Homeownership is typically a wise financial move if one is investing based on long-term goals. However, it is important that those buying a home are doing so for the right reason, NOT because everybody else seems to be doing it.
That said, if you are going to buy a home in 2020 (or beyond), it is essential to take the time you need to gain an understanding of the financial journey and investment you are about to embark on.
Why Buy a Home in 2021?
You can say a lot about the year 2020, but most people will agree that it is a year that will likely go down in the record books in several ways.
Let’s review a few critical aspects of the real estate market for the year 2021 and beyond.
Interest Rates
Consider that interest rates on borrowed money are the cost of using that money, which simplifies what is often considered a puzzling concept.
And, during the coronavirus pandemic, interest rates are currently at historic lows.
The best mortgage rates Tuesday, November 24, 2020
| Mortgage Type | Average Rate Today | Average Rate Last Week | Average Rate Last Month |
| 30-year Fixed | 2.72% | 2.84% | 2.80% |
| 15-Year Fixed | 2.28% | 2.34% | 2.33% |
| 5/1 ARM | 2.85% | 3.11% | 2.87% |
Rates from the Federal Reserve Bank of St. Louis. Source
The recent decline in rates is quite stark compared to a year ago and from six months ago.
| Mortgage Type | Average Rate Today | Average Rate 6 Months Ago | Average Rate 1 Year Ago |
| 30-year Fixed | 2.72% | 3.24% | 3.66% |
| 15-Year Fixed | 2.28% | 2.70% | 3.15% |
| 5/1 ARM | 2.85% | 3.17% | 3.39% |
Rates from the Federal Reserve Bank of St. Louis. Source
As the above graphic shows, currently, borrowers will find a better deal by choosing a fixed-rate mortgage product than an adjustable-rate mortgage. This unusual interest rate picture (where starting ARM rates are higher than their fixed-counterparts) is indicative of an out of balance real estate market.
But that doesn’t mean one shouldn’t take advantage of the historic lows, not seen since Freddie Mac has been tracking rates since 1971.
Historic lows offer, perhaps, one of the best reasons to buy a home now or in the near future. This is because the current, ridiculously low-interest-rate environment will not last forever!
General Prices
The 2020 real estate market is characterized by strong home sales and higher prices but a significant shortage on the supply side of the supply/demand curve. According to the NAR (the National Association of Realtors), in June of 2020, there were about 18% fewer homes for sale than the previous year.
Asking prices for homes are up year-over-year by 13% for the first week in November, which is the thirteenth consecutive week of appreciation that has been in the double-digit range.
In fact, according to the NAR’s existing-home sales data, housing sales posted the fifth month of consecutive growth in October of 2020 – with an annual rate (adjusted for seasonality) of 6.85 million. It is noted that these home sales numbers include single-family homes.
The reality is, with strong demand, historic lows, and a low inventory of available homes, the real estate market has been lit on fire in most regional markets countrywide. In response to a blazing hot market – with limited inventory, one would expect robust demand to push home prices upwards – which is precisely what is currently happening in the marketplace during 2020.
During June 2020, the median price for an existing home in the United States was $295,300 – which is about 3.5% higher than the previous median price during June. [Check out the average house price by state]
The graph, shown below, from FRED – the Federal Reserve Economic Data, which is managed by the Federal Reserve Bank of St. Louis, delineates, with the exception of the 2008 real estate/economic bust, the consistent rise in home prices since 1963.
Historical Home Values Across the Country
This graph shows a steady increase in U.S. house values from January 1, 1963, through December 31, 2017, with the exception of the serious dip caused by the housing crisis in the late 2000s.
Future Markets
As you consider your buying options as a borrower in 2020, it is essential to look at some expert opinions regarding the housing market’s strength. However, note that each individual’s decision to purchase a home is highly personal and must include specific evaluations independent of any economist’s perceived valuations.
According to economic pundits, the housing sector has been fundamentally supporting the economy’s resistance to what most would expect during a pandemic – an economic recession. In the face of true economic uncertainty, the housing market has managed to show incredible resilience in the wake of a global pandemic.
