Q & A Friday
Thanks to everyone who has responded and come up with some good questions recently. Here are a few from this week that I haven’t yet addressed…
[If you have questions, submit them here]
I’m sick of throwing money away each month paying rent. I want to own a home. My goal is to buy a home and hopefully it will increase in value so one day I can refinance and pay off my student loan debt. However, can I still even qualify for a home loan with all my student loan debt?
Student loan debt is a major issue. It’s so big I think it could be the next Achilles heel that crashes the economy. But every month we have clients who purchase their first home even though they have quite a lot of student loan debt. In fact, student loan debt won’t prevent you from getting a loan, it will only limit how much of a loan you can get approved for based on your debt to income ratio. It also depends on who you try to get your loan from, as some lenders allow a higher debt to income ratio than others.
My wife and I purchased our first home while still carrying a lot of student loan debt. However, within a few years the home had appreciated enough that it allowed us to refinance our loan and pay off all our student loans.
There is of course no guarantee on what will happen to home prices in the future, but even if home prices don’t improve drastically, you could still come out ahead compared to renting with the additional tax deductions you get from owning versus renting. The tax savings can equal hundreds of dollars which could be applied to help paying off your student loans faster.
Your first step is to find out what you qualify for so we can better assess your specific situation. I can help you with this process, just reach out when you’re ready.
I just inquired about refinancing my loan and I was shocked by how much interest rates had risen recently. Do you think increasing interest rates will cause the real estate market to dip or even crash again?
Interest rates are on the rise because the economy as a whole is doing very well and has been for quite some time, at least comparably from 5-10 years ago. Interest rates were forced down to record lows in order to help stimulate the economy. Currently rates are still in the mid to low 4s, and it is projected to rise over the year to the mid to high 4s.
The interest rate you get quoted from lenders is now more than ever tied to your credit score, so even if a borrower hears that 30-year loans are at 4.5%, they may get quoted a loan at 4.875% based on their credit and other financial indicators.
Do I think interest rates will cause the market to crash? No. At least not on their own. Rising interest rates can and will cool down a heated real estate market. Properties become increasingly more expensive to buy as rates increase. Therefore, less people buy homes, which ultimately leads to more supply of homes on the market not selling. This in turn leads to homeowners being forced to drop their prices in order to sell. This trend continues as home prices fall until the price of homes becomes so attractive (and more affordable) that buyers begin to purchase them again. This drives down the inventory of homes and it becomes a sellers’ market, again and home prices go back up.
The market always goes in cycles. History has shown that, every once in a while, that cycle gets extreme like it did 10 years ago. The key is to monitor the supply of homes on the market. It’s often an early indicator if a market is shifting into another cycle. Also, keep in mind that cycles can happen even on a micro scale. What is happening on the national scene could be quite different from what happens in your hometown.
Right now in Boise, our inventory is at record lows, in part from our high population growth. But with rising interest rates, that inventory could rise. It’s too early to tell. Idaho is still much cheaper than many surrounding states, so rising rates could also push more people to move to Idaho for the lower cost of living, keeping the real estate market strong. Time will tell.
Some of these answers get a bit long-winded, just know that my goal is to give enough context so that there is less confusion, that you and others can make more informed decisions. Until next time.
Cheers and happy Friday!