Home is Where the Hearth Is
“Summer is here and the time is right for…..” house hunting. If you believe the hype, the real estate market is poised for a rebound, and even Vanilla Ice (look it up) is getting into the action. So before you call your friendly real estate agent or mortgage banker, here are a few points to consider.
To buy or to rent?
This is a tough decision, but must be the first one you make. A rule of thumb: consider buying if you plan to stay in the area for at least 5 years. If you are willing to crunch some numbers, there are various buy/rent calculators on the web that will help you with that decision.
If you decide to buy, there are a few things to get in order before plunging in. It is much tougher to get a mortgage these days than in the glory days, pre-2008. Check your credit score, which is the first thing a lender will want to verify. You can get it once a year for free from www.annualcreditreport.com. If you are married, verify your spouse’s credit score as well. If there are errors in your credit history, have them corrected by contacting the credit reporting service. If your score is on the low end (scores range from 300-850), you can work to improve it by paying off or lowering your credit card debt, reducing the number of cards you own (even if you do not use them, they count against you), and being scrupulous about paying those pesky minimums on time. A good credit score may lower your down payment and enable you to avoid paying for mortgage insurance.
How much house can you afford?
One lesson we learned from the 2008 meltdown is to live within your means. Lenders will scrutinize your ability to pay, so you might as well do it yourself before you attempt to get a loan and incur loan fees unnecessarily. Another rule of thumb (these thumbs are coming in handy!): the maximum amount you can afford to buy is 2.5 times your annual salary. Of course if your expenses are above average, that thumb will need to be bent accordingly. The true test of affordability is to get pre-approved by your bank. It will be a reality check and helpful in closing the deal with the seller.
The freewheeling days of “borrowing” your down payment are over. So make sure you have sufficient cash on hand to make the standard 20% down payment that most lenders require. FHA-insured loans allow for lower down payments, but it will cost you 1.7% of your loan principle for that privilege.
Pay points to lower rates?
Many lenders offer lower interest rates on mortgages if you pay “points.” One point is 1% of your mortgage loan. You will need to make that payment at closing. The longer you stay with the mortgage, the more you save in reduced interest rates, making the points more valuable. Use a mortgage calculator to figure out how long you need to keep the mortgage to break even on the points.
Finally, check out the various incentives to buy or rent in Detroit. There are credits for buyers and renters in midtown (check out www.livemidtown.org). Employers are also offering incentives to live and work in the city. A short commute may well be the icing on that cake.
Ina Fernandez is Managing Director at Liberty Capital Management, Inc.