Good Time to Buy for First Time Homebuyers

Federal programs and housing prices present a compelling argument for first time homebuyers to make their move, even before the market demonstrates signs of recovery.

Television character John Hannibal Smith, of A-Team fame, has a favorite quote:  "I love it when a plan comes together."  This may soon be your line of choice, too-particularly if you've been waiting for the right time to buy your first home.

As much as your heart might be telling you otherwise, now is a great time to make your first home purchase. The financial advantages are compelling, because of the tax breaks, low mortgage rates, and depressed home values. If you start running the numbers on what you'll save by purchasing a home this year, you may be able to overlook those feelings of uncertainty.

The three factors that decide how much a home purchase ultimately costs you include: the price of the property, the mortgage interest rate, and the size of your down payment. Here's a look at each.

Home purchase price tag

According to the National Association of Realtors, January 2009 home prices fell in all regions of the country relative to the prior year. The western quadrant of the States experienced the steepest decline, with the average home purchase price slipping from $295,500 to $220,000. In the Midwest, the national home price dropped from about $148,000 to $138,100.

If you're in California, your home purchase could be $70,000 cheaper than it would have been one year ago. That amounts to a monthly payment differential of about $430, assuming a mortgage rate of 5.5 percent.

A secondary factor is the recent enhancement of the tax incentives available to new homebuyers.  Purchase a home between now and December 1, and you may qualify for a tax credit of 10 percent of the cost of the property, up to $8,000.

Mortgage interest rates for first time homebuyers

On every $100,000 of mortgage loan outstanding, it only takes a rate drop of about 80 basis points to reduce your monthly payment by $50. Thus far in 2009, average mortgage rates on 30-year, fixed-rate loans have peaked at about 5.25 percent. This compares to last year's average rates in January and February of 5.76 and 5.92, respectively.

New homebuyer cash upfront

Just last year, the Feds threw increased support behind the FHA's mortgage insurance program. Previously, the FHA-insured mortgage wasn't an option for many new homebuyers because the maximum loan limits were too low. Those limitations have since been addressed and raised to as high as $625,500 in some markets. That allows many more first time homebuyers, possibly including you, to take advantage of the FHA's minimal down payment requirement of 3.5 percent. You can even use a gift from a relative to cover it.

Home prices are down, tax incentives are high, mortgage rates are low, and down payment requirements may be negligible. Now how's that for a home purchase plan coming together?