The U.S. housing market has seen a rapid increase in prices since the pandemic. While many buyers wait on the sidelines hoping for a better time to buy, the supply and demand dynamics still aren’t in their favor. Since the pandemic, housing inventory has dropped by 36%. Below is a chart breaking down the activity across the country’s regions as of December 2023.
(Source: Realtor.com)
Our expectation is that even if housing prices drop slightly, it will be short lived since the supply / demand equation doesn’t favor the new homebuyers. While a correction in prices would help buyers, it doesn’t seem that is on the near horizon which leads us to evaluating how to choose a mortgage if you are looking to enter the market.
When it comes to choosing a mortgage, there are several options available to homeowners. Understanding the different types of mortgages and the decision making criteria for each can help you find the best fit for your financial situation.
Fixed-rate mortgages: This type of mortgage has a fixed interest rate for the entire loan term, usually 15 or 30 years. This means that your monthly payments will remain the same throughout the life of the loan. This type of mortgage is best for those who want a predictable monthly payment and are planning to stay in their home for the long-term.
Adjustable-rate mortgages (ARMs): This type of mortgage has an interest rate that can change over time. The initial interest rate is usually lower than a fixed-rate mortgage, but it can increase or decrease depending on market conditions. This type of mortgage is best for those who plan to move or refinance within a few years and are comfortable with the risk of changing monthly payments.
FHA loans: These loans are insured by the Federal Housing Administration (FHA) and are available to those with lower credit scores and down payments. They often have more lenient qualifying criteria than traditional mortgages, making them a good option for first-time homebuyers or those with less-than-perfect credit.
VA loans: These loans are backed by the Department of Veterans Affairs (VA) and are available to veterans, active-duty military members, and eligible surviving spouses. They often have more favorable terms than traditional mortgages, including no down payment and no private mortgage insurance (PMI) requirements.
When deciding which type of mortgage to choose, consider your financial situation, credit score, and down payment. It’s also important to consider the length of time you plan to stay in your home, your tolerance for risk, and your long-term financial goals.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
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