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Originally Posted by Eagle5US
OK...So, I am a potential home buyer planning on purchasing a home between April and Jun of 2008.
Other than significantly complicating my mortgage experience...what does this mean for those of us who are responsible with our money and actually honor our word when we sign our name to a promissory note?
Eagle
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I think you need to consider a number of issues.
First, is your income stream secure? Could a recession cause your job to evaporate? Is your income likely to keep up with inflation, or not? I don’t need to know the answer to such questions, but as a buyer you might wish to consider them.
Second, I’d urge you to get a fixed rate mortgage. An ARM might have a lower initial cost; it could, in principle, have a lower total cost than a fixed rate mortgage. That said, interest rates seem susceptible to an increase here. First, because of the inflationary factors mentioned previously; second, the demographic bulge of the baby boomer generation. With regard to the boomers, their investing habits may have been part of the reason for the 20-year “virtuous cycle” (strong stock market, low interest rates, high economic growth) that we seem to be exiting. The implication is that we’ll see a trend to higher rates from quite some time.
Third, be aware of the risk of inflation. There is a real risk that the value of the things we buy – food, gasoline, whatever – will increase significantly over the years ahead. This can lead to a crunch if someone has a big mortgage along with other bills. You’ll be glad to know that Texas is one of the national leaders in producing wind-generated electricity, so this may buffer you from some of the impact of high fuel costs. Also, Texas has no income tax – so local areas tend to tax properties aggressively. I would suggest not buying as much house as you can afford.
Finally, by May of 2008 I expect cash to be King, with good credit being nearly as good. Therefore, you’ll have the opportunity to hammer the sellers hard. A person on the verge of losing their house is more motivated to sell – and will sell at a lower price – than might otherwise be the case. Take a trip down to the courthouse and look at the foreclosure notices. If you have the time, attend an auction and observe – see what houses are going for. Realtors can be valuable contacts, and might steer you to a good deal – but it’s worth remembering that, per the laws of agency, realtors represent the seller. Except in the special (and rare) case where you (the buyer) directly compensate the realtor, any realtor you use will get partial compensation from the commission generated when the transaction is done. That means the seller is paying the commission, so all the agents involved in the deal are obligated to work for the seller’s best interest. Also, their commission is impacted by the price paid. Don’t expect them to encourage efforts to get the best deal. If my premises are validated, you can get a house for a really good price – if you avoid falling in love with any particular house and negotiate aggressively.
Good luck, and welcome to Texas!