Despite the recent downgrade on U.S. debt, which in theory should raise interest rates on consumer loans, the cost to borrow has actually dropped. The average 30-year fixed rate mortgage hit a low of just 4.32% last week, according to Freddie Mac. It turns out that investors still believe Treasury bonds are among the safest investments. And in the wake of all the recent market and economic uncertainty, they’ve shifted more money to the bond market, which has pushed rates down.
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In fact, I received an email from my mortgage broker last week, saying, “Never in a million years did I think it would happen, but rates have just improved to a point where it makes sense for you to refinance. Currently you have 5.0% and today we can offer 4.5%.”
We jumped on the news, since the new rate offers substantial savings. Frankly, it makes sense for anyone to refinance right now, as along as the annual savings outweigh the closing costs within one to three years, or, much sooner than you plan to sell.
But if you’re a prospective homeowner who has watched rates fall and wondered if this is your moment to enter the housing market, don’t be blinded by the ever-low cost to borrow. There are other financial factors to consider.
Before you opt to buy, keep this homeowner’s checklist in mind:
- Property taxes. The median property taxes paid on homes in the U.S. amount to nearly $2,000 per year, according to the U.S. Census Bureau. Aside from the mortgage, this is the biggest cost of home ownership. We don’t have a crystal ball to foresee our economic future, but it’s more than likely going to involve higher taxes.
- Maintenance, upkeep and repairs. According to the guidebook Home Buying for Dummies, you should budget 1% of the home’s purchase price annually for indoor and outdoor maintenance. So, if your home was purchased for $250,000, set aside $2,500 for maintenance and repairs. That’s an average. Some years you’ll spend less, others more.
- Homeowners insurance. The average annual premium for homeowners insurance in this country is $822, according to the National Association of Insurance Commissioners (NAIC).
- Higher utilities. The bigger the home you buy, the more you’ll have to pay for many home-related expenses. For example, you may live in a small apartment where your utilities come to $75 a month. In a four-bedroom house, those same utilities may triple.
- Garbage collection. This can cost $12 to $20 a month, according to a survey by the National Solid Wastes Management Association. But as municipalities seek to raise revenues (just like Uncle Sam), expect to pay more for city and township services.
- Homeowner association fees (HOA). If you live in a condo or a house that’s regulated by an association you may have to pay several hundred dollars or more a year—and this is a cost that only tends to increase over the years.
As Karl Case, co-creator of the Case-Shiller index of housing prices, once said, ”there are negative surprises that happen when you buy a home…You don’t realize that it’s like running a small business.“
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