If we have learned anything about the real estate market in 2020, it is that the housing sector performed in ways that somehow defied all logical financial analysis. Despite a raging pandemic, the real estate market continues to outperform all expectations, characterized by:
- A seller’s market.
- Yearly price growth data that is recording historic highs.
- A falling supply/inventory of available homes for sale.
- Strong demand was created by a lockdown for several months earlier in the year to reduce the spread of the COVID-19.
Homebuyers have been on the lookout for a housing market slowdown since the market caught fire. Yet, without additional inventory to slow sharp price increases, there is nothing in the current market to reduce the pace at which current home prices are increasing. This is the reason housing prices and sales numbers have remained strong throughout the year (especially during the summer months).
It is likely that that the real estate activity during the fall/winter (which typically slows) will be stronger this year. This essentially means that homebuyers may face a more competitive market (needing quicker reactions) during these more traditionally slower seasons. Most real estate mavens predict that home prices will trend higher during the winter selling season but do so at a reduced pace – which is what most winter selling seasons perform like.
Wrap-Up
As one would anticipate, a shortage of inventory, coupled with record-low interest rates, will likely keep buyer demand strong for the foreseeable future.
And while demand has peaked (for now) and shown a bit of softening, it does not come near to the level that would be characterized by an in-balance real estate market.
Determining Your Goals When Buying a Home
Most people, when applying for a mortgage, will need the mortgage funds for three primary reasons:
- They are purchasing a home.
- They are refinancing a home to reduce the term or the interest rate ONLY – known as a rate & term refinance.
- They are refinancing a home to pull cash out and/or reduce the term or the interest rate – known as a cash-out refinance.
The type of property one intends to buy will also impact how the mortgage loan application will be underwritten, and thus, approved. Let’s review several types of property one can own that will ultimately influence the underwriting criteria upon which approval is based.
A Primary Residence
One’s primary residence is the primary home-base – whether it is a single-family home, a condominium, a coop, or a townhome.
A primary residence is an important concept in real estate, but it is also used to identify someone’s eligibility as follows:
- A primary residence may qualify for significant tax benefits based on the real estate taxes and mortgage interest paid. The IRS has enacted certain limits for these items. The owner of a primary residence will also be eligible, upon sale, for the IRS’s capital gains tax exclusion on profits from the sale.
- A primary residence identifies the district in which someone votes.
- A primary residence offers the lowest mortgage interest rates.
Because of the many significant tax benefits offered to those who own a primary residence, the Internal Revenue Service has set forth guidance to help homeowners determine their primary residence tax-benefits’ eligibility. The IRS defines a primary residence by the following criteria:
- Where someone spends the most time.
- One’s legal address as denoted on tax returns, one’s driver’s license, or one’s voter registration card.
- The residence that is near to where one works or banks, etc.
Most mortgage rates offered to finance a primary residence are the lowest available. This is significant in that even a quarter-point on a mortgage can save someone thousands of dollars over the life of the loan.
A Vacation or Second Home
A second home is similar to a vacation home in that it is bought for the use and pleasure of the homeowner exclusively. A second home must also be used for a specific period each year or, a lender may consider the property to be an investment property and not a second home. Additionally, a second home must be located a fair distance from the first home (most consider a minimum of 50 miles between houses to be acceptable) to make logical sense and not be rented out at any time.
A second or vacation home typically is, in the eyes of most lenders, considered a loan that comes with more risk than a loan on a primary residence. Because of this additional risk, the purchase of a second/vacation home requires a larger down payment and a bit of a bump on the interest rate. Consider this – if a homeowner hits financial difficulty, the first mortgage debt that will likely go into default will be the second home, not the primary residence where one’s family resides.
One word of advice – because lenders increase rates for second home mortgages, some borrowers may be tempted claim that a property is a second/vacation home, when in fact, it is an investment property (i.e., rented out for any portion of the year).
This is a bad idea as it constitutes mortgage fraud, punishable by law.
