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Homebuying and Mortgages Resources

Home Buying and Mortgages Resources

Home Buying and Mortgages Resources

Consumer Education Program

Intro

A home is the largest purchase most of us will ever make and a mortgage is the biggest loan most of us will ever take out. A home is typically one of the best investments you'll make, too. In most parts of the country, homes rise in value every year. There is a lot of your money and time at stake.

Homebuying can be a complicated and sometimes frustrating process. If you are not prepared, the decisions you make, the questions you don't ask, and the details you miss could cost you thousands – in price, fees, financing, property issues, and home repairs. You'll want to be prepared for less than ethical business practices, too.

Before you shop for a home or mortgage, read the articles below. By doing your homework, you can prevent the American Dream of owning a home from becoming a nightmare.

How much can you afford?

Many lenders will talk of affordability in terms of a percentage of your gross monthly income (GMI) or X times your annual income. For example, you may have read that conventional loans typically allow you to spend 28 to 36 percent of your GMI. Or maybe some other source said “about 2.5 times your annual income.” But if you are going to be a smart shopper, you need to get more specific about how your current income, debt, and expenses affect your home-buying power.

To determine how much you can afford to spend on a home, you have to consider your entire financial situation. Because so many lenders talk about mortgage affordability in terms of a percentage of your gross monthly income, we’re going to talk about that also. But always remember this very important point: a monthly mortgage payment does not buy you a house or condo, it buys you a lump sum of cash—your loan—and usually includes money for other expenses such as property taxes and insurance. So to determine your price range of affordable home prices, get out your financial records, your calculator, and your pencil. Use the Income and Expenses Worksheet tab to help you work through all the figures.

Before you begin remember that your monthly housing expenses will consist of the PITI (principal, interest, taxes and insurance), and possibly private mortgage insurance (PMI), plus utilities and maintenance.

Wait! What are all those things?

PITI is your monthly mortgage payment. Its components are:

  • principal—this portion reduces the remaining balance of the mortgage
  • interest—this is the borrowing fee
  • taxes—this portion goes into the escrow account to pay the annual property taxes
  • insurance—at DCU we don't escrow your homeowner's (hazard) insurance. Other lenders, however, often escrow a certain amount each month to pay your homeowner's insurance.

PMI, private mortgage insurance, is usually required by lenders when your down payment is less than 20%. This protects the lender against loss if you don’t make your mortgage payments. If PMI is required, then it is also part of your mortgage payment and also goes into the escrow account.

Utilities will be the bills for electricity, gas, water, sewer, and telephone. You may also consider cable/satellite TV as well as your ISP (internet service provider) to be utilities.

Maintenance covers any routine upkeep of the house and yard plus any repairs.

Note that there may be one additional monthly expense. If you buy a condominium, there is usually a condo fee that covers the maintenance & repair of the common areas and other expenses. Or if you choose a neighborhood or development with certain amenities or services there may be a homeowner’s association fee.

Down payment

A down payment is the money you use to lower the amount due on a purchase.

Do you need a down payment? If so, how much should it be?

The minimum down payment required will be determined by your lender and the type of mortgage you get. A VA loan doesn’t require a down payment, and some lenders offer down-payment assistance programs or 100% financing options. Other loans range from 3% to 20% of the purchase price. The larger the down payment, the smaller the loan. Thus a lower monthly mortgage payment and less interest paid over the life of the loan.

Get pre-qualified for a mortgage

Getting pre-qualified for a mortgage is the most accurate way to find out what price range of homes will fit your budget.

Buy or Rent?

