Have you found yourself priced out of the rental market? So have a lot of your neighbors in cities across the U.S. A recent survey by the American Chamber of Commerce Research Association found that the average rent for a two-bedroom apartment is a staggering $2,810 in New York, $1,178 in San Francisco and $1,055 in Hilton Head, SC. Yikes. You may as well buy a place and benefit from all those tax deductions. Hey, no problem — you’ve already socked away thousands upon thousands of dollars for a downpayment, right?
Sorry for the sarcasm there. Let’s say I’m a bit bothered by the Catch-22 that is set up by the current market: It’s cheaper to buy than to rent, but renters can’t save enough money to buy. Which means that many of today’s mortgage-hunters end up playing a lot of mah jong with Grandma Rosalie to wangle the cash they need for a piece of The Rock.
Cozying up to rich relatives is especially worthwhile for first-time buyers just now. In spite of the recent rise in housing costs, prices in most areas are still heavily discounted from their highs in the ’80s. Plus, interest rates remain relatively low in spite of all the good news about the economy. Many analysts believe that neither situation will last much longer. After the November elections, you can be sure to see a hike in rates, with a corresponding spike in housing prices caused by inflationary pressures. But if you buy now, that batty rental market could work to your advantage as more renters go house-hunting and increase the value of your new home.
Say that my tale so inspires you that you tag along after some real estate agent and successfully bid on a property you can afford. Hard part is over — or at least that’s what I thought when my husband Tom and I “went to contract” on our first apartment in Manhattan. Quoth our real estate agent: “Now comes the hard part.” She wasn’t kidding.
Like so many other buyers, we went to a mortgage broker, where we found a loan product (a 4-3 ARM, or Adjustable Rate Mortgage, whose low rate goes up no more than two points after the first four years) and interest rate (7% with one point, a one-time payment of 1% of the cost of the loan) that suited our needs. Unfortunately, what you save in interest you lose in service; we’ve had to spend some 100 hours hunting up esoteric bits of paper, including our cancelled rent checks for the last 12 months — something our bank probably wouldn’t have asked for.
Still, if the co-op board of our putative future building approves our application, we’ll be paying around $1,800 a month for a two-bedroom apartment that would easily rent for $3,000 — all thanks to a fat mortgage and some serious deductions courtesy of Uncle Sam. And if our rent hadn’t gone up to $2,200 for our current cookie-cutter one-bedroom, we wouldn’t even have considered buying. Sometimes bad things happen to good renters — and they end up living cheaply ever after.
Find out how big a mortgage you can afford before you go house-hunting, lest you fall in love with a house or apartment so expensive you’ll be eating ketchup sandwiches for life. All it takes is a call to your bank — feed them your income and debts and they’ll spit out a rough figure.
Don’t get too excited when your banker or mortgage broker tells you you’ve prequalified for your mortgage — that’s worth diddly. Once you go to contract on a property you’ll have to go through the same application rigamarole as if you were starting from scratch.
The prime rate is *not* the same as the rate you’ll pay for your mortgage. However, your interest rate may be tied to the prime rate and can rise and fall along with it.
Besides offering lower rates, mortgage brokers also tend to offer more products, or types of loans, such as the 4-3 ARM we went for. Don’t be afraid to take one of these low-interest, short-term loans; interest rates for these loans tend to be lower by as much as 1%, and you can always refinance later if you end up staying in your new home longer than you planned.
Find out well in advance which documents your bank or mortgage broker will expect of you and start looking for them while you’re house-hunting. Besides those cancelled rent checks, these can include a gift letter from Grandma Rosalie stating that your downpayment money isn’t a loan. Most mortgage commitments are delayed by the buyers themselves — not by the mortgage broker.
Don’t apply for a mortgage whose monthly payment will exceed 28% of your gross income, even if you think you can afford it. There’s a good chance you’ll be turned down for the loan.