North Shore Views

How Do Interest Rates Affect How Much House You Can Afford?

With so much uncertainty in the economy and concern that home prices have farther to fall, many would-be home buyers are still sitting on the sidelines, waiting until prices have reached bottom. The only problem is that you can never know when prices have reached bottom until they start rising again, and then you have missed it.  And, while you are waiting for a bargain to become a steal, you could be risking a reduction in your purchasing power if interest rates go up. For every 1% that rates increase, you can lose 9% of your purchasing power.

What does that mean? Consider these hypothetical examples:

Example #1: Tom and Sue are planning to buy a house and put 20% down. They looking to keep their monthly payment under $1950/month. With a 5% interest rate they can afford a home that costs $450,000. But if rates go up to 6% they will only be able to afford a house that costs $405,000, a reduction of $45,000 in their purchasing power. And at 7% they can only buy a $365,000 house, a $85,000 reduction.

Example #2: Paul and Jennifer are looking to move up to a bigger home. They have a 20% down payment and want to keep their monthly payment at $4300 or less. When interest rates are at 5% they can afford a $1,000,000 house. But if rates go to 6% they can only afford a $900,000 house. At 7% they can only buy a house costing $810,000.

What’s a home buyer to do? If rates are still low and the home you have your eye on looks like a good value relative to others that you have seen, don’t try and eke out the last dime in price reductions. Go ahead and make an offer and lock in a good rate. Not only will you be able to afford a better house than you will when rates go up, you will reap considerable savings in interest over the life of the loan.

Related articles:

• 10 Mortgage Pitfalls to Beware of
• 5 Mistakes Buyers Make in a Buyer’s Market
• How to Get Your Deal Closed in an Hour
• 10 Reasons to Buy a Home Now

Tags: home buying tips, interest rates

Where’s the Best Place to Live on Chicago’s North Shore?

Sometimes when I work with clients who are new to the area they will ask me, “So, what do you think is the best place to live on the North Shore?”

Even if it were legal for me to answer this question, which it’s not, I could not answer it. That’s because, like beauty, “best place to live” is in the eye of the beholder, and what’s best for me, isn’t going to be best for someone else.

What I can do is help my clients discover their best place to live.

The first step is finding out what’s important to them:
If they have children, schools will usually be at the top of the list. If their kids are into sports they may want to be near playing fields or the ice rink.
Do they commute to the city and want to be within walking distance of the train, or is easy access to the highway more important?
Would they rather have a big piece of property with privacy and quiet or do they prefer a more neighborhood-y feel?

Once I understand what’s important to them, I will take them on my signature Tour of the Shore, where I show them the communities and neighborhoods that fit their criteria. We visit the schools, parks, downtown areas and amenities. I will show them 2-3 representative homes in each community that fall in their price range, and we discuss why their budget will buy more in one area than another, or why two very similar houses have such different price tags.

But beyond housing prices and school scores, it’s critical to get a FEEL for the communities and neighborhoods that you are considering. Here are some of the ways I recommend getting a feel for a neighborhood or community, so you can find the one that will be best for you:

• Have your agent show you what you can buy with your budget in each community. Talk about the trade-offs and what you gain or give-up depending on the community or neighborhood.

• Compare the schools by looking at reports and test scores that can be found online. Then go to the school and sit in front at 3:15 when the bell rings at the end of the day. You will see what happens when the kids come streaming out. Are parents waiting for them? Is it a neighborhood school where they can walk or ride their bikes home or do they have to ride the bus? Do they seem happy and relaxed?

• Observe the neighborhood at different times of day. What are people doing? Are they out and about or locked in their houses?  Is it noisy or quiet? Is it well lit after dark?

• What’s the traffic like? If you are concerned the house you like may be on a busy street, you should go there during rush hour to get the “worst case” scenario. Do people drive fast through the neighborhood, or are they mindful that there are children around?

• Talk to the neighbors and ask them what they like most and least about the neighborhood.

• Also, go sit at the local Starbucks or the park and watch people come and go. Would you feel comfortable with them as neighbors?

There are lots of great communities and neighborhoods on the North Shore. You may have to make some trade-offs based on what you can afford, so you do need to be clear on your priorities. I remember when we moved back here from Colorado, I found a house I really liked in one community but my husband pointed out that, because the lots were large and the houses so spread out, there didn’t seem to be many kids close by. Knowing how social both our kids were, I had to admit this wasn’t going to work for them, so we picked a neighborhood where the houses were close together and there were always tons of children around. Even though I loved that rambling farmhouse with the big oak trees, I have to admit that the house and neighborhood we chose has worked much better for us as a family.

Tags: choosing a neighborhood, home buying tips

5 Mistakes Buyers Make in a Buyer’s Market

If you have even a passing interest in the real estate market you know that we are, and have been for the last couple of years, in a buyer’s market; there are more houses for sale than there are buyers and, as a result,  buyers are in the driver’s seat.

