Don't Dither. Buy Your First Home Now

OUR READER

WHO: Mark Pearson, 32

WHERE: Newport, Ore.

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QUESTION: Should I jump in and buy my first house?

Mark is one of millions of Americans eager to become a homeowner, drawn by low interest rates, affordable property prices and the government's tax credit for first-time buyers. That credit is worth 10% of the purchase price, up to a maximum of $8,000. (The credit not only cuts your tax bill dollar for dollar, but if you wouldn't normally owe $8,000 in taxes, you get a refund.) The credit begins to phase out for individuals with an adjusted gross income of more than $75,000 and for married couples filing jointly who earn $150,000. And you must live in the home for three years.

Trouble is, the mortgage process is more challenging than it used to be, and Mark is wary of obstacles thrown up by lenders and appraisers that could prevent him from closing his deal before the tax credit is set to expire on December 1. It's not as if he is overreaching. His heart is set on a small, three-bedroom home in the colorful seafood-packing and beach resort town of Newport that's priced at $150,000. "I like to surf," he says. "It's one of the reasons I moved to the coast." He has a good job as a mechanical engineer for the Georgia-Pacific paper mill in nearby Toledo, Ore., and he's saved up 5% of the price for a down payment.

Three years ago, banks would have been throwing cash Mark's way. But since May, appraisers have been following a stricter code, designed to prevent collusion among themselves, mortgage brokers and lenders (see Appraisal Apoplexy). The tougher rules apply even to relatively small purchases like Mark's. It took him three weeks to get the appraisal on the home he wants --and he suspects the lender will require a second appraisal, a common practice in his area, which draws a lot of investors and second-home buyers. That will take time.

To float or not. Meanwhile, Mark's mortgage broker is recommending a 30-year fixed-rate loan with a float-down option. A float-down reduces your mortgage rate if market rates fall during the lock-in period but shields you from a rise. Typically, the rate has to fall by one-fourth of a percentage point or more for the borrower to benefit. Most lenders offer a float-down free for a lock-in period of less than 90 days; if you want a longer lock-in period -- perhaps because you suspect it will take more than three months to close -- you'll pay for it. A typical fee for a float-down longer than 90 days is one point, or 1% of the loan amount. On Mark's $142,500 loan, he'd pay $1,425.

Is it worth it? Home-loan rates have moved in a tight range; the average 30-year fixed loan has swung between 4.8% and 5.6% since May. The Federal Reserve Board wants to keep rates low, but it cannot absolutely control the cost of mortgages. If the float-down is free, Mark should take it. Otherwise, the payoff is questionable. His loan isn't so big that a slightly higher interest rate would be punishing. Besides, too much rate-watching is a distraction from the urgent matter at hand, which is to settle. With $8,000 on the table and his perfect house all but in his hands, Mark should basically agree to anything the lender asks that will get him the key and the deed as soon as possible.