September, 2006 Newsletter
+++++++++++ September 1, 2006 +++++++++++++++++++
Introduction: Sales Decline, Inventories Rise
Mortgage Rate Update: Rates Decline
This Month's Tip: Developing a Mortgage Strategy
IIntroduction: Sales Decline, Inventories Rise
Existing-home sales were down in July, while home prices in many areas
are slightly below year-ago levels, according to the National Association of
Total existing home sales – including single-family, townhomes,
condominiums and co-ops – dropped 4.1 percent to a seasonally
adjusted annual rate of 6.33 million units in July from a downwardly
revised pace of 6.60 million in June, and were 11.2 percent below the
7.13 million-unit level in July 2005.
David Lereah, NAR’s chief economist, said higher interest rates
dampened sales but that price softening is good news for the
housing market because it is drawing buyers. “Many potential
home buyers have been on the sidelines, some ‘kicking the tires,’
but mostly waiting for sellers to compromise on prices and terms,”
he said. “Now sellers in many areas of the country are pricing to
reflect current market realities. As a result, there could be some
lift to home sales, but it’ll likely take some months for price
appreciation to rise.”
The national median existing-home price for all housing types was
$230,000 in July, up 0.9 percent from July 2005 when the median was
$228,000. The median is a typical market price where half of the homes
sold for more and half sold for less.
In new home sales, sales of new one-family houses in July 2006
were at a seasonally adjusted annual rate of 1,072,000, according
to estimates released jointly on August 24th by the U.S. Census
Bureau and the Department of Housing and Urban Development.
This is 4.3 percent (±11.5%) below the revised June rate of 1,120,000
and is 21.6 percent (±10.1%) below the July 2005 estimate of 1,367,000.
The median sales price of new houses sold in July 2006 was $230,000;
the average sales price was $293,500. The seasonally adjusted estimate
of new houses for sale at the end of July was 568,000. This represents a
supply of 6.5 months at the current sales rate.
Mortgage Rate Update: Rates Decline
Continuing a trend that began in July, most mortgage rates declined in the
month of August. For example, 30-year fixed-rate mortgages averaged 6.44%
in the period that ended August 31st, according to mortgage company Freddie Mac.
30-year rates began the month of August with an average of 6.63%. 15-year
fixed-rate mortgages began the month at an average of 6.27% and ended
the month at an average of 6.14%. There were declines in all of the reporting periods
during the month, and a total of six declines in the last six weeks.
For current average mortgage rates, see the rates page.
For more information on mortgages, visit the Mortgage
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This Month's Tip: Developing a Mortgage Strategy
Perhaps just as important--or even more so--than developing a strategy
for finding a house is a strategy for finding the right mortgage. The
right moves here can bring lots of rewards--both financial and in peace-
of-mind--but missteps here can be expensive and frustrating. You can
always get out of the wrong mortgage decision, but at what cost?
Unnecessary interest charges, exorbitant closing costs or both can
add considerably to your total cost of financing.
Your first step is to determine what your mortgage needs are. These
needs can vary a good deal from individual to individual. Some of the
variables that need to be considered include:
* How long will you be in the house?
* What are your retirement goals (and what is the
* Will your income be increasing, decreasing or staying
the same in the forseeable future?
* Will you need more room, less room or the same amount
of room in the future?
* Are funds available that will allow you to put 20%
down to avoid Private Mortgage Insurance (PMI)?
The answers to these basic questions will go a long way toward
determining which mortgage best fits your needs.
How long will you be in the house?
If you only plan to be in the home for a short period (say 2-4 years),
an adjustable rate mortgage, with its lower entry interest rate,
may be a good choice. Since adjustable rate mortgages, as the
name implies, adjust either upward or downward depending on market
interest rates, if you plan to stay in the home for a longer
period of time, an upward adjustment in rate (and payment) could
mean either a tighter budget or the need to refinance.
What are your retirement goals (and what is the time-frame)?
If your plans include retirement in 5-10 years, a 30-year mortgage
is probably not a wise choice, since you will not have made a big
dent in the principal balance--the amount you will owe on the house--
by the time you retire. A 15-year mortgage, with its accelerated
equity build-up, may make better sense.
