Issue Date: March 23, 2003
Buying your first home in a tough real estate market
If you're strapped for cash, you can't enjoy your new home.
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AS IF BUYING a first home weren't daunting enough, today's purchasers face a real estate "bubble" that may be ready to burst: Can you imagine writing your first check for your three-bedroom "dream" cape only to have the house's value fall over the next six months? And even if values hold, prices are so high that you'll probably pay more than you'd like. But there are tactics to buying the right house, at the right price, with the right financing.
First, figure out what you can afford. What you can spend depends not so much on the selling price of the home as on your ability to handle the monthly payment on your loan. Find a number that's in your "comfort zone," says Rhonda T. Richardson, a real estate broker in the Washington, D.C., area. "If you're cash strapped, you're not going to be able to enjoy the house."
Shop widely to match your monthly budget figure. Compare interest rates, types of loan, closing costs and other fees. Within an individual community, it's not unusual to see a rate difference of a point or more on similar financing packages (a point represents 1% of the loan amount). Try local banks and credit unions, a mortgage broker (the wholesale rates she gets can be lower than the ones you get at retail) and Web sites such as Lending Tree and eLoan.
HSH, the nation's largest publisher of consumer loan information, has a calculator at hsh.com that lets you compute monthly payments and thus compare financing options. For example, maybe a monthly payment of $1,186 works for you -- that's what you would pay on a $200,000 30-year fixed-rate loan at today's average rate of 5.96%. But if you got a 5-1 adjustable-rate loan instead (one that is fixed for five years, then begins adjusting), your starting rate would be 4.88%, and you could borrow $224,000 for the same $1,186 a month.
Get pre-approved by your lender. That way, you can make a more attractive offer -- one not contingent on arranging financing -- as soon as the right house appears.
Work with an agent. Real estate agents sometimes get a bad rap (not to mention a commission of up to 6% of the selling price). But a good agent who understands your needs and target neighborhoods can unearth hidden values. "You want someone who's been around the block," says Ilyce Glink, author of 100 Questions Every First-Time Home Buyer Should Ask (Times Books, $18). One thing experienced agents are good at recognizing is desperation in a seller who needs to get out quickly, which can help you in the negotiation process.
Be open-minded. Finding hidden gems is the goal. You'll have a better chance if you're not fixated on one type of property. Consider a duplex that has rental potential or a fixer-upper that doesn't need expensive structural work. Expand your geographic boundaries.
Laura Bonanni and her husband, Al Castorino, are expecting their first child in May. The couple found themselves priced out of the market for a house in the New York suburbs. But they could afford a two-bedroom apartment in Hoboken, N.J., with a short commute into Manhattan, and a weekend getaway townhouse in Long Beach Island, N.J. "Five years from now," Bonanni explains, "when our child is ready to start school, we'll sell both and buy a bigger home. [With] two investments, we figure we stand a good chance of having an even bigger profit." One caveat: Pay attention to school districts. Houses in neighborhoods with good schools rarely lose value.
Contact your state housing authority. Most have programs that offer lower-than-market-rate financing for people who purchase certain types of dwellings in certain (usually economically depressed) areas. HSH has a list at hsh.com/pamphlets/ state_hfas.html. In Ohio, a first-time buyer with a low-to-moderate income can buy a house with 2% down at rates below today's average rate for a 30-year fixed-rate mortgage. "That's free money," Glink says.
How can you tell whether an up-and-coming area is a good bet? Make sure the local employment scene is stable, suggests Economy.com's Celia Chen. And check with local crime analysts for stats on the rate and types of crime.
Finally, if you don't believe you can hold on to the property at least five years, you might be better off continuing to rent. Buying and selling both entail a lot of costs. And you want to give yourself enough time for prices to appreciate a bit so you come out ahead. W
Jean Sherman Chatzky is the author of "Talking Money" (Warner Books, $24.95). Additional reporting by Brian B. Reid.
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