Window of Opportunity Closing Soon for Home Buyers

Is time running out to get a great deal on a home? To listen to some accounts, you would think so.

One the one hand, it’s true that several things will happen this April that will add to the cost of buying a home. First, the income tax credits for first-time and repeat homebuyers will expire; the Federal Reserve will cease its purchases of mortgage-backed securities, which have kept interest rates down; and the FHA will increase the insurance premium it charges on mortgages it insures.

At the same time, several other factors still urge caution. It’s never a good idea to rush into a home purchase, regardless of the financial incentives. Also, there are indications that housing prices in many areas may continue to weaken through 2010, potentially cancelling out the effects mentioned above. Finally, persons with less-than-perfect credit or limited finances may actually be better off waiting a year or two, rather than try to jam a purchase through right now and pay a premium to do so.

The $8,000 first-time homebuyer and $6,500 repeat homebuyer tax credits can only be taken on homes for which sales contracts are signed by April 30, though buyers have until June 30 to actually close the sale. Congress already extended and expanded the credit after it was originally due to expire last November; there doesn’t seem to be much support for extending it again, so if you miss the April 30 deadline, you’re probably out a luck on this one.

A potentially bigger impact will occur on when the Fed buys the last of $1.25 trillion in mortgage securities it has been purchasing over the past year. Also scheduled to conclude on April 30, the program has been credited for driving mortgage interest rates to record lows in the spring and again in the fall of 2009, and keeping them at or below 5 percent for most of the year.

Though 30-year fixed rates held steady around 5 percent through Jan. 2010, most observers expect them to rise sharply once the Fed purchase program concludes. Many observers expect rates to almost immediately shoot up to 6 percent and hold there, an increase of a full percent. On a $250,000 30-year loan, that 1 percent translates to an additional $150 a month, or $1,800 a year.

Finally, in early April the FHA is increasing the mortgage insurance premium it charges on all loans by half a percent, from 1.75 percent to 2.25 percent. A onetime fee charged upfront at the time of closing, it means that the premium on a $150,000 FHA loan would increase by $750, to $3,375. However, this only applies only to borrowers seeking an FHA-backed loan, although those are making up a larger share of the market.

Reasons to wait

Clearly, if you’re in a position to buy now, go ahead and do so. But that doesn’t mean you’re out of luck if you miss the April deadlines. As mentioned above, even though housing prices appear to be bottoming out nationally, many areas still remain soft. With another glut of foreclosures due to come on the market, some areas could see prices decline another 5-10 percent in 2010, which would help make up for missing out on the current low rates and tax credits.

It also might make sense to wait if you don’t have a great credit score or if you can’t come up with 20 percent down payment. Many lenders these days want to see a credit score of at least 720 to approve a mortgage. Lower scores can still be approved, but will pay a premium to do so. The combination of a low credit score and small down payment could end up adding 1-1 ½ percent onto your interest rate. Also, if you can’t come up with at least a 20 percent down payment, you’ll need to pay for private mortgage insurance, the cost of which is roughly equal to another half a percent in interest. So even if average rates go up, you might be better off waiting a year or two to improve your credit and save up a down payment, so that you can qualify for a prime rate.

Finally, a home is a huge investment – for most people, the biggest they’ll ever make. It’s not something you want to rush into unprepared, regardless of the financial incentives. If you can’t find the home you want in a neighborhood you like, or if buying a home right now is going to put you under a heavy financial strain, you might be better waiting. Saving a few thousand dollars isn’t worth it if you end up in a home that isn’t right for you.