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Have you noticed how easy we toss around words like real estate agent or PMI? Now even a first time buyer thinks ahead about how to re-finance a house even before getting the first mortgage. New immigrants immediately get with the "old-timers" and easily plunge into conversations involving private mortgage insurance and home equity loan, re-financing and home equity line of credit, not to mention real estate prices, property taxes, so-o-o ever popular tax deductible interest and other "write offs".
When I came living to New York, this concept started changing, though not as drastically. There are still a great lot of people living in apartments who don't own them, still blocks and blocks of huge "projects" with the common yards, basketball hoops and bus stops around the corner. The difference did not strike me hard then. It was only later, when we moved in the typical mid-Western Cincinnati, when I started realizing the meaning of the "Three-story America" phrase (to me it is a family room, sleeping quarters and a basement...) Wow, how impossible it seemed to even dream about our own home! How complicated everything sounded: mortgage, equity, closing cost, escrow account? No, it is not for us, we'll never catch-up with this! I am sure, a lot of us, new (and not only new) immigrants are having similar dilemma: there is this dream house clearly etched on the back of the mind and there is this huge gap between you and your dream, and you have a very little clue of how to get there. On the surface it may sound pretty simple: you find a real estate agent and with a little patience your dream will somehow come true. Not that easy! Are you ready to buy? How much of a house can you afford? Do you even need a real estate agent or is it worth a shot trying yourself? What common mistakes do you want to avoid? I am sure, you asked these and dozens of similar questions, but did you get the answers you need? Or even, do you have anybody to turn to for help? I'd like to share my experience and ideas with you and make this "sweet home" happen a little easier.
From my own experience I know that not all the people come up with the decision to buy a house under similar circumstances. For some it is a result of a long conscientious process of analyzing all "pros and cons"; the others just think it may be cool to own the piece of property; the third got sick and tired listening to the friends and relatives talking of how you waste money renting and how you are missing out this great time when the mortgage is so cheap! Anyways, this idea got stuck deeply in your mind and now you are ready to dive in with both feet! But are you really? Renting versus Buying
You, probably, often heard people saying that you can write-off
your mortgage, that you are paying yourself when you own and what a huge waste
paying the rent is. But the truth is that not all of them know what they are
talking about. Most people have strong
opinions when it comes to the "rent or buy" question—some suggest you're crazy
for throwing money away in rent; others insist you'd be reckless to invest too
much cash in buying a house. In general, there's no clear answer as to whether
you should rent or buy—it all depends on your specific situation. Once the home is purchased, the monthly expenses attributed to owning the property start. Water and sewer as well as other charges must be paid. So do property taxes and insurance. And then whether it's summer fall or winter, the property must be maintained. Lawn mowing, fall cleanup and snow removal are all chores that need to be done around the home and in many cases some expensive equipment may need to be purchased to do this maintenance. Then there's the maintenance that the house itself needs. As an example, monthly gas and electricity bill may average $100-$140, water and sewer $40-$50, waste removal $15-$20, property taxes $120-$200, homeowners insurance $30-$40. All this may easily total to some $300-$400 a month. Building the equity into your house (in other wards, how much you really own while re-paying the mortgage back) is a very slow process. Many people do not realize that especially during the first years (roughly half of the mortgage life) huge percentage of their monthly payments is applied not towards the principal (this is the part of the house they own), but towards the interest. Re-paying the debt is not spread equally over the life of the loan and the ratio of principal-interest in the monthly payments is changing constantly: first several month you may be paying only 20% towards equity and 80% in the bank interest. At the end very of the loan life this ratio reverses. On the other hand, mortgage interest (only interest, not the entire mortgage amount!) is tax-deductible. As an example: a homeowner has a gross annual income of $40,000. The monthly mortgage payment is $1,000 on a 30-year mortgage. In the first few years, 80 percent of that payment goes to interest and is therefore tax deductible. In the 15 percent tax bracket, the homeowner saved about $375 more in taxes. Where do you start? Unless you are one of the lucky few (or not that few..) who can fork over enough cash to buy out the house, you will need to get a mortgage. So, start by asking yourself: will I qualify for a mortgage? Do I have a credit history? How much house can I afford? In the mortgage industry today, more and more lenders are relying on credit scoring models sometimes referred to as Fair Isaac Scoring to make credit decisions. A higher score results in less risk to the mortgage lender. To learn more about credit score, click here. A few tips on how to improve your credit history:
How much house can you afford? There's little point in house hunting before you know how much you can afford. Two key issues of how much you can borrow are:
The amount of the down payment (Loan To Value or LTV ratio) determines whether mortgage insurance is necessary for the loan. A down payment of 20% results in 80% Loan To Value and the equity is great enough to cover any expenses of foreclosure and resale. If the Loan To Value is greater than 80%, mortgage insurance is generally required to cover the expenses of foreclosure and resale. A mortgage lender will ask for proof of income to see if you can afford the mortgage repayments. Stable income means that you can prove you make enough money every year to qualify for the loan. If you are salaried, a lender will use your gross monthly salary to qualify you. If you are self-employed, commissioned, using bonuses or part-time income to qualify, the lender will average two years income to arrive at a stable number. The lender will also want to know about any existing debts you have, such as personal loans, as these may impact on your ability to repay the mortgage. They will take into account the amount you owe and/or the amount you are able to borrow on your credit cards. They will use the full amount of the limit on your credit card even if you do not owe that much and may suggest that you reduce the limit on your card to guard against getting into too much debt. Lenders use debt to income ratios to determine qualification. Acceptable ratios change with the loan program. There are usually two ratios used:
The following chart may help you see what your maximum monthly debt is based on your annual gross salary:
Types of mortgages Most lenders offer several types of mortgages; the most common are the fixed-rate mortgages for 30 years or 15 years.
But there are other factors to
consider:
This is a million-dollar question that nobody knows the right answer to! In my opinion, when buying a house it is worth it to work with the real estate agent. They don't charge buyers for their services and work on the commissions they split with the seller's agent. Make sure you deal with a decent, reliable and experienced professional and feel comfortable discussing very private matters with him or her. Also, have him provide you with a written document confirming that s/he will only represent you as a buyer. This will eliminate possible conflict of interests in case your agent tries to sell you a house that s/he is personally listing for sale and getting commissions paid by the seller. You can also try to find a house by yourself, though it takes much more time and effort. Buying your home yourself can save you a lot of money. The trick is zeroing in on properties sold by owner and coming to the negotiating table fully informed. Finding your home yourself can save you thousands of dollars if you negotiate with the seller to share the unpaid commission with you. Good negotiating skills are very important to make buying by owner work to your advantage. How about financing? There are two main sources of obtaining a mortgage: banks and mortgage brokers.
Paying Points.
Points are fees that are
paid at the front of the loan (typically, at the closing) to reduce the
interest rate. A point is equal to 1% of the loan amount (on the $100,000
loan, one point equals to $1000). In most cases, loans with points usually
have a lower interest rate than that of “no points” loans. Assuming that you
don’t finance the points, paying points is a trade off between paying the
money now or later. Obviously, there is a lot of nerve-wrecking work
involved when you get down to actually choosing a house, making an offer,
negotiating, ordering house inspection and finally, going through the closing
procedure. Hopefully, your real estate agent should guide you through all these
hard times and one day you will turn the key and walk into that dream-house. If
you are doing all the legwork yourself, you may want to consider asking for the
advice from your friends, relatives or start reading books and surfing Internet.
And if you like what you saw in this Web site, I am
just an E-mail away! Private Mortgage Insurance (PMI)
Private mortgage insurance (also called PMI) is insurance
provided by a mortgage insurance company to protect a lender in the event of
default (borrower being un-able to keep re-paying the debt) on a loan.
How much will it cost you? Premium prices vary. They are based on the size of the down payment, type of mortgage and amount of insurance coverage. Premiums typically are folded into your monthly mortgage payment. The range for a median priced home is $40 to $70 per month. As your home appreciates or your loan balance decreases (or a combination of the two), your equity in the home will exceed 20%. At that time a favored method of eliminating the PMI tied to the loan is to refinance. The savings on the PMI alone can often warrant the refinance. Beware! The lender will not automatically cancel your PMI even after you exceed 20% equity! You will have to keep an eye on it and request to have the PMI canceled once you exceed 20% equity in your home. You might also be able to cancel the PMI if you can show proof that your home has increased in value, but lenders often have a minimum wait time before they will accept such evidence--typically two years. Before you start thinking about taking a home equity loan, let's make sure that we understand what the "equity" is.