Will your income be increasing, decreasing or staying the same in the
If you expect your income to rise appreciably in a given time frame,
it may make more sense to buy now with that in mind, rather than having to
sell, move and buy again later. You will probably want to choose a mortgage
that allows you to take advantage of the MOST loan for which you can qualify.
The reverse is true if you expect a decrease in your income (for example,
if a spouse plans to stop working) in the future. You will probably want
to select a mortgage that allows you to qualify at the LOW end of qualifying
ratios. Better to be prepared now rather than to be forced to sell your home
later, perhaps in a depressed market where a property is both more difficult
to sell and when it does sell, does so for less money.
Will you need more room, less room or the same amount of room in the
By looking forward--past your IMMEDIATE needs--to your potential
FUTURE needs, you can eliminate many of the problems of
selling, moving and purchasing and mortgaging a new home. We've
seen many buyers purchase a home with only their immediate needs in
mind, only to find a year or two later that they either do not have
enough room (because of a growing family) or have vast unused
spaces (due to decreased family size). This can be especially
frustrating if market conditions have changed (either for the better
or the worse) during the time that they have owned the home.
Long-term mortgages with little or nothing down do not mesh with
Are funds available that will allow you to put 20% down to avoid
Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is required on virtually all conventional
loans with less than a 20% downpayment. This insurance (which benefits
the lender should you default) can add $50, $100, or even $150 or more to
your monthly payment. If you can find a way to get the 20% down, you can either
save on your monthly payment, or, if qualified, buy more home for your
A mortgage is a commitment that is not easily reversed, so it is
important to have all the facts and options in line before finalizing
anything. Also, the house should fit the mortgage rather than the
other way around. Budget considerations should take precedence
over any other issues. Too many buyers put so much emphasis
on the home that they THINK they want--and not enough on how
they will pay for it--that they end up either disappointed or deep in
debt. Spend the little time that is necessary to avoid major problems later.
SOME COMMON MORTGAGE MISTAKES
* Making little or no downpayment when moving in less than 5 years is
a near-certainty. If market values stagnate or decrease, selling the home
could be an exercise in futility.
* Taking a mortgage term much longer than the estimated time to
* Letting the lender push you to a specific loan rather than investigating
all possible options.
* Not investigating shorter--10, 15 or 20-year--terms, which allow you to
increase your equity much quicker.
* Blindly paying points without making comparisons. For more discussion on points,
see the article on that subject:
Should I Pay Points?
WHERE CAN YOU SHOP FOR A MORTGAGE?
Local Lenders: A local bank may be a good source, especially if you
already have a relationship with them. In many cases, they will have
a variety of programs available, but they may be a bit more limited
than other sources.
Mortgage Brokers: Brokers deal with numerous lenders and generally
have a panoramic offering of lending programs. A good mortgage
broker will be able to match you with a loan that fits your needs.
Online Sources: A recent addition to mortgage shopping choices are
online sources where you can submit one application and have
multiple loan choices offered to you. An example of this approach is
LendingTree, which deals with numerous lenders throughout the U.S.,
matching your needs and ability with up to 4 competing offers.
You should be extremely cautious of ANY mortgage that depends to
a large degree on large and consistent increases in home values. Examples
would be Interest Only Mortgages and, even worse, "Option" Mortgages that
allow negative amortization (even though you make a payment every month,
you have an option to make a payment that does not even cover interest charges-
-which means the amount owed goes up every month). Without big increases
in home prices, you could be left holding the bag, owing much more on the house
than it is worth, especially when you factor in selling expenses.
Choosing the right home and choosing the right mortgage go hand-in-hand.
It is far better to spend the time investigating all of the available options up-front
rather than finding out that there were better choices available AFTER
settlement and moving!
Next Month's Tip: Dealing With a Changing Market
The Home Buying Checklist
Many of our visitors have said that one of the most valuable
aspects of the Home Buyer's Information Center is the
Buying Checklist, where they can make sure that all
the bases have been touched. You can find
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.
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 month and good luck in all your endeavors!
The Team at the Home Buyer's Information Center