Financial Planning for September 2011

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Is Now the Time to Invest in a Home?

Despite all the economic uncertainty, the news for consumers might not be all bad. Short-term interest rates are low and will likely stay that way well into 2013, based on public statements from the Federal Reserve. Mortgage interest rates have been hovering at or near record lows all summer.

Long-term, fixed-rate mortgage averages, for example, dropped to 4.15 percent in mid-August, the lowest since Freddie Mac began taking surveys in 1971. Rates on 15-year mortgage loans and five-year hybrid loans are also historically low.

What does this mean for potential home buyers? Is now the time to refinance or buy a new home? Rates could go even lower, but there’s not much room left for them to drop, so some experts believe this is an ideal time to take action if you’re in the market for a home.

Low Rates and Low Home Prices

Besides very low mortgage interest rates, there is another reason why buying a home now makes sense – homes are relatively cheap. As if incredibly low borrowing rates were not enough enticement to buy, home prices dropped nearly 6 percent in the second quarter of this year, reflecting a suppressed housing market. Because of the foreclosure inventory, the market is flooded with properties that banks need to sell. Even if you don’t buy a foreclosed home, the large supply of houses on the market drags down home prices in general.

Despite these favorable factors, home sales remain depressed due to the lack of a robust recovery in the housing market, high unemployment and the much stricter credit requirements lenders are imposing. Home sales fell in July and are still well below what they were before the housing bubble popped. Applications for home purchases are at their lowest level in 15 years.

Low Rates Won’t Last Forever

If you don’t have a job and you’re not independently wealthy, low interest rates and low home prices won’t help. In fact, it’s because of high unemployment and the recent financial crisis that these attractive home buying factors exist. And low home prices are certainly not good for current owners watching their equity shrink, keeping them from drawing upon such equity for home improvements and other large purchases.

But if you have topnotch credit, a stable income and the cash on hand to make a significant down payment, buying a home now is a good move. It might be a better move now than in two years because of uncertainty about the highly publicized debt deal Congress reached in August.

Tax Breaks in Jeopardy

The budget deal requires that a Congressional super committee reach a compromise on an additional $1.5 trillion in spending cuts this fall (or combined spending cuts and revenue enhancements). If the committee fails to reach a deal, the current legislation will trigger massive automatic reductions in spending.

Any future budget deal could involve eliminating tax breaks in order to raise revenues, and the popular mortgage tax deduction and other mortgage-related deductions could be open for negotiation. Acting sooner rather than later might mean the difference between getting the full deduction or not; however, no one should buy a home unless they can afford it, regardless of the tax incentives.

Research Your Investment

Remember that the lowest interest rates are offered to buyers with the best credit and the ability to make a substantial down payment. If you are fortunate enough to be well qualified, you might get an even lower rate if you are willing to pay discount points upfront.

Whether you’re planning to buy a new home, be it a second home or a vacation home near the mountains or at the beach, that purchase is an investment – and all investments carry some risk. Just like stocks, home values can go down, so careful research is required before you make your choice. As with all such major decisions, it’s wise to talk to a financial adviser to help you decide what’s best for your unique situation.


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