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How much of a down payment should I make on my new home?
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Comparing mortgages (i.e. 15, 20, 30 year).
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Fewer than 10 percent of homebuyers purchase their homes with cash, so chances are you’re going to need financing. The best way to get a low interest rate (and to avoid a default later!) is to not borrow more than you can afford. Here’s how to figure out a reasonable amount:
The general rule of thumb is that your mortgage payment should equal no more than 28 to 33 percent of your gross income. And your total debt (i.e. your anticipated mortgage amount plus your car loan, credit card balances, etc.) should not surpass 36 percent of your gross income.
Look at how much cash you have saved up for a down payment. The larger the down payment, the lower your monthly payments can be.
Use a budget worksheet to determine how much income you can spare each month to put toward a mortgage payment. Simply subtract your expenses from your total income. Do a "practice run” for two months by saving the difference in your anticipated monthly mortgage, taxes and insurance payment and your current rent payment. See if you can maintain the lifestyle that you are accustomed to while not neglecting savings activities such as your IRA and college savings for the kids. If you find yourself falling short you may want to consider a smaller mortgage.
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Lenders often look at your cash reserves. They don’t want you to empty your savings accounts in order to afford your mortgage payments. For this reason, avoid making other major purchases in the year you plan to buy.
You may be able to borrow a larger amount or get a lower interest rate if you borrow with a co-signer. Consider this option carefully. You will both be held responsible if you default on the loan.
Look at the current buyer’s market and interest rates. Are rates increasing or decreasing? The lower the interest rate, the more home you can afford.
Get a copy of your credit report from each of the three credit bureaus (see below). Make sure that there are no mistakes on it that could cost you—or even prevent you from getting financing. Pay all of your creditors in full and on time for at least a year before you want to get a mortgage loan. And try to avoid changing employers. The better your credit rating, the more you’ll be able to borrow—and at a better interest rate.
The Three Credit Bureaus:
Once you've roughly determined how much you should spend, you'll want to get preapproved with a mortgage lender and confirm your true purchasing power. The most common type of mortgage is a fixed-rate mortgage. The interest rate and monthly payment amount remain the same throughout the loan period. Regular fixed-rate mortgages terms are usually for 15, 20, 25 or 30 years. The shorter the term, the lower the interest rate and interest charges over the life of the loan. However, even though you are saving over the life of the loan, a shorter term means a higher monthly payment.
You may also have heard of Adjustable-Rate Mortgages (ARMs). Adjustable-rate mortgages are 15- or 30-year loans with monthly payments that change over the term of the loan due to increases or decreases in the interest rate. You may have a special circumstance where an ARM makes the most sense for you. The primary advantage of an ARM is a low initial interest rate. Regular ARM adjustments are made at prenegotiated periods of time (six months, one, three or five years). Most ARMs have rate caps to protect you. These may be in the form of limits per adjustment or a lifetime limit for the loan.
Different lenders will offer various types of fixed-rate mortgage loans. When evaluating lenders, you'll want to compare the programs offered to see which would be most beneficial to you. You'll also see which lender can provide you the best rate and lowest fees. Overall, you also want to evaluate how easy the lender is to work with. You'll be relying on the lender to keep you well-informed and complete the loan package in time for your settlement date.
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Your closing costs will typically add up to anywhere from three to10 percent of the value of your total mortgage loan. The seller may pay some of these fees; others you will be responsible for. Your lender may also finance some, or even all, of your closing costs. Closing costs can be divided into three categories: lender fees, prepaid expenses and settlement costs. Here are some of the most common:
Lender Fees: As a nonprofit institution, your credit union will keep these fees to a minimum.
Points. Each point equals one percent of your loan’s value. For example, one point on a $100,000 loan would equal $1000. Many lenders offer optional "discount” or "buy-down” points at closing in lieu of higher loan rates.
Appraisal fee. Charge for an appraiser to assess the current market value of the property and produce a written appraisal document.
Credit report fee. Almost all lenders will obtain your credit report from one or more of the three bureaus. There is a charge for this service.
Document preparation/underwriting fee. The charge for the preparation of the loan agreement document.Loan processing fee. Paid to the lender to process the loan.Loan origination fee. Charge to originate and close the loan. Usually equal to one point.
Tax service fee. Charge to hire a tax services agency to ensure that you pay your property taxes on time, or that your bills are submitted to your lender.
Prepaid Expenses: Typically, two months of payments on each of these long-term expenses will be held "in escrow.” This means a third party will hold the funds until they need to be disbursed. Interim interest. The interest charged for the remainder of the month in which your loan originates.
Property taxes. Local taxes on the ownership of the property. The amount will vary by your area of residence and the property’s appraised value.
Mortgage insurance. Also called "PMI,” this is used to protect the lender in case you default on the loan. PMI is required when your down payment totals less than 20% of the value of the property.
Hazard insurance. Used to insure the property in case of loss or damage. Receipt of a hazard policy is usually required at settlement.
Settlement Costs: Actual costs for the settlement process.
Title insurance fee. Protects you from an inaccurate property title inspection, and insures against any defects in public records.
Title search fee. Paid to the settlement company to search public records to insure the seller is the sole legal owner of the property and has the right to sell.
Settlement/attorney fees. Paid to the settlement company to cover legal representation and other fees.
State taxes. Mortgage taxes charged on the sale of the home.
Recording and messenger fees. Charge for filing documents (i.e. the deed) at the county recorder’s office.
Home warranty fee. Paid to the insurance company for a warranty to pay for repair or replacement of defective items.Home inspection fee. Charge for a professional inspection arranged by the seller.
Survey fee. Charge for a surveyor to measure the property to determine its dimensions, as well as to assess exterior improvements.
