Can you afford to wait to buy a home?

Rock-bottom inventory is fueling a run-up in home prices as interest rates rise and ratchet up pressure on buyers to act. Should you be desperate? Will prices continue to surge to new heights?
In this installment of Buying Advice, we'll ask agents, a housing analyst and an economist what to expect this year, and we'll also check in with the latest housing statistics.

Moreover, we'll look at the rising cost of Federal Housing Administration loans — including the added expense of permanent mortgage insurance — and examine whether those loans are still a good option for first-time buyers. (Bing: What is mortgage insurance?)


Wishing, waiting, worrying
For buyers in many tight markets, the task of buying a home this summer seems almost Herculean. Scarce supply and an influx of cash investors have made it hard for many prospective buyers to get a bid accepted.

"It's a dogfight," says Kris Vogt, president of Coldwell Banker Residential's Sacramento, Calif., and Tahoe division. With less than a month's supply of homes on the market there and investors accounting for 37% of sales, it's hard for regular folks to make a deal.

Many buyers, he says, are exhausted after making up to 40 or 50 unsuccessful offers on homes. He says those buyers can start to feel hopeless and decide, "I will take some time off."

Buyers are beginning to feel the pressure now that interest rates are once again climbing. The average rate on a 30-year-fixed mortgage rose from a monthly average of 3.68% in the first week of January to an average of 4.68% in the week ending June 28, according to mortgage-data website HSH. Rates took their biggest weekly jump since 1987 in the last week of June, according to Freddie Mac.

"Every tenth of a point that rates go up makes buying more expensive," says Jed Kolko, Trulia's chief economist. "It will almost certainly be more expensive to buy six months, a year or even two years from now."

A rise in rates from 4.5% to 5% adds $75 to the monthly payment on a $300,000 house with $50,000 down.

But Kolko says rates will have to rise to at least 10.5% before renting becomes cheaper, on average, than buying a similar home. "It's still 41% cheaper to buy than to rent on average nationally."
And we're still far from the double-digit rates that many first-time buyers' parents experienced in the 1980s. Capital Economics predicts that rates for a 30-year-fixed mortgage will average 4.5% at year's end, rise to 5% next year and to 5.5% the following year.

Buyers, so far, seem undaunted by price increases. Sales continued their upward chug (more on that below), even as Standard & Poor's Case-Shiller 20-city home-price index reported the largest annual home price gain since early 2006 – a 12% increase for the year ending this past April. New-home sales are at their highest point since July 2008.

But Kolko says rates will have to rise to at least 10.5% before renting becomes cheaper, on average, than buying a similar home. "It's still 41% cheaper to buy than to rent on average nationally."

And we're still far from the double-digit rates that many first-time buyers' parents experienced in the 1980s. Capital Economics predicts that rates for a 30-year-fixed mortgage will average 4.5% at year's end, rise to 5% next year and to 5.5% the following year.

Buyers, so far, seem undaunted by price increases. Sales continued their upward chug (more on that below), even as Standard & Poor's Case-Shiller 20-city home-price index reported the largest annual home price gain since early 2006 – a 12% increase for the year ending this past April. New-home sales are at their highest point since July 2008.


Private mortgage insurance: Are FHA loans still a good choice?
First-time homebuyers have traditionally flocked to FHA loans because they are easier to qualify for, require less of a down payment (3.5%) and have lower rates than what borrowers might receive on a conventional loan. But that equation is changing as the cost of these loans has gone up.

The FHA recently increased mortgage insurance premiums by a tenth of a point — the third such increase since 2010 — to rebuild its cash reserves. It also for the first time began requiring mortgage insurance for the life of loans with less than 10% down.

That's right, the life of the loan, not just until the borrower achieves 20% equity or pays off 20% of the loan balance.

This change can add thousands to the cost of a loan, according to a comparison provided to MSN Real Estate by United Guaranty, a private mortgage insurance company.

For a $200,000 FHA 30-year fixed loan at a 3.25% rate with 3.5% down, the monthly payment would be $1,111. A conventional loan for the same amount with 5% down, a 3.75% rate and a single upfront private mortgage insurance payment of $6,080 at closing would cost $926 a month, or $185 less than the FHA loan. That's $2,220 less a year.

For those who can't afford the big payout at closing, the same loan with a monthly PMI payment would cost $1,073 a month, $38 less than FHA and $456 less a year. (Those amounts do not reflect today's rates and are for comparison only.)

For those who can qualify for a conventional loan, it's much cheaper to pay for private mortgage insurance each month or have your lender pay it for you in exchange for a slightly higher interest rate.

Of course if your lender is paying it for you, you can't cancel it and are stuck with the higher interest rate. By paying for it yourself, you have the option of canceling when you achieve 20% equity, which is good considering today's rising home values.

Under federal law, your lender is required to cancel it when your mortgage balance reaches 78% of your home's original value.

With today's double-digit increases in values, it is possible that you could cancel private mortgage insurance after the minimum of 24 months, says Scott Schang, branch manager of Broadview Mortgage in Orange, Calif. Many insurers will give a percentage rebate against the original upfront charge if you cancel within a certain period, Schang says.

So who should still use FHA loans? Those who don't qualify for anything else, Schang says.
The FHA will make loans for people with credit scores under 600, he says, and with debt-to-gross income ratios of more than 50%. "It absolutely opens the door to homeownership for someone who doesn't qualify for an alternative program," he says.