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January, 2002 Newsletter


+++++++++++ January 2, 2002 +++++++++++++++++++

CONTENTS:
Introduction:
Mortgage Rate Update: Up and Down
This Month's Tip: Warning: Overpaying Can Ruin
Your Financial Health!
++++++++++++++++++++++++++++++++++++++++++++
Introduction

Welcome to the January edition of the Home Buyer's
Information Newsletter and a Happy New Year to all
of our subscribers!
Looking back at 2001, although it was dominated by
both tragedy and an economic downturn, was
nevertheless a reasonably good year for home
buyers. Mortgage rates, especially at the end of
the year, were at multi-year lows. Appreciation
was steady and strong, and home sales were at or
near record levels. Although most extimates for
2002 are at slightly reduced levels, it still may
shape up to be another excellent time to buy a home.
The only potential concern, in our thinking, is the
level of price appreciation that has occurred over
the last year. When the economy begins to turn
around, price appreciation likely will continue
to accelerate. As such, we've devoted this month's
tip to ways to prevent overpaying for a home.

+++++++++++++++++++++++++++++++++++++++++++++
Mortgage Rate Update: Up and Down
Mortgage rates moved up and down, within a fairly
narrow range, during the month of December.
Generally, though, 30 year fixed rates were in
the low 7% range for most of the month. According
to mortgage company Freddie Mac, 30 year fixed rates
stood at 7.16% (not including points) as of the
week ending December 27th. 15 year fixed rates
were at an average of 6.65%. Many analyists see
rates staying in this same general range for the
near term.
For current average mortgage rates, see:
Mortgage Rates
For more information on mortgages, visit the Mortgage
Section at:
Mortgage Information

++++++++++++++++++++++++++++++++++++++++++++++

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++++++++++++++++++++++++++++++++++++++++++++++

This Month's Tip: Warning: Overpaying Can Ruin
Your Financial Health!

In our monthly newsletters (and on the Home Buyer's
Information Center web site) we always try to be as
forthright as possible with tips that warn of potential
pitfalls in the home buying process such as buying the
wrong home, overshooting your budget or selecting the
wrong mortgage. We've always believed that a better
informed buyer is more likely to make decisions that
will benefit their personal situation, rather than
having to rely on information from someone that may
be self-serving (a lender pushing a specific loan,
for example).

In the fast changing economy in which we find ourselves
at the start of the New Year, some of the most
important advice we can give is to be very wary when
negotiating for a home and protect yourself from
overpaying either more than the home is worth or more
than your budget can comfortably withstand.

Many home buyers, unfortunately, have the attitude that
"it really doesn't matter WHAT we pay for a home. Since
the Real Estate market keeps going up, the home will be
worth more next year than it is now." This can be very
dangerous thinking.

The best example of the fallacy of this type of thinking
is a comparison to the U.S. stock market in the late
1990s. At that time, the same kind of thinking dominated
overall equity market philosophy: "Buy now, hold, and the
price will go up." Various statistics were cited showing
that, over any given long-term period, stock prices only
went one way--up. In the wider picture, this is true, but
in shorter time frames of 5 years or less, this is definitely
not always the case. Stock prices can (and will) go down.
If you need to sell in the period when the market is depressed,
you will lose money. Many investors learned this hard lesson
in 2000 and 2001.

The same cyclical environment can occur in residential Real
Estate. Although home prices will always rise in the long-
term (meaning periods of longer than 10-15 years) there will
NOT always be increases in shorter time periods (5-10 years
or less). There have been numerous instances of time
where a home that was purchased in a given year was worth
less 4 or 5 years later. This is why it is crucially
important to ensure that you pay no more than what is fair
and reasonable.

If you are certain that you will be staying in the home
you buy for a long period of time, the effect of these
cyclical movements will be minimized. If, however, there
is a possibility that you will need or want to move in a
shorter time frame, these cycles must be addressed. This is
especially true if you have put yourself in a position
of very limited equity through a low downpayment, since you
will have no "buffer" should prices stagnate or fall.

Those who have the MOST exposure are those who:
+ Pay more than market value
+ Have a low or no downpayment
+ Select a 30 year mortgage

Those who have the LEAST exposure are those who:
+ Pay at or less than market value
+ Have 10% or more downpayment
+ Select a 15 year mortgage

Unfortunately, we see more buyers falling into the first
scenario than the second.

These cautions would carry a lot less weight if there had not
been a huge run-up in real estate prices in most areas of the
U.S. and Canada in the last 5 years or so. Real Estate
appreciation rates have been at levels rarely seen in the
last 50 years, meaning that there is now little room for
error in negotiations. Anything that could affect
home buying activity--layoffs, a softening economy and a
clouded economic picture--can put extreme pressure on what
may be a fragile pricing structure. Less homebuyers in
the market means less competition, which converts to lower
prices. Those who have owned their homes for a number of
years and who paid reasonable prices are less affected.
Those who paid over market value and have owned for shorter
periods of time can be severely impacted.

Although a home purchase is obviously an emotional decision,
it must be influenced by a healthy dose of common sense.
If the potential purchase feels too expensive or if it
tests the extended limits of your budget, it is probably
a good time to sit back and take a clear-headed view of
the situation.

TIPS ON HOW NOT TO OVERPAY

+ Don't buy in the heat of the moment. Give yourself at
least a day to review both the house and your finances.
Budgets

+ Avoid "bidding wars" like the plague unless the house
is demonstrably UNDERpriced--either by a CMA or by an
independant appraisal.
CMAs

+ Don't bite off more than you can chew. If you only
barely squeek by the mortgage qualifying process, you
are probably looking at too much house.
Qualifying Ratio Examples

+ Buy quality, not trends. Today's trendy houses are
tomorrow's has-beens. Plus, trendy houses always cost
more.

+ Keep your priorities in perspective. Yes, owning a
home is a worthy pursuit, but it is not a necessity.
Being happy in your job, having a contented family
life and having some resources (both in money and
energy) are usually more important (as well as longer
lasting).

Summing Up

Mortgage delinquencies are currently running at one of the
highest levels in years. To some degree, this is a result
of the large numbers of layoffs that have occurred in the
last six months. In many cases, though, these mortgage
delinquencies are a result of buyers simply paying more
for a home than they could reasonably afford. When we
hear the words "We'll do ANYTHING to get a home" a large
red flag goes up. With that attitude, financial
difficulties are frequently hiding just over the horizon.
It is always better, in the long run, to focus on a
comfortable budget that can handle the payments on a
home that is fairly and reasonably priced.


As always, if you have suggestions for improving the
site, or topics you would like to see addressed in
this newsletter (or, if you have used the Home Buyer's
Information Center to successfully purchase a home),
drop us a quick line here:
Email Us
or access our feedback page at:
HomeBuyers Information Center Feedback

A special thanks to all those who have written to let us know
that they have found the Home Buyer's Information Center a
helpful resource in their buying process.
Have a great New Year and good luck in your home buying process!

The Team at the Home Buyer's Information Center

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