Category — Mortgage

It is always a good time to buy a home, always. The only thing that should deter you is if there is an impending earthquake or a certain hurricane in the next couple of weeks. There is really no such thing as timing the home market. One can try for interest rates, but darn, did they drop so low last year? Every now and again some financial planner or mortgage expert opens their can and spills out some G-F-N-BS about when to buy. Take it from me, there is no such thing as when to buy a home. Let us discuss this.

Buy When It Is Cheap

When property prices are at rock-bottom, some people say it is not the right time to buy. Reason is that prices are dropping. By implication that suggests that if you are renting, keep renting and giving EVERYTHING to your landlord. However if you have just purchased a new home, even if prices drop further below what you purchased for, you can at least write off the mortgage interest in your taxes.

We purchased our home in June 2009 and property prices have dropped further since then. However, we got some deductions from our 2009 tax returns for the interest paid and the points paid at closing. We are not paying a landlord and irrespective of which direction the housing market goes, we have a roof over our heads and we can afford our mortgage which by the way came at a significantly low interest rate. It would have been really idiotic to heed some advice and not buy then.

Buy when the price is on the rise

The converse ironically is also the case. Prior to the housing bubble bursting, property prices were on a steep upward trajectory. Buying a property at that time meant seeing your home value rise overnight. Who can resist that? The interesting thing again is that like good old gravity reminds us what goes up has to come down. Prices rise and fall but it is very unpredictable even for the experts so it will also be foolish to sell your home 18 or 36 months before the housing bubble bursts just because you expect prices to crash. What if it never happens? Analysts are wrong half of the time if not more so making a decision not to purchase a home because they ‘predict a crash’ does not make economic sense.  So in other words, not buying at this time or selling a newly bought home at this time would also be ‘not so smart’.

When not to buy

The only time when not to buy a home is when you really can not afford it. Buying on projected future income increases is retarded. that is because no one person controls the economy. thus you can not put your shelter and that of your family in jeopardy based on hopes for ‘a raise’ , ‘for better business next year when the ARM switches’ or even ‘when interest rates drop!’ One of the leading causes of people not being able to afford their homes is job loss. I recently read a very interesting scenario on Free Money Finance about securing your career. The author is certainly very creative and a good teacher.

Can I afford it?

Plain simple advice from me to you: If you plan to purchase a home, do your homework first. Do not purchase because the mortgage looks like you can afford it, no. In addition to the pre-requisite of making sure you have no credit card debt on which you are carrying a balance, having up to 12 months mortgage payments in a high yield savings account is something to consider as an important security. The down payment could be whatever your lender is willing to accept from you. In addition to that, you should budget at least 10% but preferably 20% of your monthly payments being put aside for repairs and maintainance. That includes association dues and other minor structural expenses.

If after looking at your income and expenses, it seems you can still maintain a reasonable standard of living with all this money going out into your savings account every month, then you are ready to afford a home and you should go get one.

As an African Proverb says, Whenever We Rise is Our Dawn!

There are three sayings often referred to as Chinese Curses the origins of which are shrouded in controversy.  Looking at the recent mortgage crises as well as the economic meltdown, it is not difficult to imagine the proverbs outlined below to relate to someone we know.

• May You Live in Interesting Times
• May you come to the attention of those in authority (sometimes rendered May the government be aware of you)
• May you find what you are looking for

The recent times have been interesting, full of unpleasant twists to people’s homes and mortgages . However the majority of homeowners still have their homes and are faced with lower values to their homes,  some much lower than what they had initially paid for it. Thus it is not surprising that one may be ambivalent about selling/short-selling and cutting one’s losses. This argument however is intrinsically flawed for the following reasons:

1. If you live in a home, it is worth 1000 times whatever value you put to it. Is a $400 per month rental apartment worth $400 dollars only to the family it provides shelter for on cold winter nights and rainy spring afternoons? Certainly not.

2. There s a limit beyond which a property’s price can not fall. At least there will still be a value for the land which the property sits on.

3. Prices just like many other things in this world go up and down, so why will we choose to sell/foreclose a property when it is at rock-bottom price only to get back onto the property ladder when prices are on the rise, say 5 or 10  years from now?

So regarding the debate about selling a home and going into rentals because of low property values, forget it.

Now back to what we are here to talk about, sometimes I come across this question:

Should I Pay Off My Mortgage Now?

My simple answer and I will go straight to the point is NO!

I have my reasons and please do not get mad yet:

If you will be carrying a credit card debt with a higher APR/APY.

If you will soon want a HELOC.

If you have other loans of higher interest rates.

If you do not have a lot of money in savings and invested for retirement.

If you will be late on other bills because of the payment.

Then indeed No.  Settle these turbulences in your finances first before paying off that low interest mortgage. When all these have been settled, of course you can pay off your mortgage and have more free money to add to your savings. There is even some more discussions about this topic on FrugalDad.com. Check it out.