June, 2001 Newsletter
+++++++++++ June 5, 2001 +++++++++++++++++++
Introduction: Market Softens
Mortgage Rate Update: Rates Move Upward
Recent Site Updates: New Charts
This Month's Tip: Budgeting for Home Ownership
Welcome to the June edition of the Home Buyer's Information Newsletter. In the last 30 days,
we've seen some softening in the overall Real Estate market both in the U.S. and in
Canada. The final April numbers show that sales of both new and existing homes declined a
bit. We would expect this trend to be maintained for at least the short term. Although mortgage
rates are still at a reasonable level, they have continued to move upward in the last month (see
the following story).
Mortgage Rate Update: Rates Move Upward
Giving further evidence that the closely watched Federal Open Market Committee (the "Fed") rate
has little or nothing to do with mortgage interest rates (the FOMC rate is a short term loan rate)
mortgage rates rose slightly again in May, even with another Fed interest rate cut. Mortgage
company Freddie Mac reported that the average rate for a 30 year fixed-rate mortgage was 7.24% as of
May 31 with an average of about 1 point. 30 year rates began the month with an average of 7.14%.
All in all, though, rates have only fluctuated by a quarter point or so for the first 5 months of
the year. Many analysts expect this relative stability to continue for the next 30-60 days.
For more information on evaluating, comparing and preparing for mortgages, visit the Mortgage
Recent Site Updates:
We've added a couple of new charts on the site, including an example of a Good Faith Estimate
(a disclosure of your mortgage interest and closing costs) and a worksheet where you can
make comparisons between different mortgage offers.
Good Faith Estimate
Mortgage Comparison Worksheet
You can always find out "Whats New" at the Home Buyer's Information Center at the following location:
Buying for Dummies
for a great companion guide to the Home Buyer's Information Center? Home Buying for
Dummies--like all in the "Dummies" series--is an easy to understand but concise approach to
the home buying process. The book is an excellent roadmap to the home buying process.
You can save 20% at Amazon.com here:
Home Buying for Dummies
Month's Tip: Budgeting for Home Ownership
Buying a home is a combination of a number of factors--emotional, legal and financial. To a large degree,
the emotional and legal considerations end at the time of closing, but the financial aspects continue
throughout the home ownership experience. Managing finances is always a challenge--especially during
the buying process. You'll find that it's much better to have your financial preparations completed
BEFORE you make the step of buying a home rather than scrambling to get things in order AFTER you have purchased.
Once you have bought your home, it is important to keep a tight rein on your budget during your
time of ownership.
If you are coming from a rental situation, it is important to understand that the financial situation
with home ownership is very different from renting, even if the monthly payments are similar. You will
be contending with a completely different tax situation (mortgage interest payments are, in general, tax
deductible. This is a positive financial aspect of owning a home. But homeowners insurance and property
taxes also are a part of your monthly payment, which can raise it considerably above just principal
and interest. If you put less than 20% down, you will likely also encounter Private Mortgage Insurance (PMI)
which protects the lender but can add $50, $100 or more to your monthly payment. If you live in a condominium,
townhouse or housing community that has a Homeowner's Association, you'll also need to consider monthly dues
in your budget.
Planning for budget concerns should always preceed actually searching for properties. Buyers will
often begin house hunting without a clear idea of what they can afford. If (as is often the case) a
buyer only selects properties that are beyond their budget, it can be a real disappointment when they
are forced to lower their field of vision.
If you want ot know how much you can reasonably afford, mortgage qualifying ratios are an easy place
to start. The lender will be using such ratios to determine whether or not they will approve the loan,
so it is a good idea to factor them in advance.
Take your total monthly gross income and multiply it
by 28%. This is generally the total amount most
lenders allow for your maximum mortgage payment--
including taxes and insurances.
EXAMPLE: $4400 monthly gross income x 28%= $1232
As a second (and just as important) test, take your
gross income and multiply it by 36%. This is the
total maximum outlay for all your monthly debts--
including the mortgage payment, car loans, credit
card payments, personal loans and any other monthly
payment obligations. This would NOT include such items
as food, utilities, clothing, insurance, etc.
EXAMPLE: $4400 x 36% = $1584 maximum monthly debt
Although there may be plans or lenders who will boost the qualifying ratios above, if you want to remain
safely within a budget, you should adhere to the ratios above as closely as possible. These ratios were developed
over many years of analyzing repayment histories of home owners. Those with qualifying ratios of 28% (payment)
and 36% (debt) or less were much less likely to run into problems or default than were those with ratios
above those levels.
Even the most liberal of qualifying ratios, though, have specific limits. For example, if the home you
want to buy has a mortgage payment equal to 40% of your monthly income (before adding other debts) or
your total debts will total 50% of income, you'll need to either lower your sights or make a lot more money.
You can't afford the house and the lender will not approve the loan. It's better to have control of
such a situation sooner (before you go looking for a home) rather than later (when you've found the "perfect
home" and can't buy it).
What if the numbers don't fit? You'll need to adjust your budget and spending patterns. We've got lots of
hints to help you on the site at:
Considerations During Your Purchase
Even if you've made the right budget preparations prior to finding a home, there are a couple of pitfalls
you many encounter during the purchase process. For example, if you are financing with a conventional
mortgage, you will want to make every effort to put at least 20% down. Downpayments less than 20% will
require Private Mortgage Insurance (PMI) which can add considerably to your payment. If you are planning to
build a home, the "extras" that a builder may try to sell you (or you want to buy) can add a good deal
the price of the home (and ruin your monthly budget in the process). Some of these extras (for example, those
that add to the usable square footage of the home) can add to your future value but many others (swimming pools,
spas, overly expensive amenities) will often add little to value, but increase your expenditures appreciably.
This could mean either more cash up front or an inflated monthly payment.
If you are building or buying a new home, you'll also need to be prepared for a number of expenditures that
may not be necessary in a pre-owned house. Examples are landscaping, decorating, curtains and the like. The
total of these items can add 5-10% to the total price of the home shortly after moving in.
In your budget considerations both before and during your purchase, don't try to do too much too quickly, especially
if you are buying your first home. Better to take smaller bites initially and then upgrade later (add on, remodel
or move to a larger home) rather than take a huge leap all at once, only to find that you've overextended a comfortable
The advantages of buying within a reasonable budget are numerous: Less stress, more money available for savings,
less need for additional borrowing, perhaps an opportunity to work a little less. The advantage of overextending
your budget? Maybe a short-lived ego boost when friends and family first visit the home that is almost always
outweighed by the negative impact of being "house poor"--potential money troubles, more emphasis on work
leisure, less opportunity for savings. The reality is that there can (and should!) be more to life than the
bricks, mortar, fiberglass and plastic of a house!
More information on the site:
Developing a Budget
Next Months Topic: Buying for Your Needs
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 at our feedback page:
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
helpful resource in their buying process.
Have a great month and good luck in your home buying process!
The Team at the Home Buyer's Information Center
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