are two main drivers to purchasing a home: the need for more space and the view that owning a home is a smart financial investment.
Currently 70% of home shoppers plan to spend as much or more money on their next home, along with 64% of people saying they prefer to spend on a home that’s move-in ready rather than spend less and renovate.
Look What’s Framing up Nicely in Almaden Valley
It Pays to Use a REALTOR(R)!
The stats are in and below are a few reasons why using a REALTOR could earn you some extra cash!
Contact us today to see how we can help you today.
Home Improvements that can Pay You Back!
Always wonder what home improvements can actually pay you back. Well the research is in! Contact us today to see how we can help you today.
Creative Ways To Recycle Everyday Household Items
Every week the trash truck comes to pick up our garbage and unwanted items, which are promptly taken to landfills. Instead of filling landfills and just buying new items to stuff our homes, we can help the earth and recycle everyday household items.
Below are a few fun and creative ideas for recycling things around your home that you might be ready to trash.
Coffee Table Into Bench
If you just purchased a new coffee table, don’t give away the old one — repurpose it. Find a space in your home where you could use some additional seating, like at the end of your bed or in the entryway.
Push it up against the wall so that any drawers and shelves are facing out. Then add some cushions and pillow. Tada; a bench!
Copper Piping Into Bathroom Hardware
Whether you’re going for a modern industrial look or a French country theme, old copper piping can add an attractive and interesting conversation piece to your restroom.
Utilize a U-shaped piece of piping as a toilet paper holder and long pieces of pipe as towel racks. Polish the copper and then seal it with spray lacquer so that it keeps its sheen.
Light Bulbs Into Decorations
Recycle filament light bulbs with a fun little craft project for your children. Grab paint, twine, glitter and glue. You can make flower pots and hang them in the yard as a simple green accent. Use the twine to create loops for hanging.
Pillowcase Into Shopping Bag
Take an old or vintage pillowcase, lay it flat and cut the top corners off of the open end. You’ll want to cut the corners off in a half-C shape so that that there is only about a two-inch strip left in the middle at the top.
Sew that two-inch strip together and you’ve got your handle. This reusable shopping bag rolls up tight and is easy to wash.
Drawer Into Dog Bed
The size of your animal will dictate the size of drawer you should repurpose. A cat might like a kitchen drawer while a bigger dog would use a large dresser drawer. Strip the wood off the drawer and repaint. Remove the hardware.
Maybe stencil your pet’s name on the front of the drawer. Then create a mattress using foam, batting and a soft and durable material.
Before getting rid of that broken side table or trashing those carry-out chopsticks, take a second look and tap into your creative side to see if you might be able to recycle and give them a second life.
5 Home Improvements Projects to Avoid if you plan on moving!
This is a great explanation of why some home improvement projects are not worth investing money if you plan on moving in 2 – 3 years. If you are looking to sell your house, don’t hesitate to contact us for a free market analysis today!
Home For the Holiday’s! Open House – 2071 Marques Avenue
Brand New Construction in Willow Glen – Open this Sunday, December 8 from 2-5 PM. Come see us at 2071 Marques Avenue, San Jose to preview this lovely 5 Bedroom 3.5 Bath Custom Home! Contact Us for more details.