The decision to buy a home is significant. Real estate is the biggest investment the average person will make in his or her lifetime, which underscores just how significant the home buying decision can be.
The real estate experts at Zillow recently reported that the national median price of a home in the United States is $272,446. However, since the National Association of Realtors reported a record low housing inventory late in 2020, the average house price has been rising rapidly nationwide. The Federal Reserve Bank of St. Louis estimates the median home sales price at $374,900, and certain states have much higher prices.
WOWA, a real estate and finance technology company, says the average sale price of a home in Canada was
$679,051 in July 2021. Most people do not have $300,000 to $600,000 in savings on hand to purchase a home in cash. That means they’ll need to rely on financing to pay for their dream homes.
Conventional lending
Conventional lending refers to when a bank or another financial institution loans a home buyer money to buy a home. This is one of the most common ways to fund a home purchase. Personal credit score as well as credit history help determine eligibility and interest rates for conventional loans. Availability of assets as well as income level are some additional determining factors. Conventional loans are traditionally 10-, 15- or 30year notes and will require a certain percentage as the down payment to secure the loan. The bank will determine the down payment requirement, which is typically somewhere between 3 and 20 percent.
A Federal Housing Administration loan is issued by an FHA-approved lender. These loans are designed for low-to-moderate-income borrowers, according to the financial guide Investopedia. FHA loans require lower minimum down payments and lower credit scores than many conventional loans. FHA loans also require mortage insurance up front, plus annually for 11 years or the life of the loan depending on the length of the loan.
HELOC
A Home Equity Line of Credit, or HELOC loan, borrows against the available equity in your home to create a line of credit, much like a credit card. These funds can be used for large expenses or to consolidate
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higher-interest rate debt on other loans, according to Bank of America. It may be possible to use a HELOC to secure funding to make improvements to a home for those who want to flip it as an investment property.
Private money lenders
Individuals investing in real estate who do not intend to use a property as a primary residence may turn to private money lenders. These investors can tap into capital from personal connections and lend at specified interest rates and payback periods, according to Fortune Builders, a real estate investing resource. Keep in mind the interest rate will likely be higher with a private lender than through a conventional lender. The repayment term also will be shorter.
VA-backed loan
The U.S. Department of Veterans Affairs has a program for acquiring loans through conventional lenders that will be partially guaranteed against loss through the VA. This enables a lender to give better loan terms, such as the option to pay no down payment. Interested parties need to qualify for a Certificate of Eligibility and then work with qualified lenders.
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Did You Know?
According to the real estate research firm CoreLogic, annual home price growth during the pandemic was the most the group had ever seen in its 45 years of tracking home prices. Since the World Health Organization first declared a pandemic in March of 2020, home prices have risen dramatically. CoreLogic reports that median home prices across the United States increased by 18 percent between July 2020 and July 2021. The increase was even more significant in Canada, where data from the Canadian Real Estate
Association indicated home prices had risen by more than 38 percent between 2020 and 2021. Such increases were welcome news for individuals who already owned their homes, but many individuals who did not found themselves priced out of the market. The good news for potential home buyers is that median home prices are not expected to increase as much in 2022 as they have since the onset of the pandemic. In fact, CoreLogic forecasted a 2.7 percent appreciation between July 2021 and July 2022
Historically low interest rates have made now a good time to be a homeowner. According to the Federal Home Loan Mortgage Corporation, also known as Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage in mid-September 2021 was 2.86. Just ten years earlier, the average rate was 4.09. That’s a significant dip, and one that’s saving today’s homeowners tens of thousands of dollars over the life of their mortgages. Interest rates dipped during the pandemic and have remained low ever since. That’s unlikely to last forever, which has given many homeowners a sense of urgency regarding refinancing. Refinancing can be financially advantageous, but there are some things homeowners should know prior to contacting their lenders.
Refinancing does not always save money over the long haul
It’s hard to blame homeowners who jump at the chance to refinance their mortgages. Refinancing is often associated with significantly lower monthly payments, and such savings can be used to finance home improvements, pay for tuition or build retirement
nest eggs. However, homeowners won’t necessarily save money over the long haul if they’re refinancing an existing 30-year mortgage with another 30-year mortgage.
