This is a guest post from Sarah Gilbert.
The story of one mortgage
I got my mortgage statement in the mail a few weeks ago. I bought my Portland, Oregon home 10 years ago on a busy street in an up-and-coming neighborhood with what I thought was a super-low interest rate: 5.25%. It was a five-year ARM, meaning that it would stay at 5.25% for five years and then change every year based on some margin over the 10-year treasury rate.
The good news is that it can’t move more than one percentage point in either direction, and also cannot move outside a five point range (i.e., it’s capped at 10.25%). I could remember my parents, who bought my childhood home in 1978, paying 14% or more. An ARM, I thought, could only get so bad.
Now, I’ve been proved so right, I almost cry with joy each year when I get my interest rate statement. After a couple years in the mid-2000s of rising, it’s been going down, down, down, to an all-time low of 2.825% starting April 2012. I’m paying about the same for my mortgage as it would cost to rent a much-smaller, downstairs apartment nearby, the one whose landlord is too chintzy to even provide recycling bins.
I have a home that was bought when the market was in the first half of a decades-long rise. It peaked in August 2008 (my home, says Zillow, was worth $344,000 then) and has since fallen in value to about 20% less than its peak value (still close to double what I paid and more than double what I owe; I’m not complaining, ever).
But I get questions all the time from friends and readers: should I buy, now? Is the market at its bottom? Is this an interest rate market worth jumping into? And what about the mortgage interest deduction: might it go away? Is home ownership a good thing any more, or is it better to rent? What they all want to know is:
Should I buy a home now?
As always, so much is dependent on your circumstances. I think, generally, yes, the current interest rate market is worth jumping into, and yes, the housing market seems to have come to (at least a temporary) bottom. Given the disclaimer that no one can possibly know anything for certain about the future, I consider myself a pretty good prognosticator. I base this on the belief that trends are all about psychology, something I’m better-than-average at assessing.
In my opinion, the low point of February 2011 will not be seen again for a while. If I’m right, and your market, like mine, is beginngin to trend up (albeit gradually), now is a great time to buy. (Was that enough “ifs”?) Here’s how to decide if you should buy a home now:
- Do you have good enough credit to score a less-than-5% ARM or fixed rate mortgage? If yes, take a look at the proposed mortgage terms and do — or have your mortgage broker do — the math. What is the maximum interest rate you could ever pay, and how much would you pay for your mortgage in that case? Is that more or less than you’d pay in 10 years for rent? (Very probably, rent will increase each year no matter what the real estate market does.)
- How high could your payment go? Could you afford that now? My maximum possible mortgage payment (not accounting for increases in property taxes) is about $1,400; if the interest rates are that high I’m sure I’d pay that much for rent for my family of five.
- How stable are you? My family is very stable; most of our extended family lives in this city and my husband and I went to the same high school where our children will go. We feel like we belong here. Plus, I’m a freelance writer and my husband is an Army Reservist; it’s unlikely that our jobs will take us away (and if they do, we could conceivably rent the house). If we were more transient, the uncertainty of the market in the immediate future would probably make renting a far safer bet.
- Are you the sort of person who will do it all yourself? Home ownership means gardening and fixing things and making sure your gutters are clean. If you’re paying other people to do it — especially in a 100-year-old house like mine — it can erase any financial benefit of home ownership fast. I love to garden and paint and dig and I even installed the tile in my own bathroom (it’s gorgeous!). My dad and husband have framed and drywalled and done the electricity and plumbing. Not everyone has that skillset or desire.
- Do you have money saved up for a down payment? This is the key, really: when I bought my home, 5% down payments were ordinary. Now even people with great credit must put up 20%. If you don’t have it in non-retirement savings, you should probably rent, keep your expenses as low as possible, and save until you have a nice chunk of change.
- How about this tax thing? There has been a lot of talk lately about eliminating the mortgage interest deduction for taxes. If your home is significantly above the median home price; between $200,000 and $220,000; this might reduce your tax bill pretty nicely. Nickel has a nice evaluation of whether this is a big deal; I haven’t itemized for a few years thanks to my plentiful children and low healthcare expenses and state taxes. In any case, I think you shouldn’t count on mortgage interest deduction as part of your home ownership equation.
I think now is a great time to buy a home; the market seems to have stabilized and the interest rates are very, very low. However, I don’t think it’s a sure thing, the sort of market you should rush into blind without doing the math for your situation. And, of course, the real estate market is very location specific.
That being said, the Fed shows no signs of considering interest rate hikes in the near future (~2 years). Rising gas prices only makes it more likely they’ll keep rates low. And home prices are always in flux; if they’re up too high in a few years when you’ve saved a down payment or know where you want to live for the next decade, rent for another year and I’d be willing to bet the market will be down again.