In my last post I talked about using leverage to buy into real estate. I’d now like to talk about using interest rates to increase your purchasing power. That means we’ll need to do a little math.
Before I begin I would like you to know that it is best to talk with a loan specialist before you begin your hunt for a home. While I can paint a rough picture of your financing, the loan specialist will be able to provide more exact numbers for your interest rate and payment amount.
For my examples I used an online mortgage calculator I found through a search engine. My examples may not include APR or annual percentage rate. They are not intended as an offer of financing.
With a little math we are able to find a starting point for your mortgage payment. As a rough rule of thumb your mortgage payment (principle, interest, taxes and insurance) should be about one-third of your before tax income. Take your monthly gross (before tax) income and multiply it by 33%.
Let’s set aside the tax and insurance costs for now and assume that you qualify for a principle and interest payment of about $1010 per month. At 4.5% that translates into a loan amount just under $200,000. But at 4% that translates into a loan amount just over $212,000. A simple one-half point decrease in the interest rate increased your buying power by about 6%.
Turning that around…with an interest rate of 4.5% your principle and interest payment on a $200,000 loan would be about $1014 and at 4% your principle and interest payment would be about $955. That’s a $59 savings every month just by having a lower interest rate.
There are a myriad of factors used to calculate the actual interest rate you will pay. Until they change the credit rating system your FICO score will be the single most important factor. Think, higher FICO equals lower interest. Work with your loan specialist to find ways to increase your FICO score. And do so long before you begin to hunt for a home.
Improving your FICO score is one way to obtain a lower interest rate. Buying down the interest rate is another. However, before you start spending money to save money, do a little more math. To see what you will really save you’ll need to calculate the monthly savings then determine how long you’d need to hold the property to actually save money. Here’s an example using the $200,000 loan;
You pay 1% of the $200,000 or $2000 to buy down the interest rate from 4.5% to 4%. Your payment goes from about $1014 to about $955. You save about $59 per month. Divide the $2000 initial investment by the $59 per month savings. In about 34 payments you’ll have saved the $2000 you invested and will begin to save money on the loan.
Do you plan to live in the property for 2.9 years? If the answer is yes, then by all means seriously consider buying down your interest rate.
Just as interest rates vary from hour to hour and lender to lender so will “buy down points”. I suggest to all potential home buyers that they contact at least three lending specialists. Ask for a good faith estimate from each so that you will know “the other fees”. Sometimes a lender will advertise an enticing interest rate and will make up the difference by charging higher fees.
Another difficult to execute but effective method for improving your buying power through lower interest rate is to watch interest rates and time your purchase with falling rates. Of course, if you have the ability to see into the future, I doubt you worry much about interest rates.
Currently interest rates are bouncing around at historic lows making now the perfect time to maximize your purchasing power. If you think rates are due to rise in the near future, call me. If you need help finding a proven loan specialist, call me. I can help you get you into your new home before we have to worry about rising interest rates.
The probability that in San Juan county property values will rise before the island economy recovers is something islanders should consider if they are thinking of purchasing a home.
The real estate market in the San Juan islands is a bit different than most other small communities. On the mainland the local economy typically drives the local real estate market.
The San Juan islands differ in that a significant number of properties are second or vacation homes for people who work and live in other parts of the country. These homeowners are using income generated elsewhere for their purchase. Therefore the island economy plays a smaller role in the decision to purchase.
What might an island resident do to achieve their American dream of homeownership in this situation? One possible option is to “play the market”. Invest now into something small and affordable or in need of cosmetic fixing. As prices begin to rise you gain equity. Use that equity by selling the small home and purchasing a larger home.
Remember the big down cycle in the real estate market in the late 1980’s? While it wasn’t a crash as deep and long as the current cycle it did present some excellent opportunities to buy into real estate. Once recovery began many places saw their values recover in less than one year.
If you are looking to achieve your dream of ownership think about getting ahead of the pack. Make your investment now and ride the market upward. You may have to lower your expectations. Instead of owning a dream home, make it your goal to ‘just get your foot in the real estate door’. If you aren’t handy enough to invest in a ‘fixer’, purchase small. If you are handy, consider a ‘fixer’. There is a lot to be said for sweat equity. Either way the plan is to hold onto the property long enough to build equity. Equity is used to leverage into a ‘better’ home as the market improves.
Think about this. Real estate is one of the few areas of investing where you can leverage into an investment. Let’s say you have $10,000 in the bank and have a stable job and good credit. You invest that $10,000 in a $100,000 house. Now assume the market recovers at a conservative 3% in the next year.
If you left the $10,000 in the bank do you think you’d receive a 3% interest rate? Probably not. Even if you were lucky your $10,000 would have earned only $300. Now say you invest that $10,000 in a $100,000 home. Your equity will be closer to $3,000 or ten times more than you’d earn from the bank.
