Buying Boston Area Real Estate: What Higher Rates Will Do

If you’re looking to buy Boston area real estate in the next year, you might want to do so before higher interest rates make financing such big-ticket purchases a lot more expensive. The Federal Reserve, which controls the supply of U.S. dollars and short-term interest rates, has indicated that it could start raising rates as soon as June.

Here is how much more Boston area real estate will cost when mortgage rates rise

Mortgage rates for those buying Boston area real estate have been so low for so long that people might have forgotten what it’s like to pay “normal” mortgage rates of 6 percent to 8 percent for a home mortgage. But if rates rise, the impact will be felt by nearly everyone trying to buy Boston area real estate and even those trying to sell their home as well.

How Boston Area Real Estate Will Cost More

When applying for a mortgage, lenders will assess your ability to pay back the loan based on your income and the monthly mortgage payment. The higher your income, the larger the allowed payment, but interest rates play a big role in how large the payment will be. Even a slight rise in historically low interest rates could make it a lot more expensive.

A 1-percentage-point increase in mortgage rates from 4 percent to 5 percent on a 30-year mortgage results in a 13 percent jump in monthly payments. A 2-percentage-point increase results in an incredible 26 percent increase in monthly payments.

The reason those higher payments are important is that they play into how much borrowing power you have. A lender is trying to figure out how much it can loan you and still expect you to pay it back on time, but the lender doesn’t necessarily care how big the loan is. What it really cares about is whether you can make the monthly payment.

Why Boston Area Real Estate Could Suffer

Mortgage rates and borrowing power could have a profound impact on the Boston area real estate market that’s still recovering from the recession.

It’s no secret that wages haven’t risen much at all recently, so recently the improving Boston area real estate market has been driven by the borrowing power that low interest rates have provided rather than extra income from higher wages. If interest rates rise, even slightly, they could actually send home prices — and home values — lower, simply by reducing the ability of new buyers to pay for a home.

If you buy any Boston area real estate with 20 percent down and then sell it a few years later but can only get 90% percent of the price you paid, your loss is half of your down payment. That’s a big loss on an asset that people don’t usually expect to lose money on.

It’s not a question of IF higher mortgage rates are coming, it’s a matter of when. And no one really knows the answer to that question. With the economy and unemployment improving, the market is currently betting that the second half of 2015 will start to see higher mortgage rates, and consumers should know how it could impact them.

Higher mortgage rates mean lower borrowing power, so whether you’re thinking about buying or selling Boston area real estate, you might want to start thinking about how those changes will impact you in the future.

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Boston Area Real Estate Trends to Watch

As the weather warms up, so does the Boston area real estate market, and experts say this year’s spring selling season is shaping up to be an active one. Beth Braverman with The Fiscal Times penned an article recently that points out the trends to watch in 2015, whether you’re buying or selling.

2015 Boston Area Real Estate Trends

2015 Boston area real estate trends you should be aware of

1: Boston area real estate prices are rising, even hitting record levels in some places. Home prices nationwide rose by 5.7 percent in January, compared to a year ago, according to CoreLogic.

2: Mortgage rates are still low — for now. At less than 3.7 percent, mortgage rates haven’t been this favorable to consumers since 2013. Rates are expected to rise as the year progresses, for now these rates are really at very low levels. To be safe, once you’ve got a closing date, consider locking in your mortgage at today’s rock-bottom rates.

3: It’s still a seller’s market. Total housing inventory at the end of February increased 1.6 percent to 1.89 million existing homes for sale, but that’s still 0.5 percent less than a year ago. Unsold inventory is at a 4.6-month supply, giving sellers a slight advantage in today’s market. (A six-month supply is considered a healthy market.)

4: Buyers want turnkey properties. Even with tight inventory, buyers are looking for properties that are move-in ready and won’t require much more than a coat of paint.

5: Foreclosures are no longer a factor. After peaking in August 2006 just before the housing bubble burst, foreclosures are on pace to return to historic norms this year, according to RealtyTrac. Foreclosure filings fells 4 percent in February to their lowest level since 2006.

6: Investors are backing off. Ordinary buyers in recent years often found themselves competing with investors. Today’s houses are getting less desirable for investors because price points are going higher, so it doesn’t pencil out as much. The share of homes going to institutional investors or all-cash buyers dropped in 2014 to the lowest level in four years.