How do you know if owning a home makes the best financial and personal sense for you and your family? Is it the right time for you to buy a home? Determining whether you want to own or rent a home depends on your personal preferences and your financial situation. Begin by asking yourself these questions:

  • Do I/we have a steady, reliable income? If you are thinking of changing jobs or if your job is insecure, now is not the time to buy a home.
  • How much total debt do I/we have (credit cards, car loans, students loans, etc.)? Is it manageable? If you are thinking of buying a car, if you can, put it off until you have bought your home.
  • Can I/we afford to pay a mortgage and other expenses, such as insurance and property taxes in addition to our current monthly expenses? Note that there may be other monthly expenses such as water/sewer, garbage collection, gas/electric, and pest control that you might not pay currently.
  • Do I/we have money saved for a down payment?
  • Do I/we have money saved for closing costs?
  • Do I/we plan to stay in the home for several years?
  • Do I/we want the responsibilities (and lifestyle changes) that go with being a homeowner?

If you answered yes to these questions, then the time is probably right for homeownership.

Pros of ownership

  • You don’t have the prohibitions of a landlord. For example, you can put nails in the wall to hang pictures or have a pet.
  • Your home is not just shelter, it’s an investment. As property values go up, your equity in the home increases.
  • The interest you pay on the mortgage and your real estate/property can be deducted from your federal income tax.

Cons of ownership

  • It may cost more to own than rent the same size dwelling.
  • Property values can go down as well as up.
  • You have to maintain the home and pay any maintenance and repair costs.
  • Moving to another home can be dependent on selling the current home.

Is there a "best time" to buy?

There's no simple answer to this question. The “best time” to buy a home is usually when fewer buyers are looking. There are two terms that you should be familiar with: buyer's market and seller's market.

A buyer's market exists when there are more properties for sale than there are buyers. In a buyer's market, sellers may be more flexible and willing to work with a buyer. A buyer has more time to check out a property and make decisions.

A seller's market exists when there are more buyers than properties for sale. In a seller's market you must be ready to act quickly. During a seller's market, sellers typically may not be as flexible or as willing to negotiate a lower price.

Why and When Should You Refinance

Why would you refinance?

Refinancing is when you pay off your existing mortgage with a brand new mortgage. The common reasons to refinance are...

  • To lower your payment – Refinancing at a longer term or a lower interest rate can reduce your monthly payment. The first may increase the total cost of interest over the life of the loan. A lower interest rate on the same term may reduce it.
  • To pay off faster – Refinancing a 30-year loan at 15 years can reduce your overall interest costs, though payments are often higher. Refinancing to a biweekly mortgage can have the same effect.
  • To reduce interest – If you have sufficient equity, consolidating higher interest loans into your mortgage can lower your overall cost of debt and may allow you to deduct interest on your taxes.
  • To change rate types – Depending on your situation, you may want to switch from an adjustable-rate mortgage to a fixed-rate or vice versa.

When refinancing may not make sense

  • If you'll be moving soon – If you'll be paying points and closing costs to get a better rate, the interest rate savings over your remaining time in the home should be equal or greater than the closing costs or you haven't saved anything. If you look at the money you might have earned placing the point and closing cost money in a savings account over that time, the threshold is even higher for it to be worthwhile.
  • If you're already several years into your mortgage – Once you are halfway through your mortgage, you've really started to pay down the loan principal. When you refinance, your payments will be mostly interest again. As a result, your payments may be lower, but you could pay more interest over the life of the loan.

However, refinancing could be beneficial if you do not extend the loan by doing so. For example, if you have 10 years left on a 30-year loan and you refinance for 10 years or less, refinancing may save you money depending on the interest rate, fees, and closing costs.

  • If refinancing extends your mortgage past retirement age – If you haven't planned for house payments after retirement, you may want to either skip refinancing or make sure your new term does not extend past your original pay off date.

Special tax treatment for refinancing

When you purchase a home, you can generally deduct points as mortgage interest in the tax year you buy your home. Any points you pay on a refinance, though, must be amortized over the life of the loan. In other words, if you pay $1,500 in points on a 15-year refinance, you can deduct $100 in points every year until the loan's paid off.

If you pay off a refinanced mortgage early, you can deduct the rest of the points in the year you pay off the loan. Many homeowners forget to take that final deduction.