RE/MAX CEO Examines Alternative Paths To Homeownership

Key Takeaways:

– The old way of doing business is over and it’s time to conquer today’s market challenges and prepare for tomorrow’s opportunities.
– Owning a home is generally better than renting one, and lack of cash for a down payment or higher rates shouldn’t halt homeownership dreams.
– Many mortgage buyers put down less than 20 percent on the homes they purchased in 2023, reflecting a significant shift in buyer behavior and loan offerings.
– Major lenders now offer loan products that require as little as 3 percent down, allowing more flexibility for prospective homebuyers.
– It’s important to weigh all applicable lending options, such as adjustable-rate mortgages (ARMs), and consider long-term financial goals and current life circumstances.
– Navigating the complexities of securing a mortgage requires careful consideration and expert assistance.
– Putting less cash upfront means more will be paid over time, and smaller down payments can result in higher monthly payments and added costs like private mortgage insurance (PMI).
– ARMs have an interest rate that will change throughout the life of the mortgage, and buyers should consider the cap structure when shopping for an ARM.
– The decision to buy a home is deeply personal and should be made at the right time and for the right reasons.
– Having an expert real estate agent and trusted mortgage professional is crucial in guiding hopeful buyers through the process and ensuring informed decisions are made.

inman:

Whenever I’m asked, I will always say owning a home is generally better than renting one. So, if someone can secure a mortgage in which the monthly payments (principal, interest, tax, insurance, and private mortgage insurance) are comparable with what they’re paying in rent, what’s holding them back?

For many, it’s the lack of cash for a down payment or the higher rates. But let me explain why that shouldn’t halt their homeownership dreams. 

People think they need 20 percent down, but they don’t, and today’s market trends support this practice. Half of mortgage buyers put down less than 20 percent on the homes they purchased in 2023, reflecting a significant shift in buyer behavior and loan offerings.

Several major lenders now offer loan products that require as little as 3 percent down, some even requiring just 1 percent. For qualifying borrowers with steady employment and the ability to make their monthly payments, a smaller down payment strategy may be needed to get their foot in the door.

Deciding to put less money down shortens the money-saving timeline, allowing prospective homebuyers to move sooner rather than later. By alleviating some of the burden of a substantial upfront cost, there’s also more flexibility to spend in other life-enriching areas, be it furnishing their new home, investing in education or even growing a family.

It’s difficult to predict where rates will be in 2024, though we expect them to continue to bounce around and drop toward the middle of the year. Discussion about rates typically focuses on the 30-year fixed rate.

The average homeowner in the U.S. lives in their home for eight years, and the median is 12.3 years. So, in many cases, people choose this long-term three-decade mortgage when they may not need it. I suggest buyers weigh all applicable lending options, like an adjustable-rate mortgage (ARM).

I always say to “marry the house and date the rate.” Buyers might consider that they can always refinance, but if house prices continue increasing, they can’t claw back the price.

As attractive as these options may sound, they’re not for everyone. There are benefits — better interest rates, lower monthly payments, etc. — to putting more money down. Nevertheless, a growing number of qualified buyers are leaning into the availability of these alternate options.

Here’s some food for thought for anyone thinking of leaning into the untraditional. 

Use low percent down as a tool, not an end-game solution

These low down payment options should be viewed and used as a means to an end — the goal being homeownership — but not as a one-size-fits-all solution. However, this type of minimal down payment can be a game-changer for those who are financially prepared to take on potentially higher monthly mortgage payments.

As much as I advocate for homeownership, I am also a proponent of informed decision-making. Although these options undoubtedly open doors to homeownership for certain buyers in this market, I encourage them to engage in thorough financial planning, consult with their advisers and consider the full scope of costs.

For those who have done their homework and eventually find that a lower down payment option aligns with their long-term financial goals and current life circumstances, this option could turn the dream of homeownership into a fulfilling reality.

Read the fine print 

Navigating the complexities of securing a mortgage demands careful consideration and expert assistance. Putting less cash upfront means more will be paid over time — regardless of the terms involved or the other variables in the transaction. 

