Buying a home is daunting, even if you’ve done your homework.
There’s no crystal ball to predict the future of mortgage interest rates or home prices. So, ask yourself these five questions to help you determine if now is the best time for you to buy a home:
1. What is the current interest rate?
Mortgage interest rates have been slowly creeping up, reaching just above 4 percent for a 30-year fixed-rate mortgage. But interest rates are still below the historic average—which is around 7 percent—especially since the Federal Reserve (Fed) has been pumping $85 billion into the economy each month through its bond-buying program.
The Fed will continue to keep interest rates low until at least the middle of 2014, after which rates will undoubtedly go up.
If you can qualify for an interest rate at or below 4 percent, you may want to consider securing that interest rate now, before the rates jump. Even the smallest of changes in interest rates can affect how many dollars you dish out during the life of your loan.
2. Are home prices affordable?
Home prices have continued to climb upward from the recent housing market bust, increasing more than 10 percent over the past year, according to the Case-Schiller Home Price Index, a leading measure of U.S. residential real estate prices.
These rising home prices are due, in part, to a limited inventory of homes throughout the nation. Additionally, summer is the busiest season for real estate, which means prices generally rise during the hottest months of the year.
But what goes up must come down, and housing prices are no different. As more homes hit the market and the housing inventory bulks up, you’ll likely see home prices come down—but the exact trajectory is uncertain.
If you can wait a few months, you should see more competitive prices, as the housing inventory is typically more robust during the fall and winter seasons.
3. Is your credit in order?
Even if the real estate market looks promising, you should first make sure that you are creditworthy before you shop for the house of your dreams.
When you apply for a mortgage, your lender will pull your credit report to help determine the terms and interest rate of your loan. In general, a higher credit score will qualify you for a lower interest rate. But don’t wait for your lender to pull your report—order your copy now so that you better understand your profile as a borrower and are familiar with the information your lender will see.
You can order one free credit report each year from each of the three national credit reporting agencies through annualcreditreport.com, and you can pay about $9 to also obtain your FICO credit score. If you find any inaccurate information in your credit report, file a dispute with the credit reporting agency that furnished the report before applying for your loan.
4. Have you budgeted for housing expenses?
Make sure you have budgeted for your home’s down payment, which can be as high as 20 percent of the purchase price for a conventional loan. Closing costs and moving expenses will also quickly tack dollars onto your final expense.
To help you determine which house you can afford, plan to spend 25 to 33 percent of your gross monthly income on your housing expenses. The exact amount you spend on housing will depend on how conservative you want to be with your money and what you spend on your other debt payments.
5. Are you familiar with your local real estate market?
Once you’ve selected your neighborhood, keep a close eye on the local real estate market. Keep track of home prices in the area, monitor how many houses are on the market and how long it takes for them to be sold.