buying a home
Many factors go into the home purchase decision including:
- Your ability to make monthly payments
- How long you will likely live in the location
- Your ability to cover homeowner expenses including repairs, property taxes, and homeowner's insurance
- Current and likely future mortgage rates (determine the type of loan)
- Potential future value of the property
STEP #1 CALCULATE THE MAXIMUM AMOUNT YOU CAN COMFORTABLY AFFORD
The first step in buying home is to determine how much you can afford in monthly payments. I recommend that you do this on your own, before you can be influenced by a realtor or bank. Be mindful that what you can comfortably afford may differ from the amount a bank or realtor will attempt to persuade you to spend. Banks have incentives for you to borrow more and realtors earn commission based on the amount you spend. You should calculate what you can comfortably afford and not allow yourself to be persuaded to spend more.
To determine how much you can afford to pay monthly for mortgage payments, see the credit capacity tab.
STEP #2 - GETTING PRE-APPROVED FOR A LOAN:
1. Complete a mortgage application Proof of employment, income, balance sheet (assets/liabilities/net worth).
2. Lender obtains a credit report and verifies application details.
3. Approved (with maximum loan amount identified) or denied
STEP #3 – SHOP FOR A HOME & MAKE AN OFFER
I recommend using a realtor to help you with your first home purchase. The functions of a realtor:
- Finding and showing a home within your pre-approved loan amount
- Presenting your offer to the seller based on market comparables
- Make local recommendations (inspections, insurance providers, etc.)
- Negotiating the purchase price
- Representing you at closing
Terms:
Earnest Money – A dollar amount paid by the buyer at the time of a purchase offer as evidence of good faith in buying the home.
Appraisal – Paid for by the buyer, this provides an estimate of the current value of the property being purchased. The offer you make will be contingent upon the home appraising at or above the offer price.
STEP #4 – FINANCING AND CLOSING ON THE HOME
Terms:
Closing Costs – Fees and charges paid at the time of the mortgage. Also called “settlement costs.” Some items listed under closing costs are negotiable and vary between loan providers. Be prepared to ask and negotiate when you see the detailed list of closing costs.
Title Insurance – A title search and title insurance will be required as part of the mortgage process.This policy protects the owner or lender against financial loss resulting from future defects in the title or from other property claims.
Deed – The document that transfers ownership of property from one person to another.
Down payment – Most loans will require a down payment. A down payment is dollar amount you must pay toward the purchase price of a home. Likely, the bank will not allow you to borrow the full purchase price because this increases the risk that you will walk away from the loan.
If you have less than a 20% down payment, you will likely be required to purchase Private Mortgage Insurance (PMI).
Private Mortgage Insurance (PMI)- PMI ranges from .58% to 1.68% of the original loan amount paid monthly. The percent you will be charged is based on your:
• Credit score
• Debt-to-Income ratio
• Loan-to-value ratio
The Homeowners Protection Act requires that PMI be terminated when equity value is 22%. However, you should request termination at 20%
Escrow – An account established by the lending institution that the consumer pays into each month for future expenses of property taxes and homeowner’s insurance. The bank receives the property tax and homeowner’s insurance bills and pays them on your behalf, using the money you have deposited in the escrow account. Budget numbers – 40% on top of monthly payment for home repairs, property taxes and insurance.
FINANCING:
Amortization – Each loan payment is split between interest (fee) and principal (amount you owe). Each month, you pay interest on the amount you owe and the remaining payment amount is applied to principal.
Principal – The amount you owe.
Interest – The fee you pay to the bank for borrowed funds.
Points – Prepaid interest charged by the lender to “buy down” the interest rate. Points are nonrefundable. One point is one percent of the loan amount.
TYPES OF LOANS:
Fixed rate, 15 to 25-year Mortgage (Conventional Mortgage) Advantages: Fixed payments, lower rate than 30-year fixed, builds equity faster, fewer years results in far less interest paid over the life of the loan. You do not have to worry about fluctuations in interest rates impacting your monthly payment.
Disadvantages: The shorter length of the loan, the higher the monthly payments.
Fixed rate, 30-year Mortgage (Conventional Mortgage)
Advantages: Fixed payments, lower monthly payments than a 15 or 20-year loan.
Disadvantages: Higher interest rate than a 15 or 20-year fixed loan, takes many years to build equity (ownership) in the home.
FHA/VA Fixed rate, 15 and 30-year Mortgage
Advantages: Low down payment without the purchase of PMI Disadvantages: More difficult to qualify, the home must also qualify, and additional processing time is required.
Adjustable rate, 30-year mortgage (1-, 3-, 5-, 7-,10-year schedules) With adjustable rate mortgage (ARM’s), payments are fixed for a short time (1-year for example) and at the end of that year, the interest rate charged on the loan adjusts according to current market rates. When the balance is due at the end of a term, it is often referred to as a “Balloon Mortgage.” When the balance is due, you have to refinance the mortgage at current market rates.
Advantages: Lower initial interest rate than fixed loans. Disadvantages:If interest rates rise, your payments will increase. At the end of the term, you have to obtain new financing (closing costs, etc). It is difficult to budget as increased interest rates may result in higher monthly payments.
Interest-Only Mortgage
Advantages: Lower payments, you can “afford” a more expensive home Disadvantages: The amount you owe does not decrease, you do not build equity, usually must convert to a higher fixed-rate mortgage after 10 years.
