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Doing Your
Homework
Home Ownership
Pays
No question about it, home ownership is a big investment, maybe the
largest you'll ever make. But over time, it's an investment that pays
for itself many times over. Here's how:
Tax Advantages
• Mortgage interest is tax deductible.
• Real estate taxes are tax deductible.
• Local tax benefits are available in many areas.
• You can enjoy tax-free gains up to $500,000 from the sale of a
primary residence that you have occupied for two of the last five
years if you are married and filing jointly. If you are single or
married and filing separately, you can enjoy tax-free gains up to
$250,000. Moreover, you can use the exclusion as often as you meet the
qualifications.
Investment
Benefits
• You build equity over time, which you take out in cash when you sell
your home.
• The profits from home investment are often greater than from many
other investments.
• Because you can borrow against it in most states, home equity can be
a source of emergency funding.
• Land appreciation adds to the value of your home.
• For many, home ownership is an important part of retirement
planning.
Personal
Satisfaction
• You gain more living space.
• You enjoy the satisfaction and pride of home ownership.
• Home ownership, for many people, is a sign of independence and
achievement.
Frequently Asked Questions by Home Buyers
• How much can I
afford to spend on a home?
• What is buyer brokerage?
• What are some of the typical things a buyer broker might do for a
customer?
• How prevalent is buyer brokerage?
• Are "low-ball" offers advisable?
• How do you choose between fixed and adjustable rate mortgages?
• Are there set interest rates for FHA and VA loans?
• What are the components of a monthly mortgage payment?
• When is private mortgage insurance required?
• Can I safely apply for a mortgage on the Internet?
• What's the difference between being pre-approved or pre-qualified
for a mortgage, and what are the benefits of one over the other?
• How can I be sure that the home I purchase is in good condition?
• What are closing costs?
Question:
How much can I afford to spend on a home?
Answer:
Many experts believe that you can afford to spend up to three times
your gross annual household income. The price you can afford to pay
for a home typically depends on these key factors:
• Your income;
• The amount of cash you have available for the down payment, closing
costs and cash reserves required by the lender;
• Your outstanding debts;
• Your credit history;
• The type of mortgage you select; and
• Current interest rates.
Lenders analyze your
income relative to your projected cost of home ownership and
outstanding debts to determine the size loan you can have.
Question:
What is buyer brokerage?
Answer:
Buyer brokerage involves an agent representing you as the buyer in a
real estate transaction for a fee. Historically in the United States,
licensees frequently represented sellers as a matter of custom.
However, there is no legal or ethical barrier that prevents licensees
from representing the interests of buyers. Just as a seller's agent is
hired to obtain the price and sales terms sought by the seller, a
buyer's agent is hired to get the best possible price and terms for
the buyer. The buyer's agent and the buyer negotiate the fee for
service. In more than half of transactions involving a buyer's agent,
the home seller compensates the buyer's representative. Less
frequently, the buyer pays the agent a percentage of the sales price
of the home; sometimes, both the buyer and seller compensate the
agent. And, sometimes, the seller makes a payment based on a
percentage of the price, finder's fee or even hourly fee for matching
a buyer up with a home and negotiating the contract. Check with your
agent on what options may be available.
Question:
What are some of the typical things a buyer broker might do for a
customer?
Answer:
Apart from helping you find the right property, a buyer broker might
negotiate for less earnest money, for all closing costs to be paid by
the seller or for other contractual terms most favorable to the buyer.
Buyer brokerage assistance may also include helping the buyer obtain
legal assistance to review proposed contracts or structural
inspections to examine the property. The types of services buyers'
brokers offer typically are the same as those provided by sellers'
brokers.
Question:
How prevalent is buyer brokerage?
Answer:
In the past, an agent representing the buyer was far more common in
commercial or land real estate transactions. However, interest in
buyer brokerage has increased substantially in the residential sector.
According to a 2001 survey by the NATIONAL ASSOCIATION OF REALTORS®,
nearly half, or 46 percent, of all home buyers used buyer brokers that
year.
Question:
Are "low-ball" offers advisable?
Answer:
It depends upon market conditions. If it's an unrealistic offer
compared to the market value of the home, you stand a chance that the
seller will not even bother to negotiate because you're so far apart.
Also, unless the home is very overpriced, the offer will likely be
rejected.
Question:
How do you choose between fixed and adjustable rate mortgages?
Answer:
Risk is involved in selecting an adjustable rate mortgage, or ARM,
because rates may go up. In contrast, a fixed-rate loan offers good
protection against rising interest rates, but you are locked in to the
initial rate if interest rates fall. Choosing between a fixed or
adjustable rate mortgage is a matter of personal choice. The former
offers stable payments while the latter offers lower initial payments.
Consider, too, the length of time you plan to own the home. If you
plan to move within three or four years, the ARM is preferable even if
rates rise through the whole period.
Question:
Are there set interest rates for FHA and VA loans?
Answer:
No. FHA and VA
interest rates fluctuate just like conventional mortgages. It's best
to shop around.
Question:
What are the components of a monthly mortgage payment?
Answer:
They are principal, interest, taxes and insurance, otherwise known as
PITI.
Principal refers
to the part of the monthly payment that reduces the remaining balance
of the mortgage. Interest is the fee charged to borrow money. Taxes
and insurance refer to the amounts that are paid into an escrow
account each month for property taxes and mortgage and hazard
insurance.
Question:
When is private mortgage insurance required?
Answer:
It is typically mandatory if you put
less than 20 percent down, to protect the lender against loss if you
default. Effective for loans written on or after July 29, 1999,
lenders must automatically cancel PMI when the mortgage balance is
reduced to 78 percent of the home's original purchase price.
Question:
Can I safely apply for a mortgage on the Internet?
Answer:
More and more buyers enter the
marketplace with their mortgage in place, including many who have been
pre-approved or pre-qualified via the Internet.
Question:
What's the difference between being pre-approved or pre-qualified for
a mortgage, and what are the benefits of one over the other?
Answer:
You can easily get a pre-qualification letter by calling a mortgage
broker or lender, and providing some basic financial information.
Similarly, getting pre-qualified on the Internet is quick and easy. In
contrast, a pre-approval letter involves verification of the
information, which means that the lender will ask for documentation to
confirm your employment, the source of your down payment and other
aspects of your financial condition.
Indeed, getting a
pre-approval may be more time consuming than getting a
pre-qualification but carries far more weight. Sellers often prefer to
negotiate with pre-approved buyers because they know that these buyers
are financially qualified to get the financing they need to close the
transaction. Moreover, a pre-approval letter lets your real estate
agent know that you're a well-qualified buyer who is serious about
purchasing a home. These factors notwithstanding, pre-approval letters
aren't binding on the lender, are subject to an appraisal of the home
you want to buy and are time sensitive.
Question:
How can I be sure that the home I purchase is in good condition?
Answer:
One of the standard contingencies that should be put into an offer is
an inspection contingency, which allows you to have professionals
inspect the property to your satisfaction. Typically scheduled within
a certain five-to-eight day window after the contract is signed, a
home inspection is a thorough examination of the physical structure of
a home — including, but not limited to, foundation, attic, basement,
windows and doors, heating and cooling systems, electrical wiring and
plumbing. A positive home inspection should increase your confidence
that you are making a solid investment, and your agent can advise you
about which inspections are recommended or required. Note: The home
inspection is a buyer's cost.
Question:
What are closing costs?
Answer: They are expenses — over and above the price of a home —
incurred by buyers and sellers in transferring ownership of a property
and can be substantial. Closing costs vary in different parts of the
country and usually include a mortgage origination fee, an attorney's
fee, accrued |
