First-time home buyers can find great deals with today's convergence of low house prices, still-low interest rates and appealing tax incentives
San Mateo, Calif. (Vocus) July 1, 2009
For individuals with steady income, manageable debt and a good credit profile, 2009 might be among the very best times to purchase a first home.
"First-time home buyers can find great deals with today's convergence of low house prices, still-low interest rates and appealing tax incentives," said Ethan Ewing, president of free online consumer portal Bills.com.
Ewing listed 10 things buyers should know about purchasing a first home in 2009:
1. Home prices are low. Home prices dropped at a record annual pace of 18.7 percent this past March (the most recent data available). That means discerning buyers can find real bargains.
2. Interest rates are still good. While interest rates have risen from their historic lows earlier this year, they still are appealing. In late-June, rates hovered around 5.25 percent for a 30-year fixed-rate mortgage.
3. Tax credits will help. First-time homebuyers can get money back from tax credits implemented as part of the 2009 American Recovery and Reinvestment Act. An $8,000 credit is available to first-time buyers (a category that includes people who have not owned a home for several years) for homes purchased before Dec. 1, 2009. Legislators are considering increasing the credit to $15,000 and expanding it to include other home buyers.
4. Credit scores matter. While houses are widely available, financing is limited to those with good credit. Credit scores range from 300 to 850, with the median U.S. credit score about 725. A score below 660 usually results in a higher interest rate or denial of credit. Check your credit score before making home-buying decisions. If the score is lagging, wait a few months and work to improve the score by paying every bill on time, paying down as much debt as possible and disputing any erroneous information on the report. Note that it can pay to research mortgage rates and lenders -- credit scores do not decline if multiple similar credit report requests are submitted within a close time period (usually a few weeks).
5. Savings are mandatory. A down payment is essential today. Ideally, put down 20 percent of the purchase price (see #7 regarding PMI). If not, talk to a mortgage lender about options.
6. Do not stretch too far. Standard guidelines call for keeping housing expenses below 35 percent of total income. "Breathing room" in the budget will help secure a home even if something unplanned does occur. If you are uncertain, wait to buy.
7. Understand private mortgage insurance (PMI). Mortgages with less than 20 percent equity (which means a 20 percent down payment for those purchasing a home) require PMI in case the owner defaults on the loan. When the home owner pays a conventional mortgage down to 80 percent or less of the home's value, the home owner can request the lender to cancel the PMI and then be able to stop paying the additional amount. Meanwhile, PMI is tax-deductible, at least through 2010.
8. Know the real costs of buying. The principal and interest on a mortgage payment are only the beginning of home-related costs. Escrow payments – the funds withdrawn to cover home insurance and taxes – and PMI can add a few hundred dollars per month (or more) to a mortgage payment. In addition, home owners must pay for repairs and maintenance. A general rule of thumb is to budget 1 percent of the home's purchase price per year for upkeep.
9. Avoid prepayment penalty. If the mortgage has a prepayment penalty, borrowers face hefty charges if they pay it off early. This provision also can be triggered by refinancing down the road, so be forewarned. Review the Truth in Lending disclosures that your loan officer sends you prior to signing your loan.
10. Buyer beware. Some of the lowest prices on homes today are "fixer-uppers" or homes sold "as is" because of foreclosure. Invest in a home inspection (typically costing under $400) before agreeing to purchase any home. An inspection informs buyers of any faults in the home and helps determine the approximate cost to remedy those problems.
"For many Americans, the time is right to take advantage of today’s excellent home buying opportunities. If you are among them – and can keep in mind that the expense of owning a home extends beyond the down payment and monthly mortgage payment – shop carefully and enjoy the journey to home ownership," Ewing said.
Based in San Mateo, Calif., Bills.com is a free one-stop portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt consolidation, insurance, mortgages and other loans. Bills.com holds the No. 257 spot on the Inc. 500 list for 2008, and the No. 3 spot on Entrepreneur Magazine's Hot 100 list of the fastest-growing U.S. companies.
Bills.com and its sister companies, Freedom Debt Relief and Freedom Tax Relief, are wholly owned subsidiaries of Freedom Financial Network, LLC. The company has served more than 50,000 customers nationwide since 2002 while managing more than $1 billion in consumer debt. Its RSS feed is available here.