The process of buying a home can seem long and complicated—so many new words to learn and understand—deciding what you really want in a home— wondering if you can afford such a major purchase. The first step in the purchase of a new home is to evaluate your financial status. Start by filling out the FINANCIAL OUTLINE:
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: (1) a down
payment, (2) closing costs and (3) 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 know how much home you can buy.
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, and the lower the interest costs will be over the life of the mortgage. Typically, a conventional lender will require 10 to 20 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 3 to 5 percent down payment. This may give you more cash for other moving expenses, but it 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 to 15 percent of the purchase price, while the buyer puts 5 to 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:
(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 he collected for the period between closing and the end of the purchase month.
(3) 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 of taxes.
(4) The cost of inspections. Pest Control, Property Inspection, Environmental Hazards, etc.
Overall closing costs vary from state to state. Check with mefor an estimate of your closing costs.
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, and the lower the interest costs will be over the life of the mortgage. Typically, a conventional lender will require 10 to 20 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 3 to 5 percent down payment. This may give you more cash for other moving expenses, but it 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 to 15 percent of the purchase price, while the buyer puts 5 to 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:
(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 he collected for the period between closing and the end of the purchase month.
(3) 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 of taxes.
(4) The cost of inspections. Pest Control, Property Inspection, Environmental Hazards, etc.
Overall closing costs vary from state to state. Check with mefor 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, income and debts control the price range of homes you can
look for, and hence, the size of 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, 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.
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 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 your financial circumstances. For more information, consult the your
me.