Renovating a Home
If a homeowner needs to renovate their home – replace a roof, or add a deck –improvements such as these offer these benefits:
- Depending on the improvement chosen, a renovation project could increase the value of the home
- Make the home more enjoyable and functional to live in.
However, most homeowners do not have enough cash to finance the home improvements out of pocket and seek either to:
- Refinance their current mortgage and take cash out, especially if the borrower can reduce the interest rate or term when refinancing.
- Obtain a HELOC – a Home Equity Line of Credit or second mortgage against their home.
It is noted that if you intend to do some renovations before selling, it is critical to understand which renovations will appeal to the average buyer in your neighborhood.
Refinancing a Home
Most homeowners choose to refinance their home for several fundamental reasons –
- To lower the interest or reduce the term to save money over the life of the loan.
- To take equity out of a property to finance a home improvement, consolidate debt, or finance a child’s education, to name a few reasons.
With interest rates at historic lows, many homeowners have chosen to refinance more than once to take advantage of these super-low interest rates.
Wrap-Up
Most mortgage professionals will tell you that the bread-and-butter mortgage loan is generally made to homebuyers purchasing a primary residence home to live in full time.
However, that should discourage anyone from buying a second home. If you are interested in purchase a vacation home, just be familiar with the underwriting rules that will impact the application’s eligibility.
Homebuying Scenarios
As noted above, one can purchase three primary types of properties based on that property’s intended use. Property owned is typically categorized as a primary (or principal) residence, a second/vacation home, or an investment.
Primary Residence
Most homebuyers are in the market to buy a primary residence, which is generally defined by mortgage lenders as follows:
- One must live in the home for most of the year.
- The home must be situated within a reasonable commuting distance of one’s job.
- Borrowers must move into their primary residence within 60 days of closing.
Note: however, if a borrower refinances their primary residence, the lender will require evidence of your primary residency by the provision of certain paperwork, like a copy of one’s tax returns.
Buying a Primary Residence
If you are in the market for the purchase of a home in which you and your family will reside (i.e., a primary residence), you will find that the mortgage interest rates of these owner-occupied properties are among the lowest. And the purchase of a primary residence will allow for the lowest down payment.
Starter Homes
As the name implies, starter homes tend to be a smaller house or perhaps a condo that is bought as someone’s first piece of real estate. Starter homes offer younger buyers the opportunity to buy a home with a smaller down payment because they tend to be less costly.
A starter home allows homeowners to begin to save money (by paying down a mortgage) while having an opportunity to build equity (through appreciation) in the property – which is clearly something that cannot be done when renting.
Here are several benefits offered by a starter home:
- Starter homes are less costly, offering an appealing price point for entry into the market.
- Starter homes are usually smaller, which generally suggests there is less required upkeep, and the electric and utility bills will be more affordable.
- Starter homes require less of a commitment, which permits new homeowners to learn what it takes to be a homeowner without a considerable investment or commitment.
However, consider that starter homes are often not large enough for most families and may not meet your future needs.
Choosing a Location
Even real estate novices have heard that it is always about location, location, and location in real estate.
The home location should meet your needs, whatever they are at the time of the purchase. Consider the location in terms of:
- Its proximity to one’s job and the type of commute required.
- Its proximity to parks and schools, if applicable.
- Its proximity to anything of value to the buyer.
If you are brand new to the general vicinity that you are buying in, map out the commute to determine how much time you will be commuting every workday.
Useful Loan Types
Homebuyers typically can choose from several different mortgage loan sources. These loan types are detailed in the table below. (note – rates are as of 11/24/2020)
| Loan Type | Interest | Term | Criteria | Down Pmt. |
| FHA Mortgage | 2.50% | 30 Year | Credit 580 | 3.5% |
| FHA Mortgage | 2.20% | 15 Year | Credit 580 | 3.5% |
| VA Loan | 2.97% | 30 Year | Credit 660 | NONE |
| VA Loan | 2.47% | 15 Year | Credit 660 | NONE |
| High Balance | 3.375% | 30 year | Credit 620 | 20% |
| Conventional | 2.72% | 30 Year | Credit 620 | 3 – 5% |
| Conventional | 2.28% | 15 Year | Credit 620 | 3 – 5% |
| Jumbo | 2.50 | 15/30 | Credit 620 | 20% |
| Reverse Mortgage | Variable | 30 | Case Approval | N/A |
Wrap-Up
Before searching for a home or mortgage, homebuyers must decide their intentions for the home purchase.
