bluecollardollar: on mortgages and homes

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The mutual fund investor has a great many more options available to them in the post-Great Recession marketplace. The question is: are they right for you as you make a retirement plan using 401(k)s or IRAs?
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on mortgages and homes in 2012

Here are three things to consider about buying a home in 2012.

First: Know Your Options
When you initially consider buying a home, the decision is often based on some contributing life event. You're getting married, having a child or feel as though one or both of you are in a good position job-wise to weather any potential economic hardship.

These life events are unsettling changes from a budgetary point of view. And in many instances, you made the decision to get married, start a family or create a budget based on job security came from the belief that what you had at the point of that decision would remain unchanged. Ask yourself: is it realistic to assume that these cost of life events wouldn't change the future somewhat? Yes, it might be a positive change (two incomes now as one, etc.) but every change offers subtractions as well as additions.

Two incomes may make many things possible. Buying a home is one of them. But here's where the past plays into the present decision you are making for what appears to be a better future. This traditional approach begins with knowing what you can afford (often dramatically underestimated) and whether you qualify for a loan. The qualification part is the key to what you can afford. But too often, it is placed after the "cart", not before.

Your credit score, now the combination of the two, are the baseline for the affordability of the home purchase. The current baseline for qualifying stands at 700, little changed in the past couple of years. This bottom line so to speak determines how much of a break you will get from the lender. The higher the score, the better the chances you will get the advertised rate. There is a newer credit score provider in the market that aggregates all of your past financial transactions including rent payments (were you ever late, missed a doctor's bill, etc.?). Is your and your significant other able to pass this newer test of creditworthiness?

Before you begin thinking about buying a house, consider the cost of capital. This might, in many instances make renting a viable options, despite the desire to own. Owning, as all homeowners know all too well, involves much more than simply a mortgage payment. It involves an ever-increasing cost due to taxes, upkeep and insurances.

Second: The Market is Improving
The question is: is it improving for you and secondly, is that a good thing? Perhaps and perhaps. An improved housing market points towards the ability of lenders to release money into the market to be purchased.

According to Krista Franks, this credit requirement has remained consistent over the last year. But she points out: "However, other market indicators point not just to a stabilization of mortgage lending standards, but also a loosening of credit availability. Banks are now lending amounts up to 3.5 times borrower earnings. This is up from a low during the crisis of 3.2 times borrower earnings. Banks are also loosening loan-to-value ratios (LTV), which Capital Economics denotes "the clearest sign yet of an improvement in mortgage credit conditions."

You will, however still need to prove ability and here is where banks exercise the most impact on your ability to buy a home. Still stinging from the meltdown, proving the ability to weather hardship (such as will the home foreclose if one income is lost) and presenting an adequate credit score contributed to the lion's share of contract failures. You get to a certain point in the process and sicker that you, the borrower may not have the right stuff or the lender might see some change or past occurrence that you never thought would enter the equation.

Third: Perhaps unconventional
Why go with a 30-year mortgage? There are many aspects of the 30-year mortgage that appeal to home buyers. It is more affordable than a 15-year mortgage with lower monthly payments. Although when you calculate the cost of loan servicing over the duration of the loan, the 15-year is much more cost effective in the long-term. Unless of course you can pay off the mortgage in advance.

Pre-paying a mortgage gives you two options. One, to not pre-pay on months where it simply isn't possible and two, to pre-pay directly to principal which lowers the loan service costs. It works in rough terms like this: you take a $1200 mortgage (the interest rate doesn't matter) and pay an additional $100 (directed to the principal, not just the payment), your length of the loan would decrease by five to six years. Add another $100 (now $200 towards the principal) and the loan is down to roughly 20-22 years. Another $100 (now $300 towards principal) and you have an eighteen year mortgage without the locked-in payment.

Then there is the adjustable rate mortgage. This option was the key element in bringing down the mortgage markets. Folks bought these loans, with an adjustable period in which rates can go up or down or remain stable after which they lock in. Fine if you are not planning on holding the home for too long. Not so fine if you can't sell the house before the rate adjusts into unaffordability!

But perhaps they could be reconsidered in light of this life event. A smaller home with a low rate (ARMs are generally half the cost rate-wise) might give you the additional time to adjust to the new "event" or perhaps allow you to create a better platform to jump from (a new job opportunity in another city for instance) should you be presented with one. Learn more about adjustable rate mortgages

Be Keenly Aware of Your Finances
Life events tend to blur or vision of reality. If that's the case for you, keep renting while the fig clears. This is NOT throwing money away of you are getting your finances in order. Buy when you can see more than just a couple of months down the road. While no one can predict the future, you can make worst-possible-scenario predictions and this is better than not trying at all.

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