In this environment you would think buyers could really make out. And they can. But they can also lose out by committing one or more of the following mistakes:

1. Trying to time the market

When home prices have been declining, it is tempting for buyers to wait as long as possible to make an offer in hopes that prices will decline even further. But just like trying to time the stock market, this strategy rarely works. It’s impossible to predict when prices will reach the bottom until they start rising again. And once a home is priced to what the current market will bear, buyers will make offers. Now that sellers have become more realistic about list prices, many properties are actually selling quickly.  And recently there have been more multiple bid situations, with some would-be buyers walking away empty-handed. The best strategy is to work with a real estate agent to make an offer based on what comparable homes are selling for.

2. Believing interest rates will stay low

Interest rates are still at 40-year lows right now, but that will not last forever. In fact most economists agree that rates will begin to rise sometime later this year. That will affect not only your monthly payment but also your purchasing power, or how much you can afford. For example, if interest rates rise 1% point, this almost offsets a 10% drop in price…so while you’re waiting to see if prices are going to go down any further, you may be shooting yourself in the foot. You could end up paying a higher price AND a higher interest rate.

3. Not getting lender pre-qualification

Things have changed since the real estate bubble burst. Lending standards are much tighter, both in terms of credit scores, down payments and salary history. Read the rest of this entry »

Tags: home buying tips, Real estate

10 Mortgage Pitfalls to Beware of

During the boom years, anyone with a pulse could get a mortgage. Not so anymore. There are lots of things that can torpedo your ability to get a home loan even if you have good income and a great credit score.

MSN Money ran a great piece called “10 Things That Can Kill a Home Loan”. Here is their list of things that can keep you from getting a loan:

1.  The house needs too much work – beware if you’re buying distressed property or a real fixer-upper.

2.  The house doesn’t “appraise out” – the appraiser says the house is worth less that the price you and the seller have agreed on.

3.  You have too much debt – if your monthly housing and other debt exceeds 40% of your income, you might not qualify.

4.  You are self-employed and your income has declined – your lender will look at two years’ of tax returns and use the lower income of the two.

5.  You recently started being paid on commission – you may have to qualify based on your spouse’s income, or wait a couple of years to get a loan.

6.  There are issues with your tax return – things like second home expenses, a too-small estimated tax payment or unreimbursed employee expenses can be a problem when trying to qualify for a mortgage.

7.  You can’t get private mortgage insurance – which means you may need a bigger down payment.

8.  The lender doesn’t like the condo association’s finances – lenders may balk if the association’s cash reserves are too low, someone owns more than 10% of the building’s units or the association’s fidelity bond is too small.

9. Your loan takes too long to get approved because the lender has had to cut back on staff- your deal could fall through or your rate could go higher while you are waiting for approval.

10. You don’t stay on top of the paperwork required by the lender – be prepared to prove everything and anything and respond quickly to requests for information.

The bottom line: the mortgage game has changed and there are a lot more rules and restrictions nowadays. The best way to win the game is to educate yourself on the requirements and potential pitfalls, and get your ducks in a row before you try to get a loan. Ask your Realtor for recommendations about mortgage professionals who can advise you well and guide you through the process.

Read MSN Money’s “10 Things That Can Kill a Home Loan“.

Tags: home buying tips, home mortgage

How to Get Your Deal Closed in an Hour

If you have your ducks in a row, your closing can be quick and painless.  Bonnie Vasilion of Ist Advantage Mortgage offers these tips on how to ensure that your closings go quickly:

1.       Make sure your lender has cleared as many conditions as possible BEFORE the closing date: “Cleared to close” just means the file can be sent to a closing; it does NOT mean that all the conditions are cleared.  Lenders have “At Funding” conditions, meaning items to be provided at the closing table prior to funding approval.  I try to clear the “At Funding” conditions for my clients in advance of the closing date.  That eliminates a lot of waiting around.

2. If you’re going to have a morning closing, make sure the buyer AND the lender wire funds to arrive at the title company the afternoon before: I have heard that some lenders don’t initiate a wire until closing documents/conditions are signed and returned for lender  review.  Our company sends the wires out the day before when necessary.  This is an extra expense to the lender (an additional day’s cost of interest to the lender), which is why many lenders will not do this.  Due to our large size and warehouse line capacity, we are usually able to offer this convenience to our borrowers.

3. Work with a Loan Officer who attends closings: Although a Loan Officer is technically not supposed to have any role at the closing table, their presence can expedite communication between the title company and the person authorizing funding.  I cannot logistically attend every closing, but I do whenever I can.

4. Work with realtors and attorneys who solve contract issues prior to the closing: I have noticed that sometimes people think the sticky issues will go away under the pressure of “getting the closing done”, but the opposite seems to be true these days.  Buyers and especially sellers are very emotional, and even the smallest unresolved issue can cause people to become irrational and blow up a closing. 

Finally, I am still noticing that title companies are under-staffed and doing “triage”/putting files off until the last minute, even when figures and documents arrive several days early, so clearly some of this is beyond all of our control.

Tags: closings, home buying tips, Real estate

House Hunting is Like Going Through Airport Security

I don’t fly enough anymore to remember the little things that can make going through security quicker and more efficient. For example, I usually forget to put my liquids in a zip-lock bag. And even when I do, I forget to pull the bag out of my suitcase and put it in the bin to go through the scanner. Luckily, the TSA people don’t usually notice (What does that say about our airport security?). But when they do, it’s a giant hassle because they stop me and take me aside to go through my suitcase. At least they haven’t put me through the dreaded full-body scan… yet.