Be certain you know how long you intend to live in the home as the answer to this query will dictate the type of home you buy, the amount of the investment, and the rate/terms available for the mortgage loan.
Investment Property
Real estate has generated a host of the globe’s richest people. However, investing in real estate does entail a bit of risk.
The purchase of an investment property typically requires a minimum of a 20% down payment and tends to have higher interest rates to compensate lenders for the additional risk they absorb for lending to investors.
Real estate investors should recognize that they need to have a sufficient financial cushion in the event the property is vacant unexpectedly.
Vacation Homes
Vacation homes are defined as property that is owned for the personal and exclusive use of the owner.
A vacation home cannot be rented at any time, or a lender will deem the property as an investment and not a second home.
A vacation home must make logical sense. In other words, it should be located at a reasonable distance from one’s primary residence.
Like investment properties, vacation homes typically require a minimum of 20% as a down payment.
Homes to Flip
Many investors in real estate choose to flip homes to make a profit. And for many, it is a lucrative career – if you can find the right homes to flip.
One of the main ways to find a home worth flipping is to attend an auction. However, homes at auctions are typically bought on site, which can be risky if you don’t have time to assess the needed repairs.
Real estate agents are often quite helpful, with many agents specializing in the sale of auction, REO properties, and short sales, among others.
Becoming a Landlord
If you are thinking about purchasing investment real estate and becoming a landlord and, be certain you know what you are getting into. Although the income generated by a rental property is considered ‘passive,’ the reality is that you will be quite busy as a landlord. Consider this:
- You will need start-up capital for the purchase and any remodeling that may be required.
- Landlord/tenant laws mandate that landlords make serious repairs without delay. And remember that some tenants will call for help constantly, at any hour.
- Some tenants pay their rent on time, while others do not. The reality is as a landlord; you will likely play bill collector now and again. Non-paying tenants are subject to the state’s eviction laws.
Loan Types
As you consider your real estate options, recognize that certain loans have been designed for specific purposes. Here are three types of loans:
| Loan Type | Down Pmt. | Term | Criteria | Loan Limits |
| Conventional | 3-5% | 15/30 | Credit 620 | Loans up to $484,350 |
| High Balance | 20% | 15/30 | Credit 620 | Loans between $484,350 & $726,525 |
| Jumbo | 20% | 15/30 | Credit 700-740 | Loans greater than $484,350 |
Wrap-Up
Independent of exact interest rates, the primary differences between these loans is as follows:
- Both conventional and high balance mortgages are sold on the secondary market, with conventional mortgages having the lowest available interest rates.
- Jumbo loans tend to be more costly, require better credit and higher down payments, with guidelines that are not always consistent.
Homebuying How-to Checklist
To determine the appropriate mortgage that one may qualify for begins with evaluating the following:
- Income to demonstrate how much home you can afford.
- Personal credit history and score.
- Available assets for a down payment and closing costs.
The most important analysis regarding the right mortgage is finding the mortgage with the best terms to fit each particular situation.
If you are in the market for a mortgage, reach out to one of our Landmark Mortgage Capital Professionals and allow them to guide you to the mortgage that meets your needs and makes the most sense. If you are ready, apply online.
Establish Your Limits – How Much Can You Afford?
Perhaps the most information a borrower needs to know before deciding to buy a home is how much of a house they can afford.
If you are new to mortgages and want to play around with a few mortgage possibilities and interest rates, check out our Landmark Mortgage Capital affordability calculator that does all the heavy lifting for you.
Let’s review the various mortgage product options for the purchase of a home for $300,000.