The smaller the down payment, the larger the loan. This can translate to higher monthly payments and added costs like private mortgage insurance (PMI) — which is required for any loan with a down payment of less than 20 percent.

The good news is that these rates vary by the borrower and usually range between 0.5 percent to 1.5 percent of the loan amount per year. With 1 percent down, for instance, though they might pay over $100 monthly for PMI, the buyer will start gaining thousands per year in home equity.

ARMS: What to know

An adjustable-rate mortgage (ARM) is a loan with an interest rate that will change throughout the life of the mortgage. During the initial period, known as the fixed-rate period, the interest rate on the loan doesn’t change, which can range from six months to 10 years. 

After the initial period, most ARMs adjust. Simply put, when the loan adjusts, the interest rate may change. Most ARMs offer a cap structure, which limits how much the rates can increase or decrease. When shopping for an ARM, buyers should look for interest rate caps they can afford.

Personalized decision-making: What’s right for you?

When I was just getting started with buying property, I was more focused on whether I could manage the monthly costs and what got me to my goal of owning a home and building equity. But that’s just it; deciding to buy a home is a deeply personal decision that must be made at the right time and for the right reasons.

It’s not about timing the market, timing the perfect rate, or even having the full 20 percent down payment. It’s about whether the timing and costs work for the buyer and their family and if they have a job that they are secure with.

Having an expert real estate agent and a trusted mortgage professional is crucial. These experts are invaluable in guiding hopeful buyers smoothly through the process, helping them comprehend and navigate the stipulations, terms, and conditions attached to mortgage deals, and ensuring they make informed and sound decisions on the path to homeownership.

Nick Bailey is president and CEO at RE/MAX World Headquarters. Follow him on Instagram and LinkedIn.


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Property Chomp's Take:

The old way of doing business is over. It's time to adapt and embrace new strategies, especially when it comes to the housing market. Owning a home is generally better than renting, but many potential buyers are held back by the lack of cash for a down payment or the higher rates. However, these obstacles shouldn't halt their homeownership dreams.

Contrary to popular belief, buyers don't need to put down 20 percent. In fact, half of mortgage buyers put down less than 20 percent on the homes they purchased in 2023. This reflects a significant shift in buyer behavior and loan offerings. Major lenders now offer loan products that require as little as 3 percent down, and some even require just 1 percent. This shift in the market allows prospective homebuyers to get their foot in the door sooner rather than later.

Deciding to put less money down shortens the money-saving timeline, giving buyers the opportunity to move into their own homes sooner. It also provides more flexibility to spend money in other areas of their lives, such as furnishing their new home, investing in education, or even starting a family.

The fear of rising interest rates shouldn't hold potential buyers back either. While it's difficult to predict where rates will be in the future, it's important to consider all lending options. Adjustable-rate mortgages (ARMs) can be a viable option for those who don't need a long-term mortgage. Buyers can always refinance if rates drop, but they can't claw back the price if house prices continue to increase.

Of course, these low down payment options are not for everyone. There are benefits to putting more money down, such as better interest rates and lower monthly payments. It's important for buyers to weigh all their options and consider their long-term financial goals and current life circumstances.

Navigating the complexities of securing a mortgage requires careful consideration and expert assistance. Buyers should be aware that putting less money upfront means paying more over time. The smaller the down payment, the larger the loan, resulting in higher monthly payments and additional costs like private mortgage insurance (PMI). However, even with these costs, buyers will start gaining equity in their homes.

Ultimately, the decision to buy a home should be a deeply personal one, made at the right time and for the right reasons. It's not about timing the market or having the full 20 percent down payment. It's about whether the timing and costs work for the buyer and their family. Having an expert real estate agent and a trusted mortgage professional is crucial in making informed decisions on the path to homeownership.

The verdict is in — the old way of doing business is over. It's time to defy the market and bet big on your future. With the availability of low down payment options and alternative lending strategies, homeownership is within reach for more individuals than ever before. So, why wait? Start planning for your future and take that leap towards owning your own home.

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