Now is the time for buying homes

Reports of market rates coming from most countries show that home prices are one of the lowest in recent times, mostly, because of recession-induced low demand for homes and more and more people are trying to sell off homes to get rid of debt-traps. In other words demand is less and supply is more. Another important trend that is emerging is the low rates on mortgages or other types of home loans. For example, in the US, interest rates for a 30-year fixed rate mortgage (FRM) averaged 5.08% from 6.35% a year ago. Fifteen-year fixed rate mortgages also dropped to 4.54% for the week ending September 3 from 5.9% a year ago.

The above trend indicates that ‘now’ is the best time for those who are interested in buying their own homes, because interest rates are the lowest and home prices are the most affordable in recent times. So, it makes sense to go for a home mortgage or home loan rather than paying rent. For example, taking an average of interest rates for different types of loans, or countries, for a home loan for $200,000 with a fixed yearly nominal interest rate of 6.5% for 30 years, the fixed monthly payment is about $1260. This, or even a higher amount, is what most people of middle income groups pay as rent every month in most developed countries and some developing countries. So, instead of paying $1260 as rent, if a person purchases a home paying the same amount monthly, it is a sound financial decision as he will become the owner of the home. It is even better for lesser periods like five-year, or for adjustable rate mortgages (ARM) for which average interest is down to 4.6% compared to around 6% a year ago.

As a result of lower interest rates and increasing home demands experienced recently, as in USA, sales of homes have been rising for the last seven months, and July's sales were the highest since June 2007. Whether you opt for a fixed rate mortgage, or type of loans for which the interest rate may change or float, it is only a question of making the basic calculations to find out what it actually costs you per month for a home loan or mortgage. There does not seem to be any significant difference.

Fixed rate mortgages can be costlier than adjustable rate mortgages in most countries, mainly due to the inherent interest rate risk long term loans are associated with. They may have, sometimes, a higher starting interest rate too. But if interest rates rise, the ARM cost will be higher while the FRM cost will remain the same, in which case FRM becomes a wiser option.

Fixed rate mortgages may offer the option to repay the principal or capital earlier than the agreed mortgage period without any penalty. If it does, and if you exercise the option, early repayment will reduce the total cost of the loan, and it will reduce the loan period. Sometimes, interest rates may drop further. In that case the entire loan amount can be repaid through refinancing to reduce the overall costs.

This opportunity can be used effectively to make fat profits if you have money locked down in low-paying investments, or loss making ventures. Just dispose of such investments and utilize the funds on homes or other real estate portfolios. As statistics show, the recession is arrested in countries like Germany, France, Japan, Hong Kong, etc., and the US economy is recovering very fast. It otherwise means the cost of homes will rise soon! So, even if you resell the property on a later date, you can pocket a tidy sum by way of profit.