People ask me financial planner questions all the time. Concocting the best timing 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 is to focus on individual circumstance 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 money for a 20 percent down payment and are fast approaching that goal, stay the course. Second-guessing your original thinking because other variables are garnering more of your attention could derail your 20 percent down payment goal. Forecasting interest rate movements and whether or not rising property values will spoil your home buying plans are certainly important, but beyond your ability to control or manage.
Mortgage interest rates trade every day. Economic data, geo-political events and even nature can have an immediate and significant impact on the direction that 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 always get it right. Setting a specific home-buying goal means keeping your eye on the ball. Do that and try to avoid the distractions that will derail your goal.
Mortgage insurance can cost thousands
But if you must introduce ifs and buts into your home buying equation, here are some things you should consider:
If you decide to buy a home with less than your 20 percent 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 necessarily a bad thing – it allows you to buy a home with less than 20 percent down, but like everything else, there is a price to be paid for that allowance.
PMI can take different shapes, the most common of which is adding the PMI to your overall monthly mortgage payment. For example; a 15 percent 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 percent equity (some PMI companies require 22 percent equity), and have the PMI eliminated.
If you have an FHA loan, you cannot do this, you will live with MIP (the FHA version of PMI) forever or at least until you refinance or sell your house.
Don't lose sight of your goals
But if you have been saving for a 20 percent down payment to buy a home and have almost reached your goals, then you are a serious real estate consumer and your primary goal is buying a home. Your down payment goal is important but it is secondary. You have made lifestyle and personal budget adjustments and have committed to a desired outcome.
Keep your primary goal 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 and 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 that 20 percent 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.
A loanDepot licensed loan officer can help with these and any other lending questions. Call (888) 983-3240 to speak with one today.
Published July 13, 2015
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