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BUYING REAL ESTATE
One of the biggest expenses that families face is their mortgage payment. This is also one of the longest commitments of expense, sometimes as long as 30 years. Because of these two factors, the mortgage payment must be carefully chosen. Even though the mortgage industry recommends that the mortgage payment can be as large as 36% of your income, in reality, the mortgage payment should only make up 28%. Since this is a long-term commitment, you will need some of the extra income to be able to absorb changes in your life. It is not wise to budget so tightly that adjustments may not be made.
Furthermore, when purchasing a home, the income and expenses that are used to calculate an affordable mortgage should reflect expected changes within your life for the mortgage life span; things such as the birth of a new child, purchase of another car, and other predictable events. In addition, there should be some cushion that would allow you to absorb unexpected events such as losing your job or unforeseen medical expenses.
Real Estate Agents
When purchasing a home, buyers have a choice of looking for their home with a real estate agent or without. Whichever option you choose first, you need to decide what kind of a real estate you are looking for. Also, look at what price range the property should be in, the location, what kind of a property you wish to buy and with what features. Only after you have decided what you are actually looking for should you start looking at different places.
If you decide to hire a real estate agent, there are some things you need to keep in mind. The buyer's real estate agent is representing the seller, even though the buyer hires him. This means that what ever you wouldn't want the buyer to know, you should not reveal to the agent. In addition, keep in mind that when the two agents are negotiating the price between each other, they are both representing the seller. However, you can change all of this. You can have your real estate agent represent you by having him sign a document stating that he is going to be representing you, the buyer.
Finally, in deciding whether or not to use a real estate agent, you are probably better off using one. Real estate agents are paid by the seller. The seller pays on average 6% of the home price. When the seller is selling the property, this 6% is already reflected in the selling price by increasing the selling price by 6%. If you don't hire the agent you are still paying the home price, the only difference is that the 6% is not split by two agents but only by one, the seller's agent. On the other hand, had you hired the agent you would have probably benefited from all of the experience and knowledge that he has in negotiating the price and working with all of the other members involved in the process of purchasing the property. In the end, most of the time hiring an agent will actually end up saving you money.
Finding a Mortgage Company
Prior to ever speaking to a real estate agent or even looking at houses, a buyer should consult with a mortgage broker. The reasoning behind this is simple. First, without talking to a mortgage broker you won't know what kind of a house you can afford. This will prevent the disappointment of finding a home that you like and later finding out that you can't afford it. Second, this process will save you time. However, the mortgage approval might take months. So having the mortgage approval process done while searching for a home might save months of the total process. Third, having a pre-approved mortgage is beneficial in negotiating the price of a home. Some sellers need to sell their homes quickly and will accept a lower offer for a quick payment.
When you decide to find a mortgage company, don't just visit one bank. You should visit many banks or a mortgage broker, since a mortgage broker represents many banks. Keep in mind that almost all banks can match each other's offers. They take loans from the same place and have a similar cost of operating. However, the service that the banks provide might be different. You can always find a bank that has quality service and ask them to match another bank's mortgage offer.
Insurances
Purchasing a home has many hidden fees that the buyer may miss to take into consideration. One of these hidden fees are three types of insurance. The first type of insurance is the Private Mortgage Insurance which covers the lender's risk of the borrower defaulting on the mortgage. If the buyer puts down a small down payment, the buyer has little incentive to keep the house in case something happens, leaving lenders to bear the risk. Because of this, if the buyer puts down at least a 20% down payment, then the Private Mortgage Insurance (PMI) is not necessary. Otherwise, the buyer has to buy the insurance. The cost of PMI is 0.65% which is $650 a year on a $100,000 mortgage. This should motivate the buyer to put down a 20% down payment, if possible. However, some lenders are willing to forego the PMI for an increase in interest rate if the buyer puts down a 5% down payment. The higher interest rate might be worth it because the interest rate on the mortgage is tax deductible, while the PMI is not.
The second type of insurance is homeowner's insurance. This is just to insure that in case the house gets destroyed, the buyer gets the necessary funds to rebuild it. The mortgage lender will require that the buyer acquires this insurance to make sure that their collateral is protected. In any case, the buyer should always have homeowner's insurance even if there is no mortgage on the house. This is just to ensure against such a great loss such as your house burning down.
The third type of insurance is title insurance. This insures that the deed that is transferred is valid. There are two parts of this insurance. One secures the lender and the other secures the buyer. The lender will require that the buyer purchase the lender part of the insurance, which secures the lender. However, the buyer should also purchase the second part of the insurance for their self. This fee has to be paid only once, which is well worth the protection.
Qualifying For Bigger Mortgage.
Affording to pay the mortgage is not the only obstacle when purchasing a home. The buyer also has to be able to qualify for the mortgage amount that he desires. Sometimes the lender is unwilling to provide as big of a mortgage as the buyer wants. There are various methods that can be used to increase the amount of mortgage that the lender is willing to lend.
First, long term debt can be reduced. This can be accomplished by paying off credit card or student loans. Having lowered debt will show the lender that more income is available to be directed toward the mortgage payment. Another way of demonstrating this is by increasing income so more money is available toward the mortgage payments. However, often times this is hard to accomplish.
