So with rents averaging around $1000 for a two-bedroom apartment in the Metroplex, it is almost cheaper now to buy than rent. Does this have the troops stirred up about home- buying again? Yes…maybe. More agents are telling me how the market for first time homebuyers is picking up in Dallas. I went north to Plano and talked with André Kocher of Keller Williams and Wade Betz of Guardian Mortgage Company about the new, more fiscally conservative homebuyer coming in for loans.
Candy: We’ve seen the good news that home sales continue to rise in our area, the investors are loving Dallas, but who are these new homebuyers? Do they really exist?
André: They do! By and large, they are a more conservative and cautious group. They are interested in buying a home because the historic low rates mean they could own for less than they are renting. However, they want to make sure they don’t get into trouble down the road.
Many of our clients have studied Dave Ramsey and are practicing his tenants. (Editor’s note: Dave is a financial media guru who teaches followers to have a zero tolerance for debt.) They are out of debt or working to get out of debt. They are saving up higher down payments – around 10% for conventional loans – and they are interested in 15-year mortgages. Many are keeping their mortgage payments to 25% or less of their monthly income.
Candy: That means they are buying smaller homes. Surely not every homebuyer is so well-behaved fiscally speaking?
André: Of course not. There are still folks who want to buy a house bigger than they can safely afford or who have a lot of debt hanging over their heads. In cases like this, my wife Kelli and I will often take them aside and talk to them about getting out of debt first, or looking at a less expensive home – to get their financial house in order before applying for the loan. We’ll even direct them to a Dave Ramsey course, if they are interested. We want them to be successful, not disappointed.
Candy: André mentioned 15-year loans – is there really that much difference between 30-year and 15-year loans when the rates are so incredibly low to begin with?
Wade: Practically no one would be upside down on their mortgages right now if everyone had a 15-year loan. It is the best “forced savings” plan you can do for your family. Not only are the rates lower for a 15-year loan, but you are paying down principal – fast. Seven years in a 30-year loan and you’ve barely touched your principal. Seven years in a 15-year mortgage, and you’re halfway done.
Candy: Wowzers. What about getting a 30-year mortgage and then making extra payments?
André: The biggest problem with that approach is that people start off with good intentions, but rarely have the discipline to keep up with the payments and they are paying at a higher interest rate. If they can afford the higher monthly payments, they really should get a 15-year loan.
Candy: How much higher do 15 years cost on average?
Wade: About 50%. On a $100,000 home you might pay around $1,000 a month with a 30-year loan and $1,500 with a 15-year loan. From what I can tell, homebuyers are getting the message. In 2011, 15-year loans made up 37% of my conventional loan portfolio – a huge jump from 8% in 2010.
Candy: Speaking of rates, what are the latest rates?
Wade: Earlier this month (Feb.) we closed conventional loans at 3.25% for a 15-year loan and 3.875% for a 30-year loan. Rates like these are not going to last indefinitely.
Candy: What about investors? Are you seeing the same kind of conservative approach from them?
Wade: It depends on why they are buying the house. A younger investor who is planning to rent the home – and boy is this a great time to be a landlord – will generally go for a 30-year loan for cash-flow purposes. Since the tenant is paying the mortgage, the investor is less sensitive to the higher rate. Investors generally put in as little as they can – 20% down is the minimum required.
An exception to this is an older investor who is looking to cash out his properties and retire. This investor wants to own the home faster and plans to sell when the market has recovered. He may put down a higher down payment – there’s a price break at 25% down – to speed up the process and get a 10-year or 15-year loan.
André: Investors have to be in even better financial shape than regular homebuyers to get a mortgage. I tell my clients who are new to this that they are entering a business venture with the bank. They have to prove that the property will pay for itself and that there’s enough revenue to cover the mortgage. If your tenant leaves unexpectedly, can you pay the mortgage for 2-3 months while you find another one? What if rental rates drop 10%? Can you still pay the mortgage?
Candy: Thanks guys, I agree it’s a great time to be a landlord. Unfortunately, the costs of home ownership are about to go up!