The other thing I never think about is my shoes and socks. Namely, to wear socks and to wear shoes that slip on and off easily. I always think I’m smart by wearing comfortable sneakers when I travel. But I’m forgetting that I’ll need to untie and re-tie them to go through security, which definitely slows down the process. And half the time I’m not wearing socks, which means I’m walking barefoot in the airport (which is kind of gross when you think about it, and cold to boot).

House hunting is pretty much the same thing. Chances are you’re going to have to remove your shoes just about every time you go into a new house, because a lot of  sellers won’t have those little bootie things to slip on over your shoes. And doing that ten times in one day can get old.

So do yourself a favor and wear slip-on shoes with socks when you go looking for your dream home. It will make house hunting so much more pleasant.

Tags: home buying tips, house hunting

5 Reasons to Hire a North Shore Agent (if You’re Moving to the North Shore)

This past Sunday was a beautiful spring day here in Wilmette and the open houses were hopping. I held two houses open and the one that is listed for $690,000 had a lot of interest from buyers looking to cash in on the tax credit before the April 30 deadline. Most of them were young families from the city who were looking to make the big move to the suburbs. And several of them mentioned that they were working with a city agent (the same one who had listed or sold their city home) to help them buy their dream home in the suburbs.

Now, I just don’t get that. Whatever agent you use is going to get the same commission. The question is, which one will really earn it?

And the home that you are about to purchase is possibly the biggest and most important investment you will make in your life. So wouldn’t you want the most qualified person you can get to represent you in this transaction? I’m not saying your city agent isn’t a terrific agent. But that agent (in all likelihood) does not know the North Shore market as well as the agents who live and work here.

It would be like me hiring my dog’s veterinarian to operate on me because he did such a great job on my dog. Yes, he is a doctor and yes, he does surgery. But he’s not an expert in the kind of surgery that I need.

Here is why it’s important to hire an agent who specializes in the area in which you plan to buy:

1. She knows the inventory of houses and can better guide you though the process of selecting a home you will be happy with. She can also make the process more efficient for you because her in-depth knowledge of the market enables her to sort through the options quickly, eliminating homes that she knows do not fit your requirements.

2.  As important as the house itself is the community, the neighborhoods, the schools and the amenities. Only an agent from the area can provide the kind of valuable insight that will help you make smart and informed decisions about location.

3. She can easily preview new homes that come on the market and alert you if there is one that is perfect for you. In fact, because of her local network, she will probably know about suitable homes even before they come on the market. That perfect home may be snapped up before your city agent even finds out about it and lets you know.

4. She will be able to provide good local resources you will need both during and after the transaction (inspectors, architects, contractors, decorators, painters,  handymen, etc.).

5. She understands relative property values in the area and why one house is worth more or less than a similar house. She can prepare a comparative market analysis (CMA) that gives you the knowledge and the confidence to successfully negotiate an offer.

Bottom line: a good local agent can help you avoid the two biggest home buying pitfalls: choosing the wrong house  and paying too much for it. And it doesn’t cost you anything.

Tags: hiring an agent, home buying tips, Real estate

How Move-Up Buyers Can Profit from a Down Market

I have some clients who want to buy a new home in the worst way. They see some great buys on the market, houses that have  the features they really want. And their earnings enable them to qualify for a bigger mortgage. But, after looking and dreaming, reality sets in, because they are saddled with their existing home, which they would need to sell before they can buy.  And they realize that they can’t sell their current home without taking a hit.  Like many other people who bought when the market was up, they have a house that’s worth less today than it was three years ago and the thought of selling it for less than they paid makes them cringe.

When I tell them that if they really do want to move, they can actually come out ahead, they look at me like I have three heads. But I’m serious. Because, while their house has decreased in value, so have the other houses, and if they are moving up, they can save more than they lose.

Let’s take their house as an example. Today, based on comps, I would list their house somewhere right around $700,000, which is about 21% less than it was worth back in 2006 ($885,000). One of the houses they are interested in buying is listed at $1,200,000, which is also 21% less than it was worth in 2006 ($1,519,000). Now, let’s say they sell their house for $630,000 or about 90% of the list price of $700,000. And let’s say they can negotiate a deal for $1,080,000 for their dream house, also 90% of asking.

They’ve “lost” $256,000 on the sale of their current house (vs. the market high in 2006), but they’ve “saved” $439,000 on the new house vs. its high price in 2006, a net gain of $183,000.

When you do the math, you see that the current market conditions CAN work in your favor in some situations. Not only can my clients afford a house that they could not have afforded at the 2006 prices, but interest rates are near historic lows, making this a great time to buy. Of course I would NOT advise them to run right out and put an offer on their dream house UNTIL they have sold their current home. If they are serious about moving, they should price their house to sell and then, once they have a contract, negotiate hard for their dream house. Once they have sold they will be in the driver’s seat and have the leverage to negotiate a very attractive deal for themselves on the buy side.

Tags: home buying tips, move-up buyer strategies