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.
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:
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.
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. Some lenders offer down-payment assistance programs or 100% financing options with loans ranging 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.
Getting pre-qualified for a mortgage is the most accurate way to find out what price range of homes will fit your budget.
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:
If you answered yes to these questions, then the time is probably right for homeownership.
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.
Refinancing is when you pay off your existing mortgage with a brand new mortgage. The common reasons to refinance are...
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.
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.