Through home ownership, the money you pay for shelter every month will be an investment in your future, not someone else's. Each mortgage check you write will build 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 can help put you into your next, larger home. Or you can tap the equity for college tuition loans or retirement funds at a rate which is generally lower than those available on personal loans. Also, paying on and ultimately paying off a mortgage is an excellent way to establish a good credit rating and prove financial stability.
Your home purchase is not only an investment in your future, it's a powerful tax benefit as well. You can deduct both the interest in home mortgage payments as well as property taxes.
Home ownership frees you from the whims and dictates of a landlord. There will be no unexpected rent hikes. You will be able to decorate as you like, have a dog or cat, and make improvements on your property. You gain privacy and the freedom of expression.
Pride of Ownership
Perhaps the most intangible, yet powerful advantage is the pride of ownership. 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 roots down in a neighborhood. Your family will enjoy the benefits of this decision for many years.
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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:
- A down payment
- Closing costs
- 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 can know how much home you can buy.
Do I Have Enough for a Down Payment?
A down payment is the money you pay up front toward the house. The more cash you pay as a down payment, the less money you will pay each month on the mortgage, and the lower the interest costs will be over the life of the mortgage. Typically, a conventional lender will require 20 to 25 percent of the purchase price as a down payment.
In some cases, involving an excellent credit history and sufficient income, lenders will agree to a 10 percent down payment. This may give you more cash for other moving expenses, but will also increase your monthly mortgage payments.
Loans through the Federal Housing Administration (FHA) or Veterans Administration (VA) carry very attractive down payment requirements of five percent or less. 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. FHA and VA loans are available at competitive interest rates. An additional benefit is that the seller may pay part of the points. In addition, when the time comes to sell, the next buyer may be able to assume the loan, subject to certain conditions.
If permissible, secondary financing may be used as an alternative way to finance your new home. This means that the seller may hold a second mortgage for 10 percent of the purchase price, while the buyer puts 10 percent cash down.
Typically, conventional lenders are willing to accept a lower down payment if private mortgage insurance (PMI) is secured. PMI protects the lender in case of default on the loan. It will cost more, but it can reduce your down payment to 10 percent.
What are Closing Costs?
Closing costs are simply this: the costs of borrowing money, establishing the loan, and preparing the necessary documents to finalize the sale. These costs may be significant and are easily overlooked by a first-time buyer.
- 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 one percent of the mortgage amount. Two and one-half points on a $100,000 mortgage would cost $2,500.
The Costs of Establishing a Loan. These might include the loan origination fee, appraisal fee, and credit reports. Premiums for hazard and mortgage insurance are usually paid at closing. Also, prepaid interest will be collected for the period between closing and the end of the purchase month.
The Costs of Document Preparation. Title costs pay for the search of public records to determine if the property you want to purchase is free from any other ownership or liens. Recording and transfer fees cover the legal recording of the deed with the proper governmental agencies as well as the transfer taxes.
Overall closing costs vary from state to state. Check with your real estate company for an estimate of your closing costs.
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 the 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 25-33 percent of your gross, pre-tax monthly income.
The interest rate and the principle amount of the mortgage will determine the amount of your monthly payments. The higher the interest rate, the higher the monthly payments. The length of most real estate loans is generally 15 or 30 years. Loans fall into two basic categories: (1) those that have fixed interest rates and payments; and (2) those with interest rates and payments that vary over time.
A fixed rate mortgage provides a known monthly payment that will remain the same throughout the life of the loan. This means housing costs will never vary and will be easy on the budget. The interest rates on these loans are usually a little bit higher than on adjustable loans since the lender is establishing a set interest for a number of years.
Adjustable Rate Mortgage (ARM) loans generally give the benefit of low initial interest rates and a corresponding lower monthly payment at the beginning of the loan term. The rates increase (or may even decrease) as the loan provides for periodic changes in interest rates. An important point to look for is the presence or absence of interest rate "caps." Life-of-the-loan caps place a ceiling on how high the rate can go over the term of the loan, often five to six percentage points above the original rate. They are a guarantee from the lender that you will not be required to pay more than the agreed-upon maximum interest rate. Annual caps protect you from extreme jumps in the interest rate in any given year and are usually in the one to two percent range.
Shop around for your loan. Don't be afraid to ask questions and to compare one loan to another. Since you will be living with it for many years, make sure to get the one best suited to fit your financial circumstances.
Searching for your dream house is no easy job. A real estate sales associate's knowledge, experience, and access to the properties can simplify the process. A sales associate who participates in the Multiple Listing Service (MLS) has access to many homes for sale.
After learning of your specific housing needs, a professional sales associate can screen the homes, finding those most suitable to show you. This can save you time, money, and effort. Your sales associate can also supply information on home values, taxes, utility costs, neighborhoods, and financing.
Now that you've read through this information, give us a call. Let us help you and your family find just the right home.