Preparing To Buy Your First Home

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A decade ago, economic experts were bemoaning the emergence of a “boomerang generation.” Young people had left for college with bright eyes and exciting dreams of rewarding and fulfilling careers. Then, in 2000, the economy collapsed. These ambitious, well-educated folk found themselves with tons of debt and little opportunity. Many of them swallowed their pride and moved back home with mom and dad.

This situation wasn’t great for anyone. Mom and dad had to put retirement plans on hold. Gen Y members had to postpone their professional and social development to take internships and part-time jobs. It’s also hard to feel fully “grown up” when your evenings end and mornings begin in your old childhood bedroom, perhaps still full of stuffed animals or posters of bands you liked in high school.

The economy improved, and members of this generation used hard work and education to put themselves in a position to consider buying houses. 70% of Gen Y, according to a Better Homes and Gardens survey, now find themselves ready to strike out on their own again. The timing couldn’t be better for them, as many market experts are predicting a coming housing boom. Interest rates are low and real estate values have likely bottomed out. These two factors suggest that a surge of home buying is likely in the next few years.

Buying a home can be a daunting task, though. The challenges of being a first-time home owner can be intimidating, particularly for people who are moving away from home. Let’s take a look at a few guidelines to help take some of the stress out of the decision.

The house you buy may not be forever.

Because of the soundness of real estate as an investment, many first-time home buyers tend to want to get the biggest house they can. They may be trying to start families or getting more space for their existing family to grow. Whatever the motivation, buying a house is one of the few times when people try to plan their lives 30 or more years down the road.

That’s a really big gamble. Any number of unanticipated changes might happen in 30 years: Your job or your partner’s job may force you to move, your parents may have medical problems that need greater care, or you may decide to change careers or start your own business. This unavoidable uncertainty means it’s not in your best interest to plan for a future that’s so far away.

Look for a house that suits your immediate needs and understand that every place is adaptable to a degree. A den or an office can become a nursery, a shed can become a workshop, and a basement storage area can become another bedroom. Don’t think you need to plan your life out forever if you choose to buy a home. Make some reasonable, educated guesses about what your life will be like for the next 10 years or so, and buy the house you need for that time.

Don’t become ‘house poor’

Many first-time home buyers also fall in to the trap of figuring out the most that they could afford to spend on a new home, then spending exactly that amount. The reasoning behind this decision is simple: money spent to repay a mortgage isn’t really “spent.” Homes can be refinanced or remortgaged if money gets tight, or repaid when the house is sold. That’s sound reasoning, but only to a point. People who end up spending most of their monthly income on a house payment leave little for other debt repayment, retirement savings, or building an emergency fund. They find themselves unprepared for an unexpected medical bill or car repair. They also find it difficult to take vacations or make home improvements. That’s an unenviable position.

Avoid this trap with a little financial consultation. Understand that your upper limit for housing expenses should only be a worst-case scenario. Buy the house you need, not the most expensive house you can afford. You’ll be happier in your home and in your budget.

Understand the process

There are a lot of factors that go into obtaining a mortgage. First, you and the seller have to agree on a final price, which includes the money you pay for the house and a host of fees, like the inspection, appraisal, and title transfer. The realtor in charge of selling the home can walk you and the seller through the process.

Next, you’ll need to arrange financing. You’ll want to shop around for the best prices, but new regulations can make that costly and time-consuming. Each financier has to appraise the value of the home, and then compare their estimate to the price you agreed on with the seller. The greater the difference between these two values, the more expensive your home loan will be, but that’s not the only factor. The financing institution also has to check your credit, verify your income and assets, and confirm your employment to follow new regulations passed after the last financial crisis that was largely fueled by bad mortgages.

These regulations can make it more difficult just to get the home loan, much less one at a good rate. This is particularly true if your employment history is short or if you’re just getting started with a new business.

You can help this process by buying a house you can afford, building your credit score by reducing the amount of credit you’re using, staying with the same employer and saving for a significant down payment. You should aim to have at least 20% of the total amount of the sale for a down payment, as this is the threshold to avoid having to pay for private mortgage insurance (PMI). A larger down payment also reduces the risk of the loan to the lender and can help get you a less expensive mortgage. This, in turn, makes for a less expensive housing payment. You can also ask for help from mom and dad; a cosigner on a mortgage may improve your credit score and lower your interest rates.

Don’t go it alone

A lot of big national lending institutions advertise appealing mortgage specials on billboards, TV, and the radio. The rates may seem reasonable and even enticing. In reality, though, those rates go only to a small percentage of borrowers – borrowers who have exceptional credit, significant income, and a considerable net worth. As a first-time home-buyer, you probably will not qualify for the rates those large, faceless corporate lenders are using as bait to pique your curiosity.

