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Your Path to Home Ownership
Your guide to buying a home, maximizing your negotiating power, and selecting a mortgage that puts you in the driver's seat.
Best mortgage rates across the nation and locally
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Fetching RSS feed... please stand byCommon Questions from First-time Homebuyers
- Why should I buy, instead of rent? A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you'll enjoy having something that's all yours - a home where your own personal style will tell the world who you are.
- Should I use a real estate broker? How do I find one? Using a real estate broker is a very good idea. All the details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate broker will be well-acquainted with all the important things you'll want to know about a neighborhood you may be considering...the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. He or she will help you figure the price range you can afford and search the classified ads and multiple listing services for homes you'll want to see. With immediate access to homes as soon as they're put on the market, the broker can save you hours of wasted driving-around time. When it's time to make an offer on a home, the broker can point out ways to structure your deal to save you money. He or she will explain the advantages and disadvantages of different types of mortgages, guide you through the paperwork, and be there to hold your hand and answer last-minute questions when you sign the final papers at closing. And you don't have to pay the broker anything! The payment comes from the home seller - not from the buyer.
- How much money will I have to come up with to buy a home? Well, that depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.
When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies.
The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loans require 10-20% of the purchase price.
Closing costs - which you will pay at settlement - average 3-4% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise. - How do I know if I can get a loan? Use a mortgage calculator to see how much mortgage you could pay - that's a good start. If the amount you can afford is significantly less than the cost of homes that interest you, then you might want to wait awhile longer. But before you give up, contact a real estate broker. They will help you evaluate your loan potential. A broker will know what kinds of mortgages the lenders are offering and can help you choose a lender with a program that might be right for you. Another good idea is to get pre-qualified for a loan. That means you go to a lender and apply for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it will speed the process once you do find the home of your dreams.
- How do I find a lender? You can finance a home with a loan from a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices. Different lenders can offer quite different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford. Talk with several lenders before you decide. Most lenders need 3-6 weeks for the whole loan approval process. Your real estate broker will be familiar with lenders in the area and what they're offering. Or you can look in your local newspaper's real estate section - most papers list interest rates being offered by local lenders.
- In addition to the mortgage payment, what other costs do I need to consider? Well, of course you'll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association or condo association dues. You'll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, your broker will be able to help you anticipate these costs.
- So what will my mortgage cover? Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you've borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you'll pay far more in interest than you will in principal - sometimes two or three times more! Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments. In the final years, you'll be paying mostly principal.
- What do I need to take with me when I apply for a mortgage? If you have everything with you when you visit your lender, you'll save a good deal of time. You should have: 1) social security numbers for both your and your spouse, if both of you are applying for the loan; 2) copies of your checking and savings account statements for the past 6 months; 3) evidence of any other assets like bonds or stocks; 4) a recent paycheck stub detailing your earnings; 5) a list of all credit card accounts and the approximate monthly amounts owed on each; 6) a list of account numbers and balances due on outstanding loans, such as car loans; 7) copies of your last 2 years' income tax statements; and 8) the name and address of someone who can verify your employment. Depending on your lender, you may be asked for other information.
- I know there are lots of types of mortgages - how do I know which one is best for me? There are many types of mortgages, and the more you know about them before you start, the better. Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower. Talk to your real estate broker about the various kinds of loans, before you begin shopping for a mortgage.
- When I find the home I want, how much should I offer? Again, your real estate broker can help you here. But there are several things you should consider: 1) is the asking price in line with prices of similar homes in the area? 2) Is the home in good condition or will you have to spend a substantial amount of money making it the way you want it? You probably want to get a professional home inspection before you make your offer. Your real estate broker can help you arrange one. 3) How long has the home been on the market? If it's been for sale for awhile, the seller may be more eager to accept a lower offer. 4) How much mortgage will be required? Make sure you really can afford whatever offer you make. 5) How much do you really want the home? The closer you are to the asking price, the more likely your offer will be accepted. In some cases, you may even want to offer more than the asking price, if you know you are competing with others for the house.
- What if my offer is rejected? They often are! But don't let that stop you. Now you begin negotiating. Your broker will help you. You may have to offer more money, but you may ask the seller to cover some or all of your closing costs or to make repairs that wouldn't normally be expected. Often, negotiations on a price go back and forth several times before a deal is made. Just remember - don't get so caught up in negotiations that you lose sight of what you really want and can afford!
- So what will happen at closing? Basically, you'll sit at a table with your broker, the broker for the seller, probably the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you're signing. After all, this is a large amount of money you're committing to pay for a lot of years! Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a "good faith estimate" of how much cash you'll have to supply at closing, and a list of documents you'll need at closing. If you don't get those items, be sure to call your lender BEFORE you go to closing. Don't hesitate to ask questions.
Mortgage Tutorial on YouTube
Helpful Books at Amazon.com
Home Buying For Dummies, 3rd edition
Amazon Price: $14.95 (as of 07/19/2008)
List Price: $21.99
Usually ships in 24 hours
Home Buyer's Checklist: Everything You Need to Know--but Forget to Ask--Before You Buy a Home
Amazon Price: $10.17 (as of 07/19/2008)
List Price: $14.95
Usually ships in 24 hours
How To Buy Your First Home, Second Edition
Amazon Price: $10.17 (as of 07/19/2008)
List Price: $14.95
Usually ships in 24 hours
The National Association of Realtors Guide to Home Buying
Amazon Price: $13.57 (as of 07/19/2008)
List Price: $19.95
Usually ships in 24 hours
The Complete Book of Home Inspection
Amazon Price: $13.57 (as of 07/19/2008)
List Price: $19.95
Usually ships in 24 hours
Rates and Points
The interest rate determines the monthly interest payments over the lifetime of the loan. A "point" or "discount point" is equivalent to 1% of the loan amount and usually reduces or "discounts" the loan rate by an eighth of a percentage point.
