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Buying a Home? Now May Be the Best Time

JPMorgan Chase "plans to lower LTV standards in certain markets for both jumbos and conforming mortgages to portfolio on balance sheet," Deutcshe Bank analyst Dave Rochester wrote in a note to clients on Feb. 11. A jumbo mortgage loan is one with a balance of more than $417,000, which cannot be sold by a lender to Fannie Mae (FNMA) or Freddie Mac (FMCC).  A conforming loan has a balance lower than $417,000 and meets underwriting criteria allowing a bank to quickly sell the loan to Fannie or Freddie.

In many parts of the country, there is a much healthier balance between home prices and salaries, and you may also still be able to find foreclosure or "fixer upper" bargains.

Interest Rates

According to BankingMyWay, the average interest rate for a 30-year fixed-rate mortgage loan in the United States is 4.39%, increasing from 4.22% last week, while the average rate for a 15-year fixed-rate loan is 3.55%, up from 3.42% last week.  Those rates are still quite low on a historical basis, although they are up significantly over the past year.

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Along with considering "buying less house than you want," in order to save money and make a purchase in the face of rising home prices and rising interest rates (as well as paying lower taxes and lower insurance premiums), you may also want to consider a 15-year loan rather than a 30-year loan.  Most of the coverage of the housing market and expenses focuses on 30-year loans, but you can save a bundle if you consider a shorter term.

Using the average rates listed above, with a loan balance of $200,000, the monthly principal and interest payment for a 30-year fixed rate mortgage with an interest rate of 4.39% would be $1,000.34.  Total interest payments over the life of the loan would come to $160,121.  If you borrow $200,000 for 15 years at the national average rate of 3.55%, your monthly payment would be $1,434.68, with total interest for the life of the loan coming to $58,242.29.

That could be a bitter pill to swallow.  You would pay $434.34 more each month, in order pay off the home 15 years earlier, while saving a total of $101,878.21 in interest.  That's quite a bundle of savings, not to mention 15 years' less pressure to come up with the monthly payment.  How can you afford the 15-year loan? In addition to considering "buying less house than you want," you might drive your old car for several more years, or make other sacrifices that might seem painful.  A careful examination of monthly expenses might shed light on discretionary items that could be cut, or reduced.

You may think something like this: "There's no way I am staying in this house, even for 15 years, so I might as well just go with the lower payment."  OK, that makes some sense, but not much, if you can afford the 15-year loan.  This is because your payment with the 15-year loan is much more heavily weighted toward principal and away from interest, meaning that if you sell the home after five years, you will have built up much more equity than you will have built up with a 30-year loan.  If you can swing the 15-year loan, it will be worth it.

These figures provide food for thought, but they do not include property taxes and insurance, which are escrowed for most mortgage loans, meaning the lender or loan servicer pays these bills for you, while collecting an additional amount each month to cover those items.  So you must factor those items in.  Do not rely on your real estate agent for proper estimates of property taxes and homeowner's insurance.   Go to the county tax office for an estimate of annual property taxes based on the amount you expect to pay for the home.  Go to an insurance agent for an estimate on the cost of homeowner's insurance.  You may also be required by the lender to carry flood, windstorm or other hazard insurance, depending on where the property is located.

The point of all of this, even if it doesn't apply to your circumstance, is to provide food for thought, since mortgage loan interest rates are likely to continue rising, and property prices are continuing to recover.  You, or someone you know, may need to "think outside the box" and make a move toward home ownership now, before it's too late. 

Don't assume that a 30-year mortgage loan is the only way to go. And if home prices continue to rise significantly after you buy, think twice before "cashing out" through a home equity loan.  Becoming debt-free is another goal to consider.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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