Financing the Home Purchase:2006 Profile of Home Buyers and Sellers
For most households, purchasing a home is one of the largest financial transactions they will ever make. The majority of home buyers do take out a mortgage in order to purchase a home and so financing is one of several important aspects of the home buying process. There are many financing options available to buyers that allow them to consider the length of the loan term, the use of a fixed or adjustable rate mortgage, and how much of their savings or other assets they want to use toward a downpayment.
In 2006, NAR surveyed recent home buyers about how they financed their home purchase. Included in the survey were questions about whether or not the buyer took out a mortgage loan, what type of loan they used, the amount of the home price that was financed, and sources of downpayment. Results from the survey are included in The 2006 NAR Profile of Home Buyers and Sellers. Below are highlights of that report that focus on financing the home purchase.
Financing the Home Purchase
The majority of home buyers need – or choose -- to finance at least part of their home purchase. In 2006, 92 percent of buyers reported that they financed the purchase of their home. First-time buyers were more likely to take out a loan to buy their home than were repeat buyers. That is likely because repeat buyers often have a sizable amount of equity in a home already, thus allowing them to use the proceeds from the sale of that home towards the purchase of another.
While there is little difference across U.S. regions in the percentage of first-time buyers who financed their home purchase, there was more variation in the use of mortgages among repeat buyers. Eight-five percent of repeat buyers in the Northeast financed their home purchase, while 90 percent of repeat buyers in the other regions used a mortgage.
Financing and Age
One factor that could help explain the difference between repeat and first-time buyers’ opting to finance their home purchase is age. Repeat buyers are typically older than first-time buyers, have higher household income, and may have other financial assets on which to draw in order to buy a home. Buyers 45 years and older are less likely to finance their home purchase than younger buyers, and the share of “financing” buyers decreases significantly after age 65. Older buyers generally have equity from homes they owned previously on which to draw. Additionally, to the extent that older buyers may be downsizing to a less expensive property, the need for mortgage financing may be reduced.
Amount of Financing
while nearly all buyers used a mortgage to finance their home, the amount of that mortgage relative to the home purchase price varied considerably. The typical buyer financed 91 percent of their home purchase. Again, first-time buyers tended to finance more of their home purchase than repeat buyers. The typical first-time buyer financed 98 percent of their home and more than four in 10 financed the entire amount. The typical repeat buyer financed 84 percent of their home purchase and 19 percent took out a mortgage for the entire amount of the home purchase price.
The share of the purchase price financed with a mortgage varied by region. In the Northeast, the typical repeat buyer financed a smaller percentage of their home than did repeat buyers elsewhere. At least half of first-time buyers in the South financed the full purchase price of their home.
Sources of Downpayment
For many home buyers – particularly first-time purchasers – accumulating a downpayment can be a challenge. Savings was the chief source of downpayment funds for home buyers in general, and for 73 percent of first-time buyers. And while repeat buyers can draw on the equity from the previous home – 62 percent of repeat buyers used the proceeds from the sale of a primary residence for a downpayment – still, 40 percent drew on savings for a downpayment. The second most popular source of downpayment funds for first-time buyers was a gift from relatives or friends (22 percent).
There are other sources for downpayment funds besides savings, gifts or equity from a previous home. Ten percent of first-time buyers used the proceeds from a sale of stocks or bonds, as did six percent of repeat buyers. While current tax law allows use of funds from a 401(k) or pension fund – tax free – for a downpayment on a home purchase, only four percent of all buyers accessed funds from such an account for their downpayment.
Types of Mortgages
There are a number of different types of mortgages available to home buyers, although they can be broadly categorized as either fixed rate or adjustable rate. Within these broad categories of mortgages, however, the specific terms can vary widely. Some buyers start with an adjustable rate loan and then “convert” to a fixed-rate mortgage. Others begin with a fixed-rate mortgage that then adjusts the rate periodically. The defining characteristics for most of these mortgages is whether the interest rate is fixed for the life of the loan, fixed for only an initial period of the loan, or whether the rate varies throughout the loan period.
Seventy-one percent of recent home buyers reported that they had a fixed-rate mortgage; 8 percent had an adjustable rate loan. Repeat buyers were somewhat more likely than first-time buyers to finance their home purchase with a fixed-rate loan. First-time buyers were more likely than repeat buyers to start out with fixed-rate loan that eventually had rates that adjusted.
Perhaps surprisingly, three percent of recent home buyers did not know the type of mortgage loan they had.
The Internet as a Source of Information
The Internet has increasingly become a major source of information for both home buyers and sellers as they search for a home to purchase. Of those recent buyers who used the Internet in their home search, 5 percent applied for a mortgage online, and 7 percent pre-qualified for a mortgage online. Four percent found a mortgage lender online after having searched for a property on the Internet.
The Role of Real Estate Professionals
Real estate agents are not mortgage lenders. But because they are the primary source of information about the home purchase transaction for most home buyers, they often are the “ones buyers turn to” for information about financing options. Among recent home buyers, 19 percent reported that their real estate agent provided a better list of mortgage lenders.
A Home is “A Home”
Most households purchase a home because of the desire to “own a home of one’s own.” But the benefits of homeownership extend beyond the value of a home as shelter. Homeownership provides an opportunity to build a nest egg through the accumulation of equity as a home appreciates in value and as the mortgage is paid down. Even in the wake of a slowing housing market, more than half of recent buyers view their home as a better investment than stocks.
For More Information
The questions regarding home financing in the 2006 survey of home buyers and sellers were limited. But more details about home finance – types of mortgages, average/median downpayment, terms, type of lender, etc. – are collected by the Department of Housing and Urban Development and the data published in compliance with the Home Mortgage and Disclosure Act (HMDA). The data is regularly analyzed by NAR. For more information on HMDA data, email NAR Research
The NAR Profile is based on a survey of home buyers and sellers and provides information on demographics, housing characteristics and the experience of buyers and sellers in the housing market. Buyers and sellers also share information on the role of real estate professionals in their home sales transactions. The 2006 survey results are representative of home purchases between July 2005 and June 2006. Consumer names and addresses were obtained from Experian, a firm that maintains an extensive database of recent home buyers derived from county record. Information about sellers comes from those buyers who also sold a home.