Given the difficulty of shopping around, make your first stop the institution that has the best chance of giving you the best rates from the start. NASA Federal Credit Union is there to help your community, and that includes helping new home-buyers secure loans for the first time. You’re making the right decision by looking for a home during a buyer’s market. Make another smart call by speaking to a credit union representative about mortgage rates. When you’re ready to get out of the basement, your first stop should be your credit union.

If you’d like to discuss your home financing options with a Mortgage Loan Specialist, call 301-249-1800, Ext 207, or fill out this contact form.

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The Closing Mortgage Window

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Over the past 6 months, you’ve no doubt heard that this is the best time in recent history to refinance your mortgage or buy a new home. While it’s easy to assume that those low mortgage rates are just the new normal, recent action from the Federal Reserve tells us that this window to lock in a mortgage at 60-year lows may be closing.

Before we look at the reason, let’s take a quick look at why mortgage rates have been so low for so long. A little background on the banking system might help explain why experts are making this observation.

Financial institutions base the rates that they charge for loans on how much it costs them to borrow money. Because other financial institutions are the lowest-risk borrowers, they get the best rate. This is usually called the “prime rate.” This rate is set by each individual institution, although they all follow signals from the Federal Reserve. The Federal Reserve uses a variety of instruments to influence the prime rate. These signals come in two forms: lending rates and bond purchases. Lending rates are the interest rates that the Federal Reserve charges to other financial institutions. Bond purchases are investments that the Federal Reserve makes in loans that institutions are making.

Since 2008, the Federal Reserve has used these signals to make credit cheaper in an effort to spur growth in major employment sectors, like construction and small business. The Federal Reserve Board kept rates low until unemployment dropped below 6.5% or inflation went up over 2.5%. New economic reports suggest that the unemployment figure could be approaching that 6.5% target. New Fed Chair Janet Yellen has begun reducing bond purchases. Experts suggest that this tapering is the Federal Reserve’s first step toward reigning in the stimulus. These signals tell financial experts that rates may soon go up, including the interest rates on new mortgages.

The frightening reality is that it doesn’t matter if they’re right or not. If enough big lenders decide they are, those institutions can start raising their interest rates. This move will prompt other lenders to raise their rates in response, and your chance to get into a cheaper mortgage will be over.

Unless you can get a full percent lower interest rate, the costs of refinancing make it unfeasible. You might not be able to do that by just extending the term of your mortgage. Yet, this may be a good time to revisit your financial goals and figure out what kind of mortgage suits your financial future. Here are a couple of questions to help you figure out if a new mortgage is for you:

Can you afford a higher monthly payment for a shorter period of time?

The most significant impact you can have on the interest rate for your mortgage is to shorten the term of the loan. Because your lender gets paid in full sooner, they’re exposed to less risk, so they charge a lower interest rate. If you’re 10 years into a 30-year mortgage, you aren’t likely to save by refinancing into another 30-year mortgage. You might be in a better financial situation than you were 10 years ago, though. The higher monthly payment of a 15-year mortgage might not be as much of a problem. This refinancing strategy gets you out of debt sooner and saves you money in the long term.

Are you going to be out of debt before you retire?

The best way you can make retirement more affordable is to retire debt-free. This allows you to use your retirement funds to support your lifestyle and hobbies. Now is a good time to investigate a shorter-term mortgage that you can have paid in full before you retire. It’ll never be cheaper to get into a mortgage that better fits your financial needs.

Are you unsure if you’ll be moving soon?

Remember, “soon” for big decisions like mortgages means in the next five years. If the next 5 years could bring a move for career or family, it might be wise to lower the total debt load on your house. For this kind of decision, the monthly payment matters less than the total amount owed. You’ll be selling your house to cover the debt. The smaller you can make the amount owed, the more of the sale price of your house you get to keep. Consider a “hybrid” mortgage. These loans are fixed-rate for a specified time, and then use adjustable rates for the rest of the loan. This kind of refinance can save you money for the time you’ll be paying for the home.

Have you been denied for refinancing before?

If you considered refinancing your mortgage before but were told that you didn’t qualify, now is a great time to try again. If you were unemployed for a while, but now have a job, lenders are more willing to see this as a positive sign of recovery. Additionally, home prices are on the rise. The collateral you have for your loan might be worth more, which will help your lender get you the best rate possible. If you signed a mortgage before 2008, it just makes sense to investigate a refinance. The interest rates are lower, the economy is stronger, and now might be your last chance to take advantage of recovery. Speak to our loan officer today to see what refinancing options are available for you.

Ready to finance your next home? Still want to learn more?

If you’d like to discuss your home financing options with a Mortgage Loan Specialist, call 301-249-1800, Ext 207, or fill out this contact form.

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