7: In most places it’s much cheaper to buy than to rent. Soaring rents in recent years have made buying Boston area real estate much more affordable for those who want to stay put than renting it. Nationally, U.S. renters spend an average of 30 percent of their income on rent, versus just 15 percent of income on mortgage payments, according to Zillow.

8: Credit is getting looser. Fannie Mae and Freddie Mac have introduced new lending programs that allow borrowers to put just 3.5 percent down on a home – although this comes with risk, of course. The Federal Housing Finance Agency recently reduced the cost of mortgage insurance by half a percentage point, which will save home buyers an average of $900 per year. All of this makes it a little bit easier for first-time buyers to qualify for a home loan.

9: New homes are smaller and greener. The average new home in 2015 was expected to be about 2,200 square feet, or 10 percent smaller than the average new home five years ago, according to the National Association of Home Builders. Millennial buyers and downsizing boomers want a smaller carbon footprint and a more eco-friendly home with energy-efficient windows and plumbing.

You can read the full article here.

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Buying Boston Area Real Estate With No Money Down?

Buying Boston area real estate used to require 20 percent down in most cases to get the best deal and avoid Private Mortgage Insurance. In recent months, the Obama administration has taken several steps to expand the credit box and make it easier for borrowers, especially first-time homebuyers, to buy Boston area real estate. To that end, in October, Fannie Mae and Freddie Mac announced 97% loan-to-value offerings.

Is buying Boston area real estate becoming possible again with no down payment?

For some borrowers, saving up 3% for a down payment is still a hurdle they can’t quite clear. However, a new program announced recently will allow some borrowers in select locations to put down even less for a down payment. It seems the “no money down” loans may be attempting a comeback. Yep, the same no money down type of loans that got us into this whole real estate and mortgage crash problem in the first place.

BBVA Compass announced the launch of a new program called Home Ownership Made Easier, or HOME for short, designed to help low and moderate-income borrowers become homeowners by helping to overcome one of the “most significant barriers” to homeownership, the down payment.

In the HOME program, qualifying borrowers will be eligible to finance 100% of the home’s value. In addition to offering 100% LTV loans, BBVA will also contribute up to $4,500 toward “certain closing costs” associated with obtaining a home loan.

But not every potential borrower is eligible for the HOME program. The subject property must either be located in a low-to-moderate income census tract (as determined by the Federal Financial Institutions Examination Council) or the loan applicants cannot have an income greater than 80% of the median income for the area, per the guidelines from the U.S. Department of Housing and Urban Development.

In some cases, clients participating in the bank’s HOME program may pay a monthly mortgage payment that is less than what they currently pay as renters for buying Boston area real estate. We’ll keep you posted on how this one goes. Meanwhile…

Mortgage Apps Show More People Buying Boston Area Real Estate

Despite recent data showing weak home sales for January, a new report shows home buyers may be edging back into the market now.

Mortgage applications for buying Boston area real estate rose 5 percent on a seasonally adjusted basis for the week ending February 27th from the previous week, according to the Mortgage Bankers Association (MBA). They are still 2 percent lower than the same week a year ago.

Lower rates could reinvigorate refinances, but mortgage rates do not seem to be the primary driver for those buying Boston area real estate. Rising home prices and very tight inventory of homes for sale have been major barriers to entry for first-time and move-up buyers alike. A recent report showed price gains accelerating again after a year of easing. Spring generally brings more sellers to the market, but so far Realtors are not seeing enough new listings at affordable prices to meet the demand.

In the meantime, you can get more information about news that may affect buying Boston area real estate in our section of articles on Boston Real Estate News to your right under Boston Real Estate Categories.

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Boston Area Real Estate: The Mistake Millennials May Make

When it comes to Boston area real estate, most millennials say they’d rather rent than buy a home — a decision that could cost them more than $700,000 (or more) over the course of their lives.

It is still cheaper to buy Boston area real estate than it is to rent

Nearly six in 10 millennials (59%) say they’d rather rent a home than buy one, with just one in four saying they are either very or completely likely to purchase a home in the next five years, according to a survey of 1,300 millennials released recently by EliteDaily and Millennial Branding. (This anti-home-buying trend can already be seen: Currently, only about one in four millennials own a home, down from about one in three in the mid-70s and early 80s, according to data from the Demand Institute.) That’s “bad news for the Boston area real estate industry,” the report concludes.