The mortgage experts at Mortgage Calculator note that a Change Terms mortgage refinance is characterized by a shift to a loan charging a lower interest rate. The initial savings with such a refinance are undeniable, but changing from one 30-year to another 30-year restarts the mortgage clock, which can add years to the time homeowners will be repaying their debt. As a result, homeowners may end up paying more interest over time than they might have had they just kept their initial mortgage. Homeowners interested in a Change Terms refinance may want to look into switching from a 30-year to a 15-year mortgage. A shorter term mortgage will increase the monthly payment, but the loan will reach maturity much faster, greatly reducing the amount of interest homeowners will pay over the life of the mortgage.
Refinancing can be costly
Lower monthly payments might be the number that
catches homeowners’ eyes as they look to refinance, but it’s important that homeowners recognize that refinancing is not free. In fact, the personal finance experts at Kiplinger note that refinancing incurs many of the same costs that homeowners had to pay when they signed their initial mortgage papers. That includes fees, taxes and appraisal costs. These costs are sometimes paid up front, but they also might be rolled into the loan balance. In the latter instance, homeowners could be paying interest on their refinancing costs. Homeowners who are refinancing solely because of lower interest rates should know that some lenders raise interest rates to compensate for refinancing costs. That can negate the savings and end up costing homeowners more money than the original mortgage.
When remodeling a home with the ultimate goal of making it more attractive to prospective buyers, homeowners can benefit from taking stock of current trends, including the style of home that’s most popular. According to a 2020 Homes.com survey of more than 5,000 adults across the United States, modern farmhouse is the most favored house style. The survey asked participants to choose from a selection of styles, including mid-century modern ranch, Spanish colonial/southwest, bohemian craftsman, Italianate, French chateau, and Tudor. The modern farmhouse style was the most popular choice in 42 of the 50 states, proving that home style preference is not beholden to geography. Respondents gave a host of reasons for favoring the modern farmhouse look, including that the style is “aesthetically appealing but not boring” and that it looks “simple, cozy, and not too busy.”
Factors to consider before investing in real estate
The appreciation of real estate over time has long made owning a home or an investment property a sound financial strategy. Prospective home buyers spend considerable time looking for a property they’re hoping to call home. Various factors, including property taxes and the reputation of local schools, may be considered as homeowners decide
where to look for a new home. That vetting process is equally important, albeit slightly different, when buyers are consider investing in properties they don’t intend to live in.
Real estate can be a great way to diversify an investment portfolio and earn extra income. Before shopping for an investment property, novice investors may want to consider certain factors
to determine if real estate is the best investment vehicle for them.
Rental potential and the local labor force
Location is a significant factor to consider when investing in real estate, but recent shifts in how and where people work could change the real estate investment landscape. A 2020 Gartner, Inc., survey of more than 300 financial executives and leaders in the finance industry found that roughly 25 percent will move at least one out of every five of their on-site workers to permanently remote positions in the years ahead. Economists note that this shift to remote working could be among the more lasting trends to emerge from the pandemic. Before investing in real estate, prospective investors should examine local trends to see if more and more locals are working remotely, and whether or not that’s affecting the market for rentals.
To flip or not to flip
Flipping properties gained popularity in the second decade of this century, but figures from the
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property database curator ATTOM Data Solutions indicates that returns on investments in flipped properties declined for the third straight year in 2020. Though flipping can still yield a strong return, investors may not realize the returns on flipped properties that they might have realized as recently as five years ago. Potential investors should conduct some research regarding real estate market trends, including flipping data where available, to make the most informed decision possible.
Property Condition
Product shortages were another trend to emerge during the pandemic, and disruptions to the supply
chain will not necessarily go away anytime soon. In addition, the cost of various products associated with home improvements, including lumber, skyrocketed during the pandemic. The National Association of Home Builders noted that while lumber prices declined in 2021, the price of lumber packages quoted to builders remained high. That means real estate investors who invest in properties that will need work could be forced to pay a lot to fix these properties. And ongoing supply chain issues could extend the time it takes to renovate a property. Investors must be able to bear these costs and lag times to make the most off their real estate investments.
Did
you know?
It’s no secret that a good-looking lawn can entice buyers when selling a home, but homeowners may not realize just how much they can benefit from even the smallest investments of time and money in their home exteriors. According to the Top Agent Insights Q2 2019 Report from HomeLight, low-cost outdoor home improvements to a landscape provide sizable returns on investment. For example, the report found that a $268 investment in a lawn care service can lead to a $1,211 increase in home value at resale. Similarly, $340 worth of fresh mulch can increase
home value at resale by $769. More than 85 percent of real estate professionals who participated in the HomeLight survey recommended other small and
simple projects, including removing dirt, grime and cobwebs from a home entrance and trimming trees and shrubs prior to putting a home on the market.
