Find out whether it’s worth it to fork over extra for a home with up-to-the-minute features and fixtures.
By Melinda Fulmer of MSN Real Estate
Given the rock-bottom pricing on existing homes these days, why would a buyer want to fork over a lot more for a new home?
In this month’s edition of Buying Advice, we’ll look at the pros and cons of buying a new home, as well as some tips for making it more affordable. We’ll check out the latest housing statistics and answer a reader’s question about whether it’s a good idea to bundle your mortgage, tax and insurance payments.
Why buy new?
Those model homes in new-home communities sure are enticing, with up-to-the-minute flooring, fixtures and appliances, but are they worth paying a premium?
That depends on the community, its location and design, experts say.
“They can bring a lot of benefits, assuming you can find a location you like,” says John McIlwain, the Urban Land Institute’s senior fellow for housing.
However, you will likely pay much more upfront for these perks: The median price of new homes sold in the U.S. in August 2011 was $204,400, according to the Commerce Department. That’s far more than the median existing home’s $165,400 price tag, which has been pulled down by the flood of bank-owned property. (See more on these stats in the “Housing snapshot” below.)
And that new-home price is far less negotiable than that of a comparable existing home. Builders say they are reluctant to discount the price and bring down the value of future sales in a community.
However, they will often throw in upgrades, such as a free fence, appliances or upgraded flooring to buyers who press for incentives. And they will often pay for closing costs to seal the deal.
What you do get in a new home – if you buy from the right builder – is a house that will need fewer costly repairs, will cost you less for updates and will have greater energy efficiency.
“The difference (in energy savings) between a new Energy Star home and even a 10-year-old home can be dramatic — as much as 30% to 50%” says Todd Frederking, sales manager for the Houston division of First Texas Homes. “These dollars per month should be considered in choosing a home.” These homes can also bring more at resale.
You won’t have to pay thousands to swap out old single-pane windows or add insulation. You won’t have to spring for new cabinets, countertops or flooring, as you might with the purchase of a 1970s or 1980s-era home. You get a home built with materials that suit your taste, and you don’t have to clear out or otherwise inconvenience yourself to get it that way.
More buyers appear to be interested in new construction; sales climbed 5.7% in September from the previous month, according to the Commerce Department.
The downside is that appraisals in new-home communities can come in low, especially if there aren’t many other new-home communities in the area to compare it with, says Ken Chitester, spokesman for the Appraisal Institute.
“Far fewer new-home communities are being built,” Chitester says. That’s putting pressure on appraisers to make tricky adjustments. Indeed, with fewer solvent builders, new-home sales are running at levels that are a third of where they were at the peak of the housing market, McIlwain says.
New homes can also be harder to appraise if they have a lot of special features. In many cases, an independent appraisal might be required to get lender approval.
And there can be a tradeoff in size. As homebuilders have worked to bring down prices post-bubble, many have had to cut lot sizes and room dimensions. In the best case, that means efficient floor plans with less to clean. At worst, it means a bedroom that barely accommodates your furniture, a backyard as small as a postage stamp and a view straight into your next-door neighbor’s window.
With so many builders cutting corners, you’d be wise to check out a builder’s reputation first and look for any pending lawsuits against the company. McIlwain also suggests going through that newly built home with a home inspector — and possibly even a contractor — before you close and move in.
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But if you are comparing two homes — one new and one existing – and both are fine options, you have to go with your gut and ask, “Where do I really feel comfortable? Will I be happier here or there?” McIlwain says.
That, he says, is how you find a home that you can live in for a decade or two, rather than a house that you might regret.
Despite record-low mortgage rates, existing-home sales declined 3% in September to 4.91 million from the 5.06 million the previous month. However, they were 11.3% higher than in September 2010, the period immediately following the expiration of the housing tax credit, according to data from the National Association of Realtors.
Lawrence Yun, NAR chief economist, looked on the bright side, noting that the housing market has been relatively stable, although at low levels. “The irony is that affordability conditions have improved to historic highs and more creditworthy borrowers are trying to purchase homes, but the share of contract failures is double the level of September 2010.”
Contract failures are sale cancellations caused by declined mortgage applications and other failures in underwriting, such as appraisal values coming in below the negotiated price.
The national median sale price declined 3.5% to $165,400 from September 2010, despite distressed homes making up a smaller share of sales – 30% versus 35% in the same period last year.
Investors continued to make up a large part of the market, with 30% of all sales being cash deals.
The biggest sale drop-off came in the West, a higher-cost area where lenders had lowered mortgage loan limits over concerns about the expiration of higher conforming-loan limits at the end of September.
Bundle your bills?
We received this question from reader “Atma” who asks: “Is there any advantage to have your mortgage, home insurance and property tax all included in one monthly payment?”
We asked Ilyce Glink, author of “Buy, Close, Move In!: How to Navigate the New World of Real Estate — Safely and Profitably — and End Up with the Home of Your Dreams.”
The best reason to pay your mortgage, real-estate property taxes and homeowners’ insurance together is that you’ll never forget to make those payments and possibly lose your home, Glink says.
Many folks have trouble coming up with enough cash to make that big tax bill once or twice a year. “It’s a big payment, and you’ve got to be pretty smart about making sure you put enough cash away so that you have enough savings at the right time,” Glink says.
Some folks don’t want to give the bank all of that money and deal with the possibility of it taking more than it needs to make the payments. The good news is that you can opt out of a tax and insurance escrow, she says, if you have enough equity in the property. We’re talking at least 30% before lenders will allow you to pay your own taxes and insurance, and some require even more.
Moreover, if you decide to place your own taxes and insurance premiums in escrow, you’ll have to pay the lender for the privilege, in the form of an upfront fee of as much as several hundred dollars.
Is it worth it? “If you’re sure you can save enough to make these payments and won’t forget to actually write the check, I’d probably try to get around having a mandatory tax and insurance escrow. I’m a big believer in maintaining as much control over your money as possible,” Glink says.
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Posted at MSN.com