Boston Area Real Estate Cheaper to Own Than Rent

Whatever the reason, this decision may be a costly one. “In the Boston area real estate market it is still cheaper to buy than to rent [each month]” — even when you factor in the insurance and property tax payments, in addition to the mortgage payments, according to Daren Blomquist, vice president of RealtyTrac. And because interest rates are so low, now is a good time to buy Boston area real estate — at least if you plan on staying in the home over the long term. As a very rough rule of thumb, if you don’t plan on staying in a home you are buying for at least five years, it may make sense to rent instead of buy.

Many millennials will likely rent now but buy a home down the road. But waiting to buy has its costs, too — interest rates and median home prices are likely to rise down the road. At current rates of appreciation, in 10 years the average $190,000 home now would be selling for about $249,000. If interest rates return to their historical norm (from over the past 15 years) of 5.6%, a monthly house payment (including mortgage, taxes and insurance) on a $249,000 home would be $1,574 a month, a 52% increase over the $1,037 house payment for a median priced home now; plus, over that 30 years, you’d pay a total of $566,640 (assuming you put 10% down) for a home worth $558,356 at the end of that period.

If that same millennial rented — let’s assume he or she pays $1,312 a month in rent this year (which is the average fair market rent for a three-bedroom nationwide, according to RealtyTrac) — and his or her rent appreciates at a rate of 2.7% a year (the average increase over the past decade, RealtyTrac says), he or she will end up shelling out nearly $717,000 in rent over that 30-year period — all without an asset to show for it in the end. Of course, he or she can cut that by having roommates, but at some age, he or she is probably going to want out of the roommate game, unless it turns out to be a spouse or love interest.

The bottom line in this whole scenario is simple. If you can afford to buy Boston area real estate rather than rent, do it.  If you can’t afford it, don’t. You don’t want to end up in a situation where you have to foreclose on a home because you bit off more than you can chew.

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Buying Boston Area Real Estate: Things to Consider

If you’re thinking about buying Boston area real estate, perhaps for the first time, we know it can seem like chaos trying to figure out all the things you have to do and the order you need to do them in. We’re here to help with a list of things you might not ordinarily think about before buying Boston area real estate, but things you definitely should consider.

When buying Boston area real estate, it can seem like chaos trying to figure out all the things you have to do and the order you need to do them

Before Buying Boston Area Real Estate

You’ve probably heard this 1,000 times. So make it 1,001. Get your credit score in order before starting the process of buying Boston area real estate.

The higher your credit score, the lower your interest rate will be, which makes your mortgage payment smaller in the long run. If your credit score isn’t looking too good (below 660), see if you can improve your finances and boost the score before shopping interest rates.

As long as your credit score is above 580, you can always try for an FHA loan, which can save you some money. If you’re looking to raise your credit score, it’s all about making payments on time and keeping your debt payments current.

Take some time to get your financial house in order before you go hunting for Boston area real estate. Outside of your credit score, make sure you have some money saved. Yes a mortgage is a loan, but it still requires a good chunk of change up front.

Two of the largest items you’ll pay for will be your closing costs and your down payment. Closing costs is a general term for many of the services and fees you’ll have to pay when getting a mortgage: title fees, inspections, taxes and more are thrown into this. Your down payment is how much you pay upfront on the overall cost of your home – the remainder is your mortgage.

The larger the down payment, the smaller the loan you’ll have to pay off. The recommended down payment size is 20% of the total cost of your home, but that’s not a required amount. It’s hard to give exact advice on savings for your down payment and closing costs, because the amount depends on what your home costs. Have a good amount of money saved, so you have the upper hand when approaching lenders.

Know How Much Boston Area Real Estate You Can Afford

Know what you’re financially capable of before you even start looking for any kind of Boston area real estate. Searching for a new home can be like ordering at a restaurant when you’re starving – it’s easy to overspend. Figure out realistically how much you can afford with your down payment and closing costs, and start searching for homes in areas that will accommodate your budget. There’s no point in touring 8-bedroom mansions if you’re in a 2 or 3-bedroom starter home bracket.

Buy Boston Area Real Estate For the Long Haul

To prevent you from making impulse buying decisions when looking at any Boston area real estate, decide if the home you’re going to buy is going to be one for the long haul, or a temporary move as a stepping stone on the way up to something bigger or better.

Think about all of the changes your life could have while you’re living in your new home, and if this home will accommodate your needs long term.

Are you going to get married while living here? If so, are children in the plans? Does the surrounding community seem like it’s getting better or worse? Is this a neighborhood you will want to live in at your current age? How about in 10, 15, or 20 years? It’s a little weird to get that deep in thinking about your future, but it’s a conversation you need to have with yourself, and your partner, if you have one.

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