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Arrows Real Estate!
Home Buyer's Tips
Why Buy?
When the roof is leaking, your mortgage payment is late, and your new neighbors move in with a 90-pound German shepherd that likes to howl at the moon every night, you may seriously wonder whether buying a home has any advantages. Of course it does. Here are a few of the important ones:
Tax breaks.
Savings.
Fixed housing costs.
Investment.
Credit history.
It’s your place.
Uncle Sam likes to encourage home ownership, so you get a big tax break when you own you own home. You get to deduct some, if not all, of the interest you pay on the loan as well as some of the costs involved in financing the home (points paid, for instance). Your property taxes are also deductible. On a modest home, you may be able to deduct, for example, $ 8,000 to $ 10,000 a year. That’s quite a tax break.
Home ownership brings with it the advantage of enforced savings. Unlike a rent payment, which goes bye-bye once you pay it, some of the money you pay on your home goes toward building up your equity. You can take out a loan against your equity, and you can get back the equity when you sell your house.
If you rent and apartment or home, you don’t have much control over the rent. Your landlord can raise the rent, sometimes as much as he wants, As a homeowner, on the other hand, you have the advantage of fixed housing costs. If you pay $ 800 the first month of a 30-year fixed mortgage, you’ll pay $ 800 the last month, for principal and interest. If you get an adjustable-rate mortgage, however, the payments may vary some.
Most home appreciate, or increase in value, over time. Your house is likely to be worth more when you sell it than when you purchased it; this can be called building equity. You can us the money you make on the sale of your home to finance a bigger and better home or to finance your retirement.
Making timely mortgage payments builds a great credit history. If you want to purchase a car or get a credit card, most lenders look favorably on homeowners.
The financial and rational advantages are great, but probably the best advantages of owning a home are the control and autonomy that ownership affords you, and the sense of pride in that ownership. You can paint all the rooms chartreuse and knock out wall to remodel if you want. You can add an enclosed porch or put in solar panels. It’s your house, and you can do what you want. There’s just something special about owning your own place.
Buying a home can be one of your most significant investments in life. Not only are you choosing your dwelling place, and the place in which you will bring up your family, you are most likely investing a large portion of your assets into this venture. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of this page is to provide you with detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, I’m only a phone call or email away!
Mortgage Loans and Interest Rates
As you start shopping for a home loan, your first question of each lender will probably be "What's the interest rate? How much are you charging?"
Interest rates are usually expressed as an annual percentage of the amount borrowed. If you borrowed $120,000 at 10% interest, you'd owe interest of $12,000 for the first year. With most mortgage plans you'd pay it at the rate of $1,000 a month. You would also send in something each month to reduce the principal debt you owe - and the next month you'd owe a bit less interest.
When your forebears bought their home (putting at least half the purchase price down, by the way), their interest rate was probably around 4 or 5%. Rates stayed the same for years at a time. Then in the years following World War II, things became more turbulent. As economic changes speeded up, rates began to change several times a year. By the l980s, lenders were setting new rates on mortgage loans as often as once a week - and they still do today. When inflation hit a high in the '80s, some mortgage loans carried interest rates as high as 17% - and those who absolutely needed to buy, paid that much.
Rates dropped gradually through the 1990s, and by 1998 had reached their lowest rates in decades. Heading toward the millennium, home buyers appear to have the most favorable conditions for mortgage borrowing since their grandparents' days - and without 50% down payments either.
On the day you actually buy your new home, in addition to your down payment and the prepaid property tax and homeowners insurance premiums, you'll need cash for various fees associated with the purchase. These expenses are known as closing costs and are paid by both buyers and sellers.
Some closing costs you pay up-front when you apply for a mortgage loan. That includes money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don't eventually receive the loan, that money is not refundable.
Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:
Title insurance fee;
Survey charge;
Loan origination fee;
Attorney fees or escrow fees;
Document preparation fee;
Garbage or trash collection fees; and the big one:
Points - up-front interest paid in return for a lower interest rate. Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points.
NOTE: Consider closing costs when choosing one mortgage plan over another. The good news is that if your cash is limited, some mortgage plans allow the seller to pay some or all of your closing costs, such as title insurance, escrow fees, and points. Certain closing costs can sometimes be added to the amount of mortgage loan you're receiving.
Figuring Out Your Monthly Income
When you apply for a mortgage loan (and even long before that, when you first speak to a REALTOR®) the first question may likely be "How much is your income?" In making this determination, lenders consider the income of all parties who will be owners of the property. Be prepared to provide a monthly accounting of all sources of income.
Figuring Out Your Monthly Debt
Lenders are interested mainly in your present monthly payments because they want to be sure you can handle the mortgage payment you'll be applying for. Different mortgage plans consider payments on any debt that won't be paid off within, for example, six months, nine months, or a year.
Amount of Your Down Payment
Your down payment is paid in cash and is not included as part of the loan amount. The bigger your initial down payment, the smaller your loan, which reduces the amount of your payments.
How much you'll put down depends on the cash you have available and the amounts you'll need for closing costs and prepaid property taxes and homeowners' insurance.
Mortgage plans have various down payment requirements and they can range from 0% down on a VA – Veterans Administration Loan - to between 3 and 5% down on a FHA – Federal Housing Administration Loan - to 20% down, the traditional amount for a conventional loan. In addition, special state programs for first-time home buyers may set different sums, which are usually lower than conventional financing.
If you put less than 20% down on most loans, you'll be asked to protect the lender by carrying private mortgage insurance ( PMI ). Carrying PMI ensures that the debt is repaid if you default on the loan. This adds approximately an extra half a percent onto the loan.
FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).
How Much House Can You Afford?
The amount of loan for which you qualify is based on two different calculations. Using what are known as qualification ratios, lenders evaluate your income and long-term debts to determine a "safe" amount for your mortgage payments. A fairly standard ratio is 28/33. Certain mortgage plans sometimes use more liberal ratios - for example, the FHA currently uses 29/41.
Here's how it works: With a 28/33 ratio, you'd be allowed to spend up to 28% of your gross monthly income for mortgage payments. The lender will then run a different calculation. This one is your loan payment and debt payments combined, which may not exceed 33% of your gross monthly income. To calculate exactly how much you may borrow, you also need an estimate of current interest rates.
For Example: Suppose you had $1,000 a month for mortgage payment; at 7% that would let you borrow about $160,000 on a 30-year loan. At 6% the loan amount would be nearly $175,000. If your rate were 8%, the loan amount would be a bit less than $150,000.
As part of this calculation, you also need to estimate and include the property taxes, homeowner’s insurance, and Homeowner Association fees (if applicable) you might need to pay, which are considered part of your monthly expense.
Begin the home buying process by using our mortgage calculator to determine how much you can afford, or visit a REALTOR® or mortgage lender and they can analyze it for you.