Notary fee. Paid to a notary public to witness the signing of paperwork and insure its validity.
Not all of these costs will apply to your situation, and there may be additional fees that were not mentioned. When you apply for your mortgage loan, your mortgage officer will give you a "good faith estimate of settlement costs.” This document will outline all of the applicable closing costs and the dollar amounts of each.
Real estate agents show you homes, answer your questions, help you get insurance and loans, handle settlement paperwork and act as liaisons between you and the seller. Legally, they can play one of three roles: seller’s agent, buyer’s agent or dual agent. It's important to know what role your agent is playing.
Unless you find a property that is "for sale by owner," the houses you look at will be listed through seller’s agents, that is, agents hired by the homeowners or developers. They represent the sellers, but they’ll also help buyers interested in their properties. Even if an agent represents the seller, he or she must give you honest answers to your questions about the property, reveal any problems related to it and, if you decide to put a contract on the home, promptly present your offer to the seller. However, a seller’s agent isn’t obligated to get you the best deal when it comes to contract negotiation. If you want, you can simply find properties you like and call the seller’s agents listing them. Look in the paper, check online real estate listings and look for for-sale signs posted in front of homes. Seller’s agents almost always represent multiple properties, so if you don’t like the first home you see, ask what else is available. Avoid signing exclusivity contracts. It’s okay to request information from multiple seller’s agents, just remember they are not working for you.
Unless you are a seasoned homebuyer, it’s best to get your own agent. This "buyer’s agent,” will try to get you the home you want at the best possible price and terms. Your agent can show you any property for sale, even those not listed with the company he or she works for. Your buyer’s agent will tell you things a seller’s agent won’t, such as whether the seller’s willing to accept a lower price, how long the property’s been on the market, how eager the seller is to sell, the status of any other contracts on the property and any inside information that could affect the home’s price or terms. How do you find a good agent? Start by asking friends, relatives or coworkers for referrals. You’re usually limited to one buyer’s agent, so choose wisely.
Dual agency occurs when the buyer's agent and the seller’s agent are affiliated with the same real estate company. Because the company’s legally bound to represent both you and the seller, the amount of confidential information that can be revealed to either of you is limited, unless you and the seller agree to disclose this information.
There are many factors to consider when house hunting. Save time, energy and money by narrowing your focus before you hit the pavement.
Once you've determined what your budget is, narrow your search by determining some basic characteristics for your new home. This will not only help your real estate agent service you more effectively, but it will also help you determine if you can truly afford what you want, or if you need to adjust your list to suit your budget.
It's important to separate needs from wants in this list. Needs might include the minimum number of bedrooms and bathrooms, whether you need a garage or office space, the size of the yard and any special requirements such as handicap access. Also be sure to list anything you absolutely don't want such as multi-levels. Then list things that are preferences, but that you might be somewhat flexible on if all your other criteria are met. Rank the items on your list in priority order.
Start searching for homes on your own online to see if your list fits your budget, or if there's anything else that needs to go on your list.
Share your list with your real estate agent. As you tour homes, don’t become so focused on finding that "dream home” that you overlook viable options. Have your agent show you several types of homes. You may find that the home you choose is quite different from what you original planned.
Once you find something that you like, evaluate it objectively. Your agent will help you evaluate things that are inexpensive changes versus major renovations. Be willing to make small changes or improvements, but don’t take on more than you can handle. Also consider the home’s resell value. Consider how long you expect to stay in the home. You want to consider what it could cost you should you have to move in a couple of years.
Make a list of pros and cons for each home that you like. In addition to the structure itself you should consider the location: neighborhood, your commuting distance to work, the quality of nearby public services and schools and the convenience to grocery stores and other necessities.
Feel free to knock on doors or ask questions of passersby. Visit the property at a variety of times of day, on weekdays and weekends, as the atmosphere may change.
Once you've found a home that meets your needs and your budget, it's time to make an offer. Your agent will play a critical role in the negotiation which is one of the reasons to carefully select your agent. Your agent should be looking out for your best interest and working to get you the best deal and terms.
Your agent should provide you with comparable sales to show you what the current market value of the home is. Remember, if you are financing the purchase, the mortgage lender will require the home appraise for at least the purchase price, so you don't want to make your offer higher than market value unless you intend to pay the difference in cash. Depending on the current market, your agent will advise you on what the initial offer to purchase price should be. You may be advised to start low so you can negotiate up to your desired purchase price. However, if there are a lot of buyers in the market, you'll probably be advised to make your highest and best offer at the first pass.
There's more to your offer than just the purchase price. You can also ask for special conditions such as help with closing costs, an quick or delayed closing, or the inclusion of personal property with the sale, such as a lawnmower or swing set. You should also make your offer contingent on a home inspection and appraisal, and the sale of your existing home if that is a requirement. Have your agent ask the selling agent if the sellers have any special conditions they prefer — if you can accommodate their needs as well, your offer is that much more attractive to them.
Once you and the sellers have come to an agreement, it's time to take a closer look at the property. Your buyer’s agent should be able to recommend an inspector, or you can find one on your own that is a member of the American Society of Home Inspectors (ASHI). The inspection will cost you between $300 and $600, but it is well worth it. It's recommended you tour the home with your inspector. He or she will look for flaws in the structure, electrical systems, appliances, etc., and write up a report and estimate the cost of repairs, but being present during the inspection will help you make an objective decision about any negative findings.
You may want to hire separate inspectors to check for radon, lead, asbestos, carbon monoxide or termites. If the home is older, or the home inspector raises flags, you may want to consult a structural engineer. After your inspection(s), present the report(s) to the seller. He or she may agree to fix these items, give you money to repair them yourself or offer to sell you the home "as is.”
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