Let's say you bought your home for $95,000 and made a 20 percent
down payment of $19,000. You then took a first mortgage to pay the remaining
$76,000. On the day you closed on your home, you automatically had 20 percent
equity. You gain equity as you pay off the principal and your home grows in
value.
There are two types of equity loans: term, or closed-end loans,
and lines of credit. A home equity loan, sometimes called a "term" loan, is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan.
A home equity line of credit (HELOC)
works more like a credit card. You are allowed to borrow up to a certain amount
for the life of the loan, a time limit set by the lender. During that time you
can withdraw money as you need it. As you pay off the principal, your credit
revolves and you can use it again. Let's say you have a $10,000 line of credit.
You borrow $5,000, but then pay back $3,000 toward the principal. You now have
$8,000 in available credit. This gives you more flexibility than a fixed-rate
home equity loan.
Financial institutions negotiate a home equity loan just like they do a
mortgage: You have to pay off the loan or line of credit when you sell the
house.
How much can you borrow against your equity? It depends on the
program and Loan-to-Value ratio (LTV).
When applying, ask the lender about the length of the home equity
loan, whether there is a minimum withdrawal requirement when you open your
account, and whether there are minimum or maximum withdrawal requirements after
your account is opened. Inquire how you gain access to your credit line -- with
checks, credit cards, or both.
Most common
uses
The purpose of most refinance loans is simply to save money. The
goal is to minimize your expense over the life of the loan or to minimize your
monthly payment in the near future. The old rule of thumb on refinancing held that the interest rate would need to decline by at least 2% for the refinancing to be worthwhile. A more accurate measurement would be to consider the savings in monthly payment, the costs of the loan transaction, and the term of the new loan compared to the old term. The key is to determine whether the benefits of payment savings and/or term reduction exceeds the costs of the transaction.
When you refinance your mortgage, you usually pay off your
original mortgage and sign a new loan. With a new loan, you again pay most of
the same costs you paid to get your original mortgage. These can include
settlement costs, discount points, and other fees. You also may be charged a
penalty for paying off your original loan early, although some states prohibit
this. With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.
If you are thinking about refinancing your mortgage, you might
want to consider other types of mortgages. For example, if you have a 30-year
mortgage, you might want to look into a 15-year, fixed-rate mortgage. In this
plan, your mortgage payments are somewhat higher than a longer-term loan, but
you pay substantially less interest over the life of the loan and build equity
more quickly. (Of course, this also means you have less interest to deduct on
your income tax return.)
And, of course, this is a good time to get rid of the
Private Mortgage Insurance (PMI),
because chances are that by the time you decided to refinance, you will have
accumulated over 20% equity in your home.
From my limited experience, selling the house could be even more frustrating than buying. Very often you are under the gun to sell by certain time because you already have another house earmarked to buy and may be even signed a purchase contract. You don't seem to be in control of selling: it is just nobody is interested in buying from you and there is not a lot of showing going on! And you are just sick and tired of this old house and the damned neighbor's kids. I tried selling by myself once: it did not work. But I bought a house sold by owners, so I know it can work. I used a company who helps selling by owner and I used real estate agent. It is just a matter of preference, what you want and can do and at the end of the day--pure luck! If you are interested in my experience, feel free to contact me. A few links that I found extremely helpful while working on this page: http://www.cincybyowner.com/index.html http://www.bayhouse.com/index.shtml http://www.keystonefunding.com/ http://www.esourcemortgage.com/101/ http://www.businessweek.com/investor/nonips_content/pf_all_learn.htm http://www.owners.com/Tools/BuyerHandbook/DecideToBuy.asp http://www.creditoption.com/default.htm http://www.bankrate.com/brm/default.asp
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"My home is my citadel". "Home sweet home". "There is no place
like home"... Everybody has his or her own feelings about the home and
understanding what this perfect home is. The
"home"
concept is deeply rooted in every person, every country and culture. My "home"
was associated with a tiny two-room apartment on the fourth floor, a giant yard
with dozens of kids playing soccer or ping-pong all the time and my grandmother
calling out for me: "Lunch is ready-y-y!" Where is it now..?