Second, the buyer can get a co-signor to sign for the mortgage. This will make the co-signor also liable for the mortgage balance. Having two persons with two incomes liable for the loan decreases the risk the lender faces and increases the lender's willingness to increase the mortgage.
Furthermore, there are times when the buyer himself feels that the mortgage payments might be too high. In this case, check if there are alternative financing plans that have lower monthly payments or a lower down payment. If this is not available, the debtor might have to wait for the interest rates to decrease. Another option is to buy a lower interest rate by paying points on the loan. One point equals one percent of the loan. For example you can pay 4 points, meaning 4% of your mortgage, to decrease the interest rates by 2%. The question arises whether paying the points is worth it. A way to calculate this is to see what happens with paying the points and by not paying the points. Look at what the decrease in the monthly payments would be by buying the points. Look how long this decrease in the payments will return the initial cost of points (divide the cost of points by the decrease in the monthly payments). Now determine whether you are planning on keeping this mortgage for this period of time; obviously the longer you are planning on keeping the mortgage the more sense it makes to pay for the points.
Buying a Home Sometimes Requires Selling a Home
When buying a new house, often times there is a current home that needs to be sold first. Selling a house can be a long and intimidating process, which might last eight to ten month. The first thing that you need to do when selling your house is to hire a real estate agent. Some people attempt to save the 6% of the real estate agent fee by selling the home themselves, however the agents are more than worth the 6% that they charge. Remember that the 6% is not coming out of your pocket, but the cost is incorporated in the price of the home, for which the buyer is paying. There are numerous benefits to hiring an agent. Real estate agents will get a higher price for your home. This is their job and they are experts in negotiating in addition to drafting contracts of the negotiations. The buyer will be represented by a real estate agent. You will want somebody to represent you.
Once you do hire a real estate agent there are some steps that you can take to help the process of selling your home. First, leave the house. This ensures you won't say anything that may dissuade one from buying the property. Second, always remove your pets from the house when potential buyers are coming. Not everybody is fond of pets. Third, turn off your television, radio, and any other kinds of distractions. This will allow the potential buyers to focus on the home and not get distracted. Fourth, turn on all of the lights and open the curtains whenever there is a showing to a potential buyer. Finally, listen to the advice of the agent. He may recommend that you move furniture around, remove unsightly clutter, or provide an enticing fragrance like fresh flowers or home baked cookies.
Following these simple steps will increase your chances of selling the property for the highest value in the most efficient manner.
Selling and Buying a House at the Same Time
When selling one house and buying another, a problem arises on what should be done first. Should the old house be sold first or the new one bought? Some choose to buy a house first, with a contingency. This contingency dictates to the sellers of the new house that the buyers will only buy the house if they are able to sell their own house. If the seller, Joe, agrees to this contingency then he may have to wait for ninety days for the buyer, Mike, to sell his own property, and then if Mike does sell his property then only will he purchase Joe's house. This option allows the buyers of the new home, Mike, to buy only after he sells his house. This may seem like a good plan but it has its weaknesses.
You are much better off shopping for a new home without any contingencies. This will give you better leverage with the sellers. The sellers don't want there to be any contingencies, since contingencies prevent the seller to be sure that the house will be sold. Therefore, sellers would be more willing to sell the home for a lower price immediately, rather then to sell on contingency.
The proper solution for having to sell an old house and to buy a new one is to sell a home on contingency rather than buy on contingency. Such contingency provides that after the sale you will need ten to thirty days to move out. This approach would provide you with stronger leverage to buy a new house for a good price.
Taking Out Maximum Mortgage
When people are purchasing their first home the bank usually notifies the mortgagee of the down payment that must be made in order to qualify for the mortgage. When buying a second home, often times the equity from the old house is a major part of the down payment for the new house. Although providing the highest down payment decreases your monthly payment, it is not always the best approach to take.
Often, it is better to make the lowest down payment that is necessary to qualify for the loan. This will allow you to carry the biggest possible mortgage loan, freeing up money to pay for other things, such as the purchase of a car. Instead of paying high interest on car payments or credit cards, you will have a small mortgage interest rate. In addition, the interest on the mortgage is deductible from your income tax, further minimizing the overall cost of the debt.
Take out the biggest mortgage that you can on the house and keep the cash. Invest the cash so that it will provide you with a stable return while the home mortgage will provide you with a low interest rate, which is also tax deductible. Such an approach will allow you to have liquidity and be able to absorb changes in your life. For example, if you have cash invested in stocks and you got laid off, you can always liquidate the stocks to meet the mortgage payments and the daily expenses. However, if you have a small mortgage but no liquid assets and get laid off, you won't have the liquidity to meet the mortgage payments nor everyday expenses. This might lead to the bank foreclosing your home.
Furthermore, the proper time to take out the biggest mortgage is when you are first buying the house. Deductions can only include the interest on the original mortgage and an additional $100,000 that can be taken out later as an equity line of credit. Make sure that you borrow for the full thirty years instead of the fifteen. Though you will pay more interest over a 30 year loan, it is a low rate and it is tax deductible.
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