Buying a home is a big deal whether you are doing it for the first time or the twentieth, and if it’s your twentieth home purchase, we want to know your secret. We should all be drinking some of what you are! There are at least a million (it seems) factors that influence your house interest rate, and rates can change daily.
Read below to learn more about a financial climate called Quantitative Easing and what you should know when buying your next home.
At TwinCity Lending, we want to take the guesswork out of all your major financial decisions. Schedule an appointment today with one of our lending specialists today to find out how much buying power you have in today’s home market.
What is Quantitative Easing?
Quantitative easing is a tool that governments can and have used to assist their country in getting back on its feet after a significant downturn in the economy. It is a controversial decision and has historically been used as a “last resort” to avoid deep economic depression.
The goal of quantitative easing is to provide short-term economic stimulus via lower interest rates and raise money supply. In the U.S., quantitative easing has been used three times in our history.
The principle of quantitative easing is to flood the economy with money. This flood happens when the federal reserve increases its printing of new money to get central banks to purchase government treasuries.
This ramp-up in government-backed treasuries helps banks to have more money to lend. With increase money “supply,” the “cost” of capital (federal interest rates) reduces to encourage more borrowing by the public, and in turn, more spending by the public. Hence, a short-term boost to the economy.
QE can be a slippery slope.
Even though QE provides short-term relief for dire economic circumstances like the 2009 market crash and homeowner crisis, many believe the long term risks of QE outweigh the benefits.
In the US, we are currently in a period of QE. It is a grand experiment, truly. While we have seen encouraging economic recovery nationwide since the financial crisis of 2009, the long-term benefits and consequences of using QE remain to be seen.
Some possible long term “side effects” of employing QE include:
A negative impact on the global economy.
Inflation goes up when the extra money supply causes the prices of goods to rise disproportionately.
The strength of the U.S Dollar is threatened comparatively with other countries.
When QE is removed or suspended (remember, QE is a “last resort” option in tough economic times), economic growth can stall or even reverse.
QE encourages both businesses and individuals to take on more debt
How can you be smart about home buying during QE?
It’s no joke that knowledge is power. By leveraging your knowledge of QE with your understanding of personal finance, you could come out a real winner as a homeowner during a period of QE. Here’s what we mean.
When QE is enacted, federal interest rates generally fall, or they may already be lower, as was the case in 2009. In our present economic climate, interest rates are currently as low as 3.15% fixed (meaning this rate is locked in for the duration of the loan) on a 15-year mortgage. Be sure to check with us at TwinCity Lending frequently, as interest rates can fluctuate, and each day may be a little different.
Because money is so “cheap” right now, it can be tempting to buy a little more house than you would generally consider because the mortgage payments could be seen as “doable” in your household budget. Here’s what we suggest for home buying that is not only celebratory at the close of the sale, but will keep you stress-free for the duration of your mortgage.
Take a careful look at your take-home income. Your total mortgage payment, including taxes, insurance, and homeowners association fees, should total no more than 28% of your income after taxes.
Lower your consumer debt. Begin now to pay off other loans like student debt, credit cards, or car notes. Eliminating even one monthly payment means, even more, buying power can go into your home, especially if the home you choose may need some repairs or updates.
Get a home inspection. When shopping for your next home, a qualified home inspection is essential to increasing your peace of mind and preparing for the many extra expenses that home-ownership brings. Pay extra attention to the age and condition of the roof, the state of the foundation and basement, as well as major appliances like water heaters and HVAC which are among the most expensive to repair or replace for homeowners.
Make a significant down payment. When money is cheap like it is now, it can be tempting to purchase more house with less of a down payment; financing as much of the purchase price as the lender will allow.
Paying as much as you can in a down-payment will assist you in building home equity right away, as well as lowering your mortgage payment. A significant down-payment (20% or more of the asking price) may potentially eliminate the need for mortgage insurance as well.
Create a Home Emergency Fund. Begin immediately to fund a savings account for both emergency repairs or replacement, as well as planned large expenses like roof replacement or kitchen/bath updates.
In the end, Quantitative Easement periods can give homebuyers an edge with low-interest rates. The vital key to being a stress-free homeowner is to not “go wild” with your home purchase so that you paint yourself into a corner later by taking on too much debt in a changing economy.
When searching for your next home, use your common sense, keep your overall debt low, and be honest about your behavior around debt and spending. Don’t forget to call on professionals for help like our team at TwinCity Lending.
Schedule a consult with us today and let us help you land great home in which you can truly relax because you know you made the best decision.