As home values skyrocket, many first time home buyers are opting for interest only mortgage loans. Others are purchasing homes with zero cash down so they can afford a home. While these homebuyers have paid very little toward principal on their loans, they are building equity simply by owning their homes. The home price index released by the government shows little evidence that home value appreciation is reaching its peak. However, the rapid appreciation of home values, more than 20 percent per year in some areas, cannot be sustained, according to the government report. This could be a problem for many homebuyers with heavy mortgage debt, counting on value appreciation to turn a profit when they sell the home.
Timing the housing market is next to impossible. Homes have been appreciating by more than 13 percent this year; home value appreciation will vary depending on the part of the country the home is in as well as the quality of the neighborhood. If you have little or no assets, you won?t have anything to fall back on if home prices fall. Should those values fall flat, you still have to pay fees to sell your home. While interest rates have not gone up much from their historic lows, there are plenty of reasons for rates to go higher. If you are considering an adjustable rate mortgage (ARM), which means you will have lowers payments in the beginning, it is very likely your payments will go up eventually. With all the risks associated with purchasing a home, what is a first time buyer to do? Make sure you do you homework before taking out a mortgage. Use a mortgage calculator to determine how much mortgage you can afford. Even if you mortgage conservatively with a 30 year fixed interest rate loan, in many cases your income many not be high enough to qualify for a medium-priced home.
Something to consider: do you really want or need a home. There is nothing wrong with jumping into the housing market now. However, if you just buy a home because everybody else is, that may not be the best reason. Consider how much you can afford and how difficult it would be to keep your mortgage payments going if you have a problem selling it. Your ability to refinance a mortgage in the future is not a guarantee. There is no way to be sure the conditions that you received a mortgage today will exist in the future. As a first time home buyer take advantage of programs geared towards first time buyers. Many state, county, and federal housing agencies offer down payment assistance for first time home buyers. Many of these programs are restricted to mid or low income individuals; however, in some areas where prices have skyrocketed, it is easier to qualify for these programs.
With many programs today the loan is interest free and your payments do not begin for five years. There is a catch however; you will owe your city a percentage of your profit when you sell the home. This is much less risky than skimping to make adjustable rate mortgage payments.
Weigh the risks associated with an adjustable rate mortgage against the lower initial payments and you may save yourself a lot of heartache down the line.
To learn more about chosing the right mortgage for today and tomorrow, sign up for our free guide to mortgaging on our home page.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
