FINANCIAL BENEFITS
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 (in the absence of depreciation) 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 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 on home mortgage payments as well as the cost of property taxes.
DO I HAVE 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 you will have to pay each month on the mortgage. Typically, a conventional lender would like to have 20 percent of the purchase price as a down payment. In many cases, involving an excellent credit hstory and sufficient income, lenders will agree to a 10 percent down payment. This may give you more cash for other moving expenses, but it will also increase your monthly mortgage payments. Some lenders will even lend up to 95 percent of the home’s value to those with exceedingly good credit, income, and cash reserve after closing.
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.
There are other ways including double mortgages that can also help reduce your costs. When you schedule an appointment with me, I will be more than happy to discuss the different avenues there are available.
WHAT ARE CLOSING COSTS?
Closing costs are simply this: the costs of borrowing money, establishing the loan, 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 one percent of the mortgage amount. Two and one-half points on a $100,000 mortgage would cost $2,500.
(2) The Costs of Establishing a Loan. These might include the loan origination fee, appraisal fee, and cost of 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.
(3) The Costs of Document Preparation. Title insurance 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 of taxes.
HOW DO I FINANCE MY HOME?
The single most important aspect of your home purchase is the loan, or mortgage, you obtain. Generally, the amount of your down payment and income/debts control the price range of homes you can look for, and hence, the size and loan you will need.
A lender will analyze your income to determine your ability to repay the loan. A general rule of thumb is calculate how much loan payment you can handle is to figure 25-28 percent of your gross, pretax 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. The length of most real estate loans is generally 15 or 30 years. 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.
MORTGAGES
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 to budget. The interest rates on these loans are usually a little higher than adjustable loans since the lender is establishing a set interest for many years.
Adjustable-rate mortgage (ARM) loans generally give you 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 abouve the original rate.
An escrow account is generally required by most lenders. The account provides funds to pay for hazard insurance and property taxes. A portion of the borrowers monthly payment goes into this account (total payment is generally called PITI, for principal, interest, taxes and insurance). Since insurance premiums and taxes may vary, the monthly payment may change over time even for fixed-rate loans
(c) 2009 Thayer Morgan
