Buying a home can be a very complex experience. Here are some tips that will make your home buying experience easier.
1. You should buy, instead of rent.
You’ll love the feeling of having something that’s all yours – a home where your own personal style will tell the world who you are. But there’s more to owning a home than personal satisfaction. Another benefit of home ownership is you can deduct the cost of your mortgage loan interest from your federal income taxes, and in most cases your state taxes. Interest will be the majority of your monthly payment, for over half the life of the loan. This adds up to large savings at the end of each year. As a homeowner, you can also deduct your property taxes. Another financial plus in owning a home is that over time; the house could increase in value. A disadvantage of renting is you write your monthly check and it’s gone forever.
2. Use a real estate broker.
Using a real estate broker is a very good idea. All the details involved in home buying, particularly the financial ones, can be stressful. A good real estate professional can help guide you through the entire process and make the experience much easier. A real estate broker will be well acquainted with the important details such as a neighborhood you may be considering, the quality of schools, the number of children in the area, the safety of the neighborhood and traffic volume. Your broker will help you determine your price range and search the multiple listing services for homes that you might want to look at. They have immediate access to homes as soon as they’re put on the market so the broker can save you hours of driving around looking for homes. When you have found a home and are ready to make an offer, the broker can help structure your deal to save you money. Your broker will explain the advantages and disadvantages of different types of mortgages, guide you through the paperwork and answer last-minute questions when you sign the final closing papers. You don’t have to pay a broker anything! The payment comes from the seller of the home – not from the buyer
3. The amount of money you will have to come up with to buy your first home.
Several factors need to be considered, including the cost of the house and the type of mortgage you decide on. In general, you need to put down enough money to cover three costs:
Earnest money – the deposit you make on the home when you submit your offer, this proves to the seller that you are serious about buying the house. When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If your offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is rejected, your money will be returned.
Down payment – is usually between 3 percent and 20 percent of the total cost of the home that must be paid when you go to settlement. The amount of the down payment depends on your credit history, income, the cost of the home and the type of mortgage you choose. Some lenders also have loan options where you do not need a down payment.
Closing costs – are fees you pay when you actually get your loan from your financial institution. Closing costs generally range between 2-7 percent of the loan value. These include points, taxes, title insurance, financing costs, items that must be prepaid or escrowed and other settlement costs. You’ll receive an estimate from your lender after you apply for a mortgage. These costs must be paid at the time you close on your loan.
4. Know if you can qualify for a loan.
A good start would be to use our mortgage calculators to see what you can afford. If the amount you can afford is significantly less than the cost of homes that interests you, then you might want to wait a bit longer.
5. Additional cost of of owning a home.
There are many other cost, in addition to your monthly mortgage that you need to consider before you buy a home. Your monthly utilities cost needs to be considered. If your utilities have been included in your rent, this may be new for you. Your real estate broker will help you get average utility costs from the seller. In addition, you may have homeowner or condo association dues. You will have property taxes and may have city or county taxes, which are normally rolled, into your mortgage payment. Again, your broker will be able to help you anticipate these costs.
When you are ready to buy a home you must consider that the monthly mortgage cost is not the only cost you will face. Maintenance costs such as appliances needing repair and utility bills will also come out of your pocket. You should also consider homeowner’s insurance as well as association or condo dues depending on your location. Lastly, be sure to remember to allow for property taxes which may be rolled into your monthly payment.
6. Things that your monthly mortgage payment will cover.
Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you’ve borrowed; homeowners’ insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. During the life of the loan, you’ll pay more in interest than you will in principal – in some cases two to three times more! Because of the way loans are structured, in the first years you’ll be paying mostly interest in your monthly payments. In the final years, you’ll be paying mostly principal.
7. What you will need when you apply for a mortgage.
If you have the necessary paperwork when applying for a loan, you’ll save yourself a great deal of time. You should have the following: 1) social security numbers (for you and your spouse, if both of you are applying for the loan) 2) copies of your bank (checking and savings) statements for the past 6 months 3) evidence of additional assets like stocks and bonds 4) a recent paycheck stub detailing your earnings 5) a list of credit card accounts with the approximate monthly amounts owed on each 6) a list of account numbers and balances due on outstanding loans, such as car loans 7) copies of your last 2 years’ income tax statements 8) the name and address of someone who can verify your employment.
8. Things to remember when picking your mortgage.
There are many types of mortgages and the more you know before you start, the more confident you will feel when selecting a mortgage. A fixed-rate mortgage is a popular choice. The principal and interest are fixed payments for the life of the loan, which is normally 30 years. The advantage of a fixed-rate mortgage is you always know how much your mortgage payment will be and you can plan for it. An Adjustable Rate Mortgage (ARM) is another option were your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can fluctuate, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower.
9. Determining what you should offer when you find the home of your dreams.
Your real estate broker can help! But there are several things you should first consider: 1) Is the asking price similar to other homes in the area? 2) Is the home in good condition or will you have to spend a lot of money making it the way you want it? It is usually recommended to make an offer contingent on inspection, which means your offer is not valid until a home inspection is performed. Your real estate broker can usually recommend one 3) How long has the home been on the market? If it has been awhile, the seller may be willing to accept a lower offer 4) how much mortgage will be required? Make sure you really can afford whatever offer you present 5) How badly do you want the home? The closer you are to the asking price, the more likely your offer will be accepted.
10. What to do if the seller rejects your offer.
Offers are often rejected but don’t get discouraged. The negotiation process will begin, with the help of your broker. You may have to offer more money, but in return you can ask the seller to cover closing costs or to make repairs that wouldn’t normally be expected. Often, price negotiations go back and forth several times before a deal is made. Just remember – don’t get so caught up in negotiations that you lose sight of what you really want and can afford!
11. Preparing yourself for closing.
Basically, you will meet with your broker, the seller’s broker, most likely the seller and the closing agent. The closing agent will have several documents for you and the seller to sign. While the closing agent will give you a basic explanation of each document, you may want to read each document and/or consult with your agent to make sure you know exactly what you’re signing. Before you go to closing, your lender is required to provide you with a “good faith estimate” which details your closing costs, how much money you’ll need to bring to closing and a list of documents you’ll need at closing. If you don’t receive those items, it is important to contact your lender BEFORE closing. The “HUD Settlement Cost Booklet” located at www.hud.gov will also help you understand your rights.
12. Knowing how much house you can afford.
Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. We can help you determine exactly how much you can afford.
13. The difference between a fixed-rate loan and an adjustable-rate loan.
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM will likely change. There are advantages and disadvantages to each type of mortgage. The best way to select a loan product is by speaking with one of our knowledgeable mortgage representatives. You can reach our Mortgage Lending Department directly by dialing 703-739-3092.
14. The Benefits of Home Ownership.
Knowing that the house is yours brings you satisfaction in itself. You can enjoy the savings that can come when you deduct your property taxes and mortgage loan interest on your federal income taxes and in most cases your state income taxes too. Because interest will make up a large portion of your monthly mortgage, for many years you will easily see how home ownership can save you on your taxes. With every payment, you build more equity in your house. This equity is like a savings account which you can cash in when you sell your home or use it to borrow against.
By: Donovan Fox, SDFCU.org