Along with the personal factors that always play a part in whether it’s better to rent or buy your home, you also must consider the general economic conditions of the time. These are factors that are out of your control, except in weighing their importance to you!
These personal factors include affordability, location, job security, need for mobility and opportunities to build equity. The economic conditions include interest rates, availability of mortgage funding and supply and demand of properties (buyers vs. seller’s market) and, of course, the corresponding level on monthly rent payment.
Economic Conditions to Consider
Regarding interest rates, the best time to buy is when interest rates are low which will reflect in lower monthly mortgage payments. Interestingly, when the general economy is facing challenges like lower GDP, higher unemployment, and more houses than buyers, the Fed will lower interest rates to encourage people to buy. When the economic outlook is brighter, interest rates often go up.
Buyer’s vs. Seller’s Market
In addition to the interest rates, the market supply and demand plays a large role in the overall real estate market. When there are more houses than there are buyers, selling prices go down and it is known as “a buyer’s market.” Conversely, when there are fewer houses on the market and a surplus of buyers, it’s known as “a seller’s market.” Here the prices go up and “bidding wars” may occur, which often raise the value of the house even above the original asking price.
It’s important to note that real estate markets are very localized. Different areas of the country (even the same state) can have very different market conditions. The key here is to avoid losing money on both ends of the transaction; you don’t want to sell low and buy high!
Finally, the other economic condition that can have a great effect on the viability of your purchasing a home is the availability of funding. When the market crashed, in 2008, and banks and mortgage companies were inundated with bad mortgage debts, the availability of funding dried up.
There are many speculations about who is to blame for the real estate collapse, one theory though, is the lax mortgage qualifications that these financial institutions required – creating the housing bubble to burst.
Today, while the market has made a major come-back, over the last two years, some of the requirements for obtaining mortgages have remained fairly rigid. In 2010, to assure that customers were receiving loans they would be able to repay, Congress instituted the mortgage qualification rule as part of the Dodd-Frank Act.
To qualify for a mortgage, a borrower’s total monthly debt payments (including mortgage) may not be greater than 43% of their gross income. Additionally, all mortgage loans now require income verification, which was greatly by-passed or ignored, prior to 2008.
A Necessary Down Payment
Last, but not least, the down-payment is always a strong pre-requisite and, often, a deterring factor in whether you buy a home or rent one. Mostly, gone are the “no money down” deals of the past. If you wanna play, you have to pay. And that’s a good thing. The bank knows it’s harder to “walk away” when you have money invested AND you are, indeed invested, building equity, right from the start.
The best way to provide a down payment would be through the cash value of your whole life policy. If you don’t have a whole life insurance policy, it’s never too early or too late to start one. There are many beneficial ways to utilize the cash value to increase your real estate gains.
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