For example: You want to get a loan for $100,000 to buy a home. Each "point" would cost you 1% of $100,000 or $1,000 but would reduce your loan's interest rate by .125%. The lender might offer you an 8.0% loan with zero points, a 7.875% loan with one point, or a 7.75% loan with 2 points.
Points, like the down payment, are paid at closing. In some cases, lenders will allow borrowers to finance the points over the term of the loan. Lenders sometimes use points to make their interest rates appear lower. Be aware that lower interest rate offered by a lender may translate into higher points requirements.
For example: You want to get a loan for $100,000 to buy a home. Each "point" would cost you 1% of $100,000 or $1,000 but would reduce your loan's interest rate by .125%. The lender might offer you an 8.0% loan with zero points, a 7.875% loan with one point, or a 7.75% loan with 2 points.
Points, like the down payment, are paid at closing. In some cases, lenders will allow borrowers to finance the points over the term of the loan. Lenders sometimes use points to make their interest rates appear lower. Be aware that lower interest rate offered by a lender may translate into higher points requirements.
Fixed-Rate Mortgage
A Fixed-Rate Mortgage applies the same interest rate toward monthly loan payments for the life of the loan. Fixed-rate mortgages are more straightforward and easier to understand than Adjustable Rate Mortgages (ARMs), are more secure for the buyer, and are popular with first-time homebuyers. Since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than ARMs.
For example, a lender can offer a 30-year fixed loan to a homebuyer at a 7.0% interest rate. The loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. Conversely, if the market interest rate decreases to 5.5%, the borrower will continue to pay the 7% interest rate.
Fixed-Rate benefits include:
No change in monthly principal and interest payments regardless of fluctuations in interest rates
More stability may give you "peace-of-mind"
Fixed-Rate considerations include:
Higher initial monthly payments compared to those of adjustable rate mortgages
Less flexibility
For example, a lender can offer a 30-year fixed loan to a homebuyer at a 7.0% interest rate. The loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. Conversely, if the market interest rate decreases to 5.5%, the borrower will continue to pay the 7% interest rate.
Fixed-Rate benefits include:
Fixed-Rate considerations include:
Adjustable Rate Mortgage
An Adjustable Rate Mortgage (ARM) does not apply the same interest rate toward monthly payments for the life of the loan. Throughout the life of that loan, the homebuyer's principal and interest payment will adjust periodically based on fluctuations in the interest rate.
For example, a lender could offer a 30-year ARM loan to a homebuyer at an initial 6.5% interest rate. During an adjustment period for the ARM loan, the market interest rate could rise to 8.0%, resulting in a significantly larger interest payment. Similarly, the market interest rate could decrease to 6.0%, resulting in lower interest payments.
ARM benefits include:
Initial payments lower due to lower beginning interest rate, usually about 2 percentage points below the fixed rate
Ability to qualify for a higher loan amount due to lower initial interest rates
Lower interest payments if the interest rate drops over time
Interest rate caps limit the maximum interest payment allowed for the loan
ARM considerations include:
Initial lower interest rate and monthly payments are temporary and apply to the first adjustment period. Typically, the interest rate will rise after the initial adjustment period.
Higher interest payments if the interest rate rises over time
For example, a lender could offer a 30-year ARM loan to a homebuyer at an initial 6.5% interest rate. During an adjustment period for the ARM loan, the market interest rate could rise to 8.0%, resulting in a significantly larger interest payment. Similarly, the market interest rate could decrease to 6.0%, resulting in lower interest payments.
ARM benefits include:
ARM considerations include:
30-Year vs. 15-Year Mortgage Terms
Typically, a 30-year mortgage term will have lower monthly payments than a 15-year mortgage term. If you decide on a 15-year loan, you will pay significantly less in total interest over the life of the loan, but your monthly mortgage payments will be higher. As a homebuyer, you will need to consider the implications of supporting higher monthly payments when accepting a 15-year term. Can you consistently meet those monthly payments over time?
Should You Pay More or Less "Up-Front"?
The size of the down payment, money paid at closing, can affect your mortgage in a number of ways.
Higher up-front payments result in:
lower monthly payments
lower private mortgage insurance (PMI) costs (if applicable)
lower interest payments
In fact, making a down payment of 20% or more can save the homebuyer money by avoiding the monthly mortgage insurance payments.
On the other hand, lower up-front costs mean that your cash requirements at closing are much less, although monthly payments may be somewhat higher.
These lower up-front costs may be a significant benefit for first-time homebuyers and people who simply don't have a lot of cash on hand.
Higher up-front payments result in:
In fact, making a down payment of 20% or more can save the homebuyer money by avoiding the monthly mortgage insurance payments.
On the other hand, lower up-front costs mean that your cash requirements at closing are much less, although monthly payments may be somewhat higher.
These lower up-front costs may be a significant benefit for first-time homebuyers and people who simply don't have a lot of cash on hand.
What is PMI?
Insurance policies written by private companies insuring lenders against loss resulting from defaults on mortgages.
Why Use a Mortgage Broker?
Why Use a Mortgage Broker?
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