Financial Benefits
Purchasing a home is a valued investment which can have many financial advantages. Because homes generally increase in value, each monthly payment you make is an investment in your future. And even if your home doesn’t appreciate much, which is rare, you will benefit from the monthly savings that result from paying down the remaining balance due on your mortgage.
With each monthly payment, you also build home equity…the difference between what your home is worth now and what you paid for it. When you sell, you collect the equity as your profit. This profit or gain can help you purchase your next home, perhaps moving up to a larger one. Or you can tap into the equity for college tuition, home improvement…just about anything. Also, making payments toward, and ultimately paying off a mortgage is an excellent way to establish a good credit rating and prove financial stability.
Owning a home is also a powerful tax benefit. You can deduct both the interest on home mortgage payments as well as the cost of property taxes.
Perhaps the most intangible, yet greatest benefit of homeownership is the personal satisfaction of living in a home that you own. Home ownership frees you from the whims and dictates of a landlord. There will be no unexpected rent hikes and you are free to keep pets, plant a garden and remodel or redecorate to reflect your personal style when building a new home office or making your home space. A home gives you and your family a feeling of stability and commitment. A special sense of security and satisfaction comes as you begin to put down your roots in a neighborhood. Your family will enjoy the benefits of this decision for many years
Where to Begin
The process of buying a home can seem long and complicated – so much to learn and understand…deciding what you really want in a home…wondering if you can afford such a major purchase.
What can you afford to spend on a home?
The best approach in buying a home is to first understand how a home is financed. There are three crucial elements: (1) a down payment, (2) closing costs, and (3) the mortgage. When you know the amount of down payment and closing costs you can afford, and how much mortgage money you will be able to borrow, you will then know how much you can afford when searching for a home to buy.
Down Payment
A down payment is money you pay up front toward the house. The more cash you pay as a down payment, the less you will have to pay each month on the mortgage. Typically, a conventional lender would like to have 20% of the purchase price as a down payment. With 20% down, you will almost always avoid paying mortgage insurance (PMI), which is an added amount to your monthly payment, but does nothing to pay down your balance (it only benefits the lender as an insurance policy against default on loans with less than 20% down).
In some cases, involving an excellent credit history and sufficient income, lenders will agree to as little as 5% as a down payment. This may give you more cash for other moving expenses, but it will also increase your monthly mortgage payments.
Loans through the Federal Housing Administration (FHA) or Veterans Administration (VA) and USDA (Rural Housing Loans) carry very attractive down payment requirements of between zero down and 5%. There is usually a maximum on the amount of money you can borrow with these types of loans, and VA loans are only available to veterans. These types of government backed loans are available at competitive interest rates. An additional benefit is that the seller may pay some of the closing costs and may also contribute towards your down payment! In addition, when the time comes to sell, the next buyer may be able to assume the loan, subject to certain conditions.
Sometimes secondary financing may be used as an alternative way to finance your new home and increase your down payment. In this case, the lender may structure a second loan to cover part of your down payment…here’s an example: You have 10% of the purchase price to put down and your lender structures a second mortgage loan in an amount equal to another 10% of the purchase price. This in effect gives you a 20% down payment and thus allows you to qualify for a more attractive loan and avoid private mortgage insurance (PMI). This would be called an 80-10-10 loan. Also, it need not be the lender making the second loan…it could be the seller taking a small second note on the sale of the property.
Closing Costs
Closing costs are simply this: the costs of borrowing money, establishing the loan, cost of appraisal, purchasing title insurance, establishing escrow charges, conducting pest inspections and preparing the necessary documents to finalize the sale. These costs may be significant and are easily overlooked by a first time buyer.
(1) The Costs of Borrowing Money. This includes what some lenders call “discount points,” a one-time charge to adjust the yield on the loan to what market conditions demand. Each point equals 1% of the mortgage amount. Two and one-half points on a $100,000 mortgage would cost $2,500 paid upfront or financed into the loan.
(2) The Costs of Establishing a Loan. These might include the loan origination fee, cost of credit reports and an appraisal. Premiums for hazard and mortgage insurance are usually paid at closing. Also, pre-paid interest will be collected for the period between closing and the end of the purchase month.
(3) Escrow Costs and Document Preparation. Escrow and title fees as well as other fees are normally charged by the escrow holder, usually a local title and escrow company of the buyer’s choice. The escrow holder is basically a facilitator to the transaction. These are some of the fees you can expect to be charged in the escrow process: Title insurance which covers the search of public records (a title search) to determine if the property you want to purchase is free from any other ownership or liens and insures against the possibility of any liens not found in the search, recording and transfer fees covering the legal recording of the deed with the proper governmental agencies as well as the transfer of taxes normally paid to the county where the home is located, your loan fees, other prepaid fees and prepaid loan interest as well as property tax proration’s.
Overall closing costs very from state to state and county to county. Check with Phil Reith for an estimate of your closing costs.
How Do I Finance My home?
The single most important aspect of your home purchase is the loan, or mortgage, you obtain. The amount of this loan will be decided by the price of the home and your down payment.
Generally, the amount of your down payment and income/debts control the price range of homes you can look for, and hence, the size of loan you will need.
A lender will analyze your income to determine your ability to repay the loan. A general rule of thumb to calculate how much loan payment you can handle is to figure 25-30 percent of your gross, pre-tax monthly income.
The interest rate and the principal amount of the mortgage will determine the amount of your monthly payments. The higher the interest rate, the higher the monthly payments. Note that you must also add property taxes, home insurance costs, and homeowner’s association fees, if any, to these figures for a complete, realistic monthly obligation.
What to Look for in a Home
The best way to prepare for the home search is to be clear about your needs and wants before you look. First, decide where you want to live. Location is the single most important factor in buying a new home. It will partially determine the price of the home and will be a powerful influence on your lifestyle.
If you are from out of town, ask co-workers and acquaintances for their recommendations. More importantly, rely on the services of a seasoned real estate professional. They make it their business to know the area – with its neighborhoods, shopping, and schools etc.
Once you’ve identified a geographic area for your new residence, decide what you want in a home. There are three basic choices: a new or an existing (resale) single family home; a multi-family property (duplex etc.) and/or a condominium/townhome.
The “new” versus “existing” questions means weighing the benefits of established neighborhoods and sometimes superior building materials against amenities, appliances, and style. Purchasing a new home requires the added expenses of window coverings, interior upgrades, landscaping, and a great deal of time and patience. To many, an existing home that has been well cared for is much more attractive than a new home requiring months of decision making and cash outlay.
A single family home gives you the most privacy and choice. It is generally more spacious than a condo and provides yard space for children to play and outdoor hobbies such as gardening. Landscaping can be designed to be maintenance-free, giving maximum enjoyment for minimum work. Condos and townhomes free you from the burden of general upkeep and provide common areas with pools and other recreational facilities. They are also usually more affordable, however there are many more rules and regulations to contend with and there is normally an added monthly fee to cover the amenities offered.
Whichever type of home you are interested in, Phil Reith and the RE/MAX team will be your best bet in finding the home of your dreams.
