For those who live in Waco or surrounding areas in McLennan County, an excellent opportunity presents itself today, both for the short-term and the long-term. Waco, TX is in the midst of a real-estate boom while still having prices that are below those of most other major metropolitan areas. Over the last five years, homes in Waco have appreciated in value by 34%, with a 12.3% increase in value during the last year alone.
In spite of the increasingly hot housing market, homes remain undervalued (as defined by Zillow’s “neutral” outlook) in many Waco neighborhoods, with a median home price of less than $170,000. That’s lower than the Texas statewide median of slightly less than $200,000. This means that, despite Waco’s affordability, other Central Texas homebuyers have not necessarily caught on to all that the city has to offer.
The bottom line is that Waco is an excellent place to put down roots and now is the time to buy, rather than rent. In this Homebuyer’s Guide for Waco, we’ll explain everything you need to know about why Waco is the place to be, how to find your perfect home there, and how the mortgage process works. Have questions? Our friendly team is always happy to talk home buying and answer your questions
What first-time home buyers need to know about Waco
Like many American cities, Waco is in the midst of a renaissance. For evidence, the Waco Cultural District website details many of the city’s current offerings: farmers markets, art events, museums, and more. And of course, there’s the “Magnolia Effect.” Waco was the setting for the very popular HGTV show “Fixer Upper” with its magnetic hosts, Chip and Joanna Gaines, co-owners of the business Magnolia Homes in Waco and Central Texas. Providing a wholesome yet intricate look at the relationship of this husband-wife team while detailing their renovation efforts in homes in the area, Chip and Joanna put Waco “on the map” for their millions of fans across the country. Today, their Magnolia Market at the Silos is a popular destination for both tourists and locals.
Recently, a $5.5 million grant has been secured for the first phase of the Waco Riverfront Redevelopment project. This money will be part of a larger $40 million project that will include more than 10,000 square feet of restaurant and retail space and 264 family apartments. Waco is hopping onboard a recent phenomenon of “mixed-use development” that does its best to locate amenities, shopping, and housing in a convenient, walkable package.
Finally, for homebuyers interested in acquiring rental properties, Waco has a large abundance of potentially profitable rentals, with an extensive group of properties costing less than $100,000.
Should you buy an existing home in Waco, or build a new one?
Individual buyers will have different opinions about whether to custom build a house; purchase an already existing, older house; or buy a new model in a subdivision. This is a personal question, but in general, if you’re someone with a little extra money and have a strong vision you’d like executed from the beginning, Waco is an excellent place to hire a builder to help your dream come true. Building a new home may also reduce the various “surprise” costs that come with owning an older home (for example, replacing central air, roof replacement). Here are some top-line considerations:
- Building a home is more expensive up front than buying an existing house. Currently, the median price for an existing home (all of the U.S.) is $223,600, while building a home has a median price of about $281,000. Other costs also exist to consider. For example, landscaping costs for a brand-new home will likely run several thousand dollars, while existing houses already have mature trees and yards with existing landscaping.
- However, the wear and tear of older homes leads to costs adding up more quickly over time. Issues with things such as the roof, the central air, or the need to simply update (due to personal preference) rooms such as the kitchen and bathroom(s), over time, can even out the cost difference.
- Finally, newer homes can be built with greater energy efficiency up front, helping reduce the costs of heating/air conditioning while also reducing to some extent the cost of the original implementation of energy-saving steps (solar cells, newer windows, etc.). Such energy savings are important because on average new homes are about 50% larger than existing homes (average size of approximately 2400 square feet vs 1600 square feet for existing homes).
Zillow provides a separate listing of new homes and existing home plans for Waco here. In addition, a rudimentary search on “Waco” and new home builders will provide you with a plethora of potential builders to choose from. For financing, TFNB offers convenient construction loans that can be turned into a permanent mortgage upon completion.
How to Buy a Home: A Step by Step List
- Looking for a home: Many excellent sites (including Realtor.com, Trulia, Zillow, and Red Fin) provide an excellent way to search for home by city/zip code, and then sort them via a wide variety of search criteria (such as price range, number of beds and baths, off-street parking, amenities such as pools or other unusual features, and square footage). This is also a good time to engage a realtor as a buyer’s agent.
- Putting in an offer: Your realtor will help you narrow your focus and put in an offer (at an appropriate price) for the house you and your family want. Prior to putting in this offer, you will apply for a preapproval letter from a mortgage lender that will confirm you qualify for buying the house you’ve chosen. At this juncture, community banks, who have an excellent grasp of the home-buying market in your immediate area, provide personalized service that may not be present at larger banks. Reach out to the TFNB mortgage team to get a glimpse of the types of services that are available.