If you’d like to discuss how you might leverage your savings into home-ownership give me a call. I’m here to help.
For many having a home inspection completed before closing escrow is a bit like purchasing insurance. If everything is in working order it seems like a waste of money. You can’t hold onto or cuddle-up with or even resell “peace of mind” which makes the primary reason for an inspection a bit difficult to embrace. For most of us the value is found only when a major defect is discovered and we have the option to cancel the purchase or make a price adjustment.
Yet there is more to a home inspection. These inspections also provide the would-be home-owner a basis for maintenance planning. One of the best ways to retain or improve your home’s value is to keep it in good repair. For example, the report discloses missing or damaged flashing at the chimney. There is no visible evidence of water intrusion. Yet water is and has been slowly seeping into a roofing truss. As time passes a minor repair issue grows into a major repair which lowers the value of the home.
Water, electricity and propane are expensive on the island. Homes in good repair save money every single day in the form of less waste of these resources. Having a professional inspector’s written report highlights existing or developing problems and gives a homeowner the ability to make minor repairs which result in savings on the cost of these items.
At some point, usually ofter closing escrow, it is a good idea to review your inspection report and create a spreadsheet listing the the major components of your home such as heating, plumbing, electrical, roof and foundation. The inspection report usually breaks down your home into these components. From the report note the age and condition and any notations or suggestions into separate columns. If the report doesn’t give you an approximate age and life expectancy you’ll have a little research to perform before you enter that information.
Lesson learned, Orcas Island is a small community where you may run into tradesmen on the ferry, in the local hardware store or in line at the grocery store. The good tradesmen on the island are usually busy. Those who love their trade also love to talk about their service. Whether you hang-out in the store or volunteer with one of the many organizations, go out and meet the locals. Like all small communities people are more willing to give priority to a neighbor over a total stranger. Can you think of a better way to kill an hour long ferry ride than talking to a professional about work you may need to have done at your new home?
If you want to become “a local” and need a place to start, call me at 619.224.9015. We will find you the perfect home while discussing the method of networking which best meets your needs.
Back again! It’s now September of 2001 and I’m off to Orcas Island to hunt for property. Let’s take a moment to talk about a few things I should have thought about before I started looking.
Orcas, as you’ve probably already figured out, is located in the Pacific Northwest. Summer days are long and warm. As a summer visitor from San Diego one tends to forget the flip side of that benefit, the short, cold days of winter. Orcas is mountainous. During the winter the north sides of Mount Constitution, Pickett, Entrance, Willard, Turtleback, Buck, etc. receive significantly less light than the south sides.
There are a large number of tall trees growing on the island. These factors should be considered when planning to purchase a home in which you intend to live during the winter. I’m not suggesting that you eliminate a home on the north side of a mountain. But it could be a consideration if you are trying to decide between two homes.
The economy on Orcas is tourist-based. If you plan to rent out the house when you aren’t vacationing, expect very little income. You might consider turning the property into a vacation rental but there is a down-side to that also. I’ll talk a little more about renting in a future blog post.
Okay, back to Orcas and hunting for property versus sitting on a log at North Beach drinking in the view.
I’ve found a couple of vacation rental condos available in Eastsound. They have a fabulous view of the water, a live-in property manager to handle all the details of renting and are well within my budget. The market analysis indicates rising values. Everything looks attractive except the limitation on how much I can use the place myself.
While I agonize over my decision it is brought to my attention that a certain family member will be heartbroken if I don’t at least look at the home they have for sale. The price is a smidgen above my comfort price but well within my qualification. I figure it wouldn’t hurt to at least look at the place.
And now we come to my first mistake. I fell in love with the view. I’m certain that I was manipulated into a visit at sunset. The sky was a palette of color ranging from deep blue to gold to bright orange. I could see sail boats off the northwest shore and the Canadian Rockies in the distance. In front of this was a perfect view of one of my favorite places on the island, Madrona Point.
What color was the carpet? Don’t know, wasn’t installed yet. Did the roof leak? Don’t know, wasn’t finished. Decks were in the process of being built. You could not inspect the foundation because the crawl space was filled with junk. Appliances were sitting ready there ready to install. Lesson learned, make sure the work is complete before you close escrow. And have a second inspection to be sure the work is completed properly.
I wrote the offer anyway. I thought that since this was a purchase from a family member I was reasonably assured that the work would be completed with good attention to detail so I skipped the second inspection. Unfortunately the contractor they hired didn’t install a critical flashing. Years later I faced an expensive repair. Oh and maybe you should spend a little time looking at the house instead of the view. Just a thought.
Stay tuned for things I’ve learned about home inspections. Or if you are ready to start your property-hunting adventure call me at 619.224.9015 and we’ll get started.