Monthly Payments
Note the following specifics regarding the purchase scenario –
Purchase Price – $300,000
Mortgage Term – 30 Years
Down Payment – Varies, depending on the mortgage product.
| Loan Type | Down Payment % | Interest Rate | Monthly P & I Payment |
| Conventional | 5% or $15,000 LA – $285,000 | 2.72% | $1,158.96 |
| VA Loan | 0% – No DP LA – $300,000 | 2.97% | $1,259.96 |
| FHA Mortgage | 3.5% or $10,500 LA – $289,500 | 2.50% | $1,143.88 |
The interest rates for these three products generate a monthly payment that differs by about $116. The primary reason for the difference has to do with the size of the down payment, as the interest rates are similar, separated by less than ½ of one percent.
Down Payment
One of the largest obstacles to buying a home is having a large enough down payment. And while the VA guarantees loans without requiring a down payment, the reality is not everyone has been a part of the military, which essentially eliminates this option.
Fortunately, there are some tried and true ways to reduce or eliminate the down payment requirement.
- Consider making a deal with the seller to help cover closing costs, which would allow the buyer’s funds to be used as a down payment. Note – this must be disclosed on the mortgage application.
- Check out available homebuyer’s grants and other government assistance in your area.
- Take advantage of PMI – Private Mortgage Insurance, which allows you to put less than 20% as a down payment, among other options.
Check Your Credit
How to Check Your Credit Score
Credit scores are essential factors when determining your mortgage eligibility. Each of the three credit repositories offers a free annual credit report. A credit score indicates one’s ability to manage their debt situation appropriately.
How Does a Credit Score Impact the Annual Percentage Rate (APR)?
A credit score is a picture in time of your creditworthiness based on a host of factors. Credit scoring uses an algorithm that measures one’s creditworthiness contingent on their historical use of credit, payment history, and ability to maintain on-time payments.
Overall, the higher one’s credit score is, the more likely you will qualify for the lowest rates available. Remember, however, that a credit score is a living, breathing metric that changes over time, so to make improvements to one’s credit score, begin by paying down debt, making payments on time, and using credit judiciously.
Choose a Location and Check Listings
In order to narrow down the target market that will meet your needs, it is essential to make a list of the home amenities and details that you want and those home features that you must-have. Examples would include the property’s location to work, your child’s school, other family members/friends, houses of worship, and parks/recreational facilities. And while Zillow and other websites are helpful tools, it best to contact a knowledgeable agent who will likely cut to the chase and save you time.
Visit Several Homes or Open Houses
When you are ready, it is important to take the time to visit enough properties to understand the real estate market in which you are purchasing. Check out the open houses, which usually happen on the weekends.
Make an Initial Offer
When you have found the home you wish to bid on, the next step is to make the actual bid, which includes:
- The price you are willing to pay.
- Any terms or contingencies regarding the purchase.
- Evidence of a mortgage pre-approval (not required, but highly recommended).
- Proof of funds for a down payment.
- The submission of the earnest money deposit to show goodwill.
Secure Your Loan
When your bid is accepted, the next step is to secure a mortgage. If you already have a pre-approval letter, you have likely begun to speak with a mortgage professional. This is the time to keep your spending steady and your finances organized.
Home Inspection
During the mortgage approval process, smart homebuyers hire an inspector to evaluate the home’s systems and the condition of the property. A home inspection contingency in a purchase contract will provide a homebuyer with an escape hatch should the inspector discover latent issues.
Final Walkthrough
Before you sit at the closing table, your agent will do a final walkthrough with you to make sure that the property is still in the same condition as when you last saw it.
Closing
The amount of closing cost that will be paid varies and contingent upon the state in which the property is located. To assist in understanding the closing costs required, check out this closing cost calculator.
When you have signed the paperwork, you are now a homeowner. Grab the keys and go check out your new home.
Establish Your Limits – How Much Can You Afford?
Perhaps the most information a borrower needs to know before deciding to buy a home is how much of a house they can afford.
If you are new to mortgages and want to play around with a few mortgage possibilities and interest rates, check out our Landmark Mortgage Capital affordability calculator that does all the heavy lifting for you.