- Inspection/negotiation/appraisal: Prior to closing, several steps need to occur. You will choose an inspector for your soon-to-be home to ensure that there is nothing that needs to be fixed prior to closing the transaction, and (sometimes) to get more leverage on the purchase price. See here for a directory of potential inspectors in the Waco area. The bank you are getting your mortgage from will also order an appraisal of your house to ensure that you are paying a fair price for your house. Talk to a mortgage officer at TFNB if you would like more information about how we would develop an appraisal of your house.
- Closing: At closing day, you will bring a certified check for the down-payment and other associated costs, sign a variety of documents, and purchase your home!
What to Know as a First-Time Homebuyer: Up-Front and Long-Term Home-Buying Costs
- Down-payment: Most 30-year loans require 20% down to avoid paying PMI (private mortgage insurance). To put this in perspective, if one were to purchase a $170,000 house in Waco, about the median price, $34,000 down would be required. Choosing to put less down (say, 10%, or $17,000) would require private mortgage insurance, a fairly small expense (less than $1000 a year).
- Taxes: In Waco, taxes will usually be between 2% and 4% of the home’s asking price (imagine a range between $3500 and $5000 for houses between $150,000 and $205,000). Of course, taxes are based on the city’s appraisal, and Waco has been aggressive in reappraising houses every year in order to take advantage of increased prices and housing demand, while helping ensure that homeowners’ appraisals and property taxes are as fair as possible
- Insurance: Homeowners’ insurance (assuming there aren’t idiosyncratic features of the property) will generally be between $60 and $80 a month.
- How the cost of the mortgage is impacted: Your mortgage lender will generally escrow all costs associated with both taxes and insurance if you are holding a loan with a down-payment; this is usually an easier way of managing these expenses compared to the other options. So, take the example given above: a $170,000 house. Let’s assume $3,500 a year in property taxes; a $136,000 loan at 4.5% interest for 30 years (see “What different mortgage loans are available?” below); and $75 of insurance a month. The loan costs $689.09 a month; taxes are $291.66 a month; and insurance is about $6-$7 a month. Hence, the monthly amount of the loan would be $988 a month.
- Other costs (inspection, closing costs, homeowner’s association): The buyer is required to pay for inspection and other closing costs associated with the loan, usually worth 2% or so of the price of the house. As Waco has a lot of newer housing stock, homeowner’s associations are also prevalent in many areas, with cost ranges from $400 a year to more than $1000.
Understanding your financing options, and which one to use, is a large part of a successful closing. These options for your new home can be organized into several categories, in which two options are available. With respect to interest rates, you can get either a fixed-rate or an adjustable-rate mortgage. Government-insured loans (through the FHA or VA) are available in instances where one only has 5% to put down as a down-payment (FHA) or for veterans (VA). Finally, there are jumbo loans (for investment properties primarily) versus regular loans. Each of these three categories is reviewed in brief here:
- Fixed vs adjustable rate: The fixed rate loan scenario was presented in the example above of mortgage financing; you obtain a 15-year or 30-year loan and the payments over the life of the loan remain the same. While the 15-year loans have higher payments because of their overall shorter term, the loan payments will be lower over the entire term because you will have paid the house off in half the time. In an adjustable rate mortgage, most loans (say, a 5/1 adjustable mortgage) will retain their original interest rate for five years, then adjust according to the movement of a chosen index rate + a premium (right now, the most common rate used is the 1-year LIBOR).
- Jumbo vs conventional: A jumbo mortgage is a mortgage that is higher, cost-wise, than the amount that can be insured by Freddie Mac/Sallie Mae, which is currently $484,350. They differ from conventional loans in many ways, although (as the subprime mortgage crisis recedes further into the past) they are gradually losing some of these differences. A greater proportion of jumbo loans are adjustable rate mortgages; however, for those that aren’t, interest rates are now comparable to those of conventional loans. Jumbo loans are also used often for multiple-unit investment properties.
- FHA/VA vs conventional: FHA financing is available for owner-occupant properties and allows individuals with limited down-payment funds to use as little as 3% down to purchase a home. VA (for Veterans Affairs) loans are a similar program that is available to veterans. USDA loans provide a no-down-payment incentive to assist those who wish to purchase homes in a rural area. See Consumer Finance Protection Bureau for more information about these loans, or speak with a TFNB representative, who (knowing the local area) will have a good idea about what houses, for example, would be eligible for a USDA mortgage.
In addition, there are many federal, state, and local programs available to potential new homeowners. Read more about them through these links, or talk to the friendly and knowledgeable mortgage loan officers at TFNB.
- City of Waco website
- Texas Department of Housing and Community Affairs
- First-time homebuyer grants and programs
- Department of Housing and Urban Development
Where do I start?
TFNB of McGregor and Waco wants to be a nimble, helpful partner to you as you engage in the home-buying process. Contact our mortgage team today for pre-approval, consultation, or just to tell us what you’re thinking when it comes to purchasing your home. As Your Bank for Life, we are here to help you with every stage of your life and finances!