If you are debating on whether you should make an offer on a new home before the New Year, now is the time to stop deliberating and submit your bid. Between 2013 tax benefits, and avoiding mortgage rate roulette and changing lending rules, closing before the end of the year can offer significant financial benefits. Top mortgage and real estate experts share five ways you will benefit if you buy a home by December 31, 2013.
1. Avoid rising rates roulette: Mortgage interest rates, while still attractive, are up 1 to 2 percent over this time last year. It’s possible to lock in a 30-year fixed rate mortgage at about 4.5 percent, says Shari Cashman (Gencor Mortgage). According to the Mortgage Bankers Association’s forecast, mortgage rates will likely rise to about 5 percent in 2014. If you buy now and the rates drop, you can always refinance. If you wait and the rates rise, you are stuck, says Todd Huettner (Huettner Capital).
2. New Year, new lending rule: Lending rules will change on January 1, 2014 and it could be harder to get a loan. 2014’s rules will allow you to borrow less, at your same level of income, says Huettner. 2013’s current mortgage rules allow for a 45% total debt to income ratio (DTI); in 2014, the DTI will go down to 43%. What does this mean? You need to make or reduce your debt in order to buy the same house!*
3. Easier financing: If you are waiting for home prices to decrease, don’t. 2014’s mortgage changes could make it harder to get financing, says Robert J. Spinosa (RPM Mortgage). So if you are looking to save a few dollars by waiting for home prices to drop, you could miss your window to secure a mortgage entirely.
4. Lower sales could mean higher inventory: It’s an after Christmas sale before Christmas! While 2013’s housing theme was limited inventory and higher prices, historically, the fourth quarter of the year usually slows down the housing market and this year is no exception, says Greg Cook (First Time Buyers Network). Housing sales have been declining since September so inventory has increased. According to the National Association of Realtors®, existing-home sales declined for the second consecutive month in October, while constrained inventory means home prices continue to see double-digit year-over-year gains. You may get the deal of December!
5. Maximize tax deductions: It’s important to remember that if you buy before the end of the year, you can begin deducting interest and building equity immediately, says Cashman. Some closing costs and points are tax deductible in the year you buy a home. Buying now allows you to include them on your 2013 tax return. If you buy even one week later in January, you have to wait a year for your 2014 return to take the deduction, says Huettner.
*If you decide to buy in 2014 and need to lower your DTI, Huettner recommends the below tips:
- Make more or owe less. If you do not project your income to increase, paying down debt is the easiest and fastest way to lower your debt to income.
- Paying off your car loan is one of the best ways to lower your DTI, because it is a short loan with higher payments compared to student loans, home loans, or even credit cards.
- Consolidate debt into a home loan or other loan resulting in a lower payment
The best and safest way to lower your DTI is to simply make sure the lender is calculating your income and debt correctly. Work with an experienced lender, and work together to answer the below questions: