Everything you always wanted to know about buying a house but were afraid to ask

Here's what you need to know if you want to sell your house

And this is everything you need to know about Rhode Island's real estate market right now

When Madelyn Hill and Travis Pare started looking to buy their first home together in December 2020, the market was a madhouse.

They lost bids to buyers offering large sums over the asking price, or to people who offered less but would waive house inspection.

As mortgage rates have doubled since January, nearly reaching 7%, buyers have more power in what is still a seller's market. Buyers have also been turning to types of mortgages not seen in big numbers for years.

Mortgage lenders and real estate agents all say that one of the first things a prospective homebuyer should do is sit down with a lender and figure out their finances.

One way of thinking about budget is in terms of monthly mortgage payments, as buying power has been constrained by rising interest rates.

What do higher mortgage rates, still-high prices mean for an average family?

Doubled mortgage rates, coupled with housing prices up 37% and condo prices up 36% since 2020, means the buying power of consumers, especially first-time home buyers and people in lower-income brackets, is way down.

So what does the increase in prices and mortgage rates mean for some average families?

According to the U.S. Census Bureau data, the median household income between 2016 and 2020, was $49,000, while the median income for Providence and surrounding areas in 2022 is $68,320 for a single person or $78,080 for two people.

Sticking to the rule of thumb that no more than 30% of income should be spent on housing, how big a mortgage can average families in Rhode Island afford, and how much house does that mortgage buy? Take the following examples:

• $49,000 yearly income, the median income per the U.S. Census Bureau, can afford a $1,225 mortgage, which buys $310,000 at 2.5% or $194,000 at 6.5%.

• $40,620, 60% of the area median income, can afford a $1,016 mortgage payment, which buys $257,000 at 2.5% and $161,000 at 6.5%.

• $54,150, 80% of the area median income, can afford a $1,354 mortgage payment, which buys $343,000 at 2.5% and $214,000 at 6.5%.

• $68,320, 100% of the area median income, can afford a $1,708 mortgage payment, which buys $432,123 at 2.5% and $270,253 at 6.5%.

• $81,240, 120% of the area median income, can afford a $2,031 mortgage payment, which buys $514,000 at 2.5% and $321,360 at 6.5%

• $97,600, 100% of the area media income for a family of four, can afford a $2,440 mortgage payment, which buys $617,000 at $2.5% and $367,000 at 6.5%

What are your house-buying priorities?

New homeowner Ben Wallace found one of the most important things he and his partner did as they prepared to buy a house this year was to list their priorities to better weigh them.

Closer to the city, lot size decreases. Decrease the monthly mortgage payment and buying power goes down. More rooms mean higher costs.

"Buying a home with a companion, we had to do the work of figuring out what both of us were looking for, and we spent a lot of time making lists, deciding what is a must-have," Wallace said. "You need an understanding of what you want."

Mortgage lender TJ Curran, with Semper Home Loans in Providence, said he believes owning a house is the fastest way for someone to build a better financial future, even if interest rates are higher than desirable.

"The challenge is the way housing values have appreciated over the last few years," he said.

Buying a house involves long-term planning, including time to accumulate savings.

For Wallace, saving enough for a down payment was possible only because of the pandemic-related pause in student loan payments, which opened up a way for him to save.

For Pare and Hill, the savings came from not having to pay rent, as they lived with their parents.

What's an ARM and why has it become so popular?

Wallace and his partner's initial plan to get their mortgage payment as low as possible was to take out an adjustable-rate mortgage, or ARM, for the property.

Adjustable-rate mortgages usually have slightly lower interest rates for the first five to 10 years, and then change with market conditions. For Wallace, that meant a rate of 4.875%, while the rate for 30-year mortgages was above 5%.

A day before the closing, they saw their bank advertising a 30-year mortgage for the same rate they had been locked into for the adjustable mortgage. They convinced the bank to give them the lower rate on the 30-year loan.

Real estate agents and mortgage lenders say that adjustable-rate mortgages are fine for people who understand what they're getting and why, as they are often used by those who plan to sell their house before the interest rate can be adjusted, usually in the first 10 years. That was Wallace's plan. They warn, however, that there is no guarantee interest rates will go down.

"The house was smaller than we wanted and we don't see it as a forever home, but we wanted to get into home ownership," Wallace said.

At BankNewport, 90% of the current businesses is in 10-6 adjustable-rate mortgages, which offer a fixed rate for 10 years and then adjusting every six months for the following 20 years, said Gina Lauo, senior vice president of Residential Lending Sales.

When interest rates were around 3%, the ratio was the opposite, with 90% of the loans the more common 30-year fixed rates.

What's a point and why would I buy one?

Wallace and his partner are an example of another trend in the housing market. They bought "points" on the mortgage, meaning paying extra for the bank to offer them a lower interest rate.

When interest rates were low, few residential buyers considered paying to lower their interest rate or considered adjustable-rate mortgages, but as they jump up, those products are becoming increasingly popular for the residential market.

A bigger down payment or a contingency fund?

When Hill and Pare started looking for houses, they were conservative with their budget, but found that they needed to pay more to be able to get anything.

The house they finally closed on in September in North Scituate had a few perks the couple used to consider how much they could afford. After an inspection, they found the septic system was in good shape, they saw new appliances and the roof had been replaced recently.

That meant the couple could spend more money on the mortgage and less on their contingency fund for emergency repairs.

Many first-time home buyers can be caught off guard by the expenses of owning a home. There are knowable things like private mortgage insurance, known as PMI, for mortgages where the down payment was less than 20%, and property taxes.

Then there are the unknowables, like when the hot water heater will break, if the roof will spring a leak, when the refrigerator will stop running or when the AC unit gives its last gasps in the height of summer.

While the known expenses can be factored into a total monthly rent cost, having a contingency fund left over after buying can be important for emergency repairs, according to Chris Whitten, owner of Premeer Real Estate.

"The average hot water heater's life expectancy is seven to 10 years, so you need to have money to replace that," Whitten said.

Curran said people need to have enough money, after they buy a house, to not feel the pinch in an emergency.

"You shouldn't be broke when you move into a house, because that's setting yourself up for failure," he said.

What resources are available to first-time home buyers?

First-time home buyers can access a few different federal and state programs that help with down payments. RI Housing also offers online homebuyer education classes.

But, who qualifies as a first-time home buyer? The term is a misnomer as it includes anyone who hasn't owned a home in the last three years.

State programs through RI Housing include:

• "Extra Assistance," a loan to pay for up to 6% or $15,000, whichever is lower, toward a down payment

• "10kDPA," a $10,000, zero-interest loan for a down payment, with no monthly payments, that is only due when the house is sold or no longer being occupied by the owner.

• "FirstHomes Tax Credit," which gives up to a $2,000 yearly tax deduction, tied to interest paid on a mortgage, for the lifetime of the loan.

• "FirstGenHomeRI," which gives up to $25,000 toward a down payment and/or closing costs in the form of a zero-interest loan that is forgiven after five years, open to "first-generation home buyers," that is, people whose parents never owned a home during their lifetime or lost a home to a foreclosure.

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Do you have any other questions or issues that should have been covered in this article? Email reporter Wheeler Cowperthwaite at wcowperthwaite@providencejournal.com.

This article originally appeared on The Providence Journal: Buying a Rhode Island home: What to know about mortgages, the market