Monday, January 16, 2023

How to Save for a Down Payment While You’re Renting

 

Rent prices continue to rise throughout the U.S., which creates a disheartening and discouraging scenario for many people.

As of  January 1st, median rents for one- and two-bedroom units are up 13% and 16%, respectively, since 2019.

One-bedroom rentals are at an all-time median high right now.

High rental prices coincide with a housing market that’s overheated. Demand, inflation, and reductions in home construction have led to record-setting home prices. Potential homebuyers are being priced out, requiring them to stay in the rental market, putting pressure on rent prices.

For renters, it can seem like a difficult cycle to break—how can you save for a down payment when such a large chunk of your income is going toward rent? Homeownership feels unattainable for a large portion of the population.


It’s decidedly not an easy issue to work your way out of, but it is possible.


Figure Out What You Need

The first thing you can do is start to crunch the numbers. If you have a concrete number for the down payment you need, it will be easier to work toward your goals. If you don’t have a plan in mind or a set number to work toward, you’re going to feel scattered, and it will be much harder to get out of the rent cycle.


The down payment will depend on the type of loan you hope to get and where you plan to buy.


There are mortgages with a down payment as low as 3%, giving you opportunities to save up in a shorter period of time.


You may have to pay for private mortgage insurance if you don’t put down 20%, however.


You have to think about other costs that you’ll need upfront money for to buy a home. These costs include closing fees and the costs of moving.


Open a Dedicated Down Payment Savings Account

Once you have a concrete number in mind and have explored the mortgage options available to you, and know which you’d like to ultimately get, you can create a savings account. This account will only be for your down payment and nothing else.


It should be liquid but separate from anything else so that you aren’t tempted to spend the money in it.


Deal with Debt

You’re going to need to find ways to cut costs if you want to put more money aside to buy a house. Cutting your debt is going to be one way to do that.


If you have a balance on a credit card with a high interest rate, you might try to do a balance transfer. You can transfer the expensive debt to a card with a zero-percent interest period.


If buying a house is your goal, try not to add any more debt during this time.


To qualify to get a mortgage, you’ll have to meet the debt-to-income requirement.


Find Ways to Cut Back

It’s hard to give things up, but if you’re putting a fair amount of money into your rent, there’s not a lot you can do about that unless you’re willing to move.


You’ll have to find other ways you can cut your costs. That might mean skipping meals out or delivery food or going through your subscriptions to see what you can eliminate.


Think About Moving

We mentioned moving above, and you may not be willing or able to do it, but if you can, cutting down on what you’re paying for rent is one of the best ways to have more money to put toward a down payment.


If you can’t move to a smaller or less expensive home, you might try to renegotiate your lease with your landlord, or you could get a roommate. If you can move, along with getting a smaller place, another option is to move outside of the center city area, if you live there currently. Typically, the further out you move from the central area of your town or city, the lower the rent.


Explore Assistance Programs

Finally, many mortgage lenders have programs and loans for first-time homebuyers that cover part or all of a down payment. There are also grants, which require you to complete a homebuyer education course before you get the financial assistance.


If you work in certain fields, like as a first responder or teacher, homebuying assistance programs are often available.


A lot of lenders are looking to reach out to underserved communities to help them make homeownership a reality, so make sure to explore everything that’s out there.

Sunday, January 15, 2023

The Pros and Cons of An Adjustable-Rate Mortgage

 With mortgage rates rising rapidly and coming off years of record lows, many potential


homebuyers are looking for ways to beat the situation. One available option is an adjustable-rate mortgage. An adjustable-rate mortgage has pros and cons, and both have to be carefully weighed before making a decision.

An adjustable-rate mortgage is also known as an ARM. These home loans have an interest rate that adjusts over time based on what’s happening with the market. These loans will often begin with a lower interest rate than a comparable fixed-rate mortgage, and the interest rate doesn’t stay the same forever.

Your monthly payment can fluctuate after your initial period.

A fixed-rate mortgage offers predictability and certainty because, for the life of the loan, the interest rate stays the same, regardless of what’s happening with the market.

An ARM, by contrast, can become more expensive or less expensive.

There are two periods with an ARM. There’s a fixed period, usually the first 5, 7, or perhaps ten years of the loan. During this set period, your interest rate doesn’t change. Then, there’s an adjustment period. Your interest rate during the adjustment period can go up or down based on changes in the benchmark.


Mortgage rates are influenced by a range of factors, including personal factors like your credit score and broad factors such as economic conditions. You might get a teaser rate upfront that’s much lower than the rate you could pay later on in the life of the home loan.


The benchmark in your ARM loan would be the basis of your rate. The contract may name the rate benchmark the U.S. Treasury or the secured overnight finance rate (SOFR). The named benchmark will, at some point in the life of your loan, be the starting point to calculate resets.


The benchmark is used, and the loan is priced at a markup or margin. The margin applied to your ARM will depend on your credit history. A rate cap may be in place with an ARM, which would be the maximum interest rate adjustment your loan would allow at any particular time.


The Pros of Adjustable-Rate Mortgages

Adjustable-rate mortgages can be a good option if your initial goal when buying a home and getting a loan is the lowest interest rate. Your teaser rate isn’t forever, but you’ll get lower initial payments, so you’ll improve your cash flow. You might also be able to put more toward your principal balance every month.


If you’re planning to move fairly soon after buying a home, you might not have to worry about the adjusting interest rate. An ARM can be a good option for someone buying a starter home. You may have plans to upgrade, so you can sell your home before the fluctuation of the interest rates, which keeps your risks pretty low with this type of loan.


When you’re paying less monthly, you have more flexibility in your budget to meet other financial goals.

If you think you’re moving somewhere that you won’t stay for more than five years, an ARM is often the best option.

The Cons of an Adjustable-Rate Mortgage

The biggest downside of this type of mortgage is that you’re taking a risk that your interest rate will go up. That’s highly likely, meaning eventually, your monthly payments will increase. It’s hard to predict what your financial situation will be in the future, and you might at some point find it’s a struggle to make your monthly payments if they’re higher.

There’s also an inherent sense of uncertainty that can cause anxiety for some buyers.

Finally, you also have to consider the risk that if you are planning to stay in your home for five years or fewer, you may not be able to sell it before your rate adjustment. If you’re in an ARM situation and can’t sell it, an alternative would be to refinance to a fixed-rate loan or maybe a  new adjustable-rate mortgage.

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