Buying a house
What to consider
Some Advantages of Owning Your Home
There is a lot of personal satisfaction with owning your own home, but there are more advantages than that, including some pretty significant financial ones. The cost of your mortgage loan interest can be deducted from your federal income taxes, and usually from your state taxes. Interest (as opposed to principal) will be nearly all of your monthly payment for over half the number of years you'll be paying your mortgage. So this adds up to some savings come income tax time. Property taxes that you pay are also deductible. Another financial plus in owning a home is the possibility that its value will go up through the years. Property values don't always increase but generally over time the trend is to increase in value.
Choosing a Location
Deciding on where to buy your home depends mostly on where you work and whether you are willing to commute or not, and also on your family lifestyle. If you have children, how good are the schools and how close are they to the neighborhood? Will you need public transportation? Is it available? If you're considering moving to an a neighborhood you aren't familiar with, drive and/or walk around it during the day and evening. Visit with some of the residents. Find out what they like and don't like about the neighborhood. It's also a good idea to travel the route to and from your work - and do that during the same hours that you would be driving should you purchase in that neighborhood.
There are many other factors you should consider when choosing the location of your home. Contact the local police department to find out about crime in the area. Also, contact the city to determine if there are any proposed changes to zoning or any new major developments planned.
Hire an Experienced Realtor to Help You
Using a real estate agent is a particularly good idea for a first-tim home buyer. All the details involved in home buying, especially 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.
Understanding "The Market"
Its important to understand the market conditions at the time you are going to buy a home. Your Realtor can help educate you and there is a lot of information available on the internet. You'll want to look at the trends with home prices, mortgage rate movement, the level of real estate sales activity. The more you know, the more control you have. In a "buyer's market," the number of homes available for sale exceeds the demand, so prices will either stabilize or drop. With fewer buyers and more homes, you not only have more options to choose from, you also have greater negotiating leverage. You have more time to look for the right home and you can evaluate the choices without feeling pressure to act too quickly. A "seller's market" is when the number of potential buyers exceeds the number of homes for sale in a market.
What Will I Have to Pay for At Closing?
How much money will I need? In general, you need to come up with enough money to cover three costs: earnest money is 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; and closing costs, the costs associated with processing the paperwork and the loan if you are borrowing money to buy a house. You will learn more about the specific amounts of these items in working with both your Realtor and your loan officer.
What is a Mortgage?
A mortgage is security for a loan on the property you own. It is repaid in regular mortgage payments which are blended payments. This means that the payment includes the principal (amount borrowed) plus the interest (the charge for borrowing money). The payment may also include a portion of the property taxes.
How Much Can I Afford?
All taken into account, how much can you afford? The shortest and best answer to that question is: it depends--on a number of factors. The most important are your gross household income, your down payment, and the mortgage interest rate. Lenders also consider your assets and liabilities. Your own lifestyle and debt comfort zone also come into play. If you understand these variables, you can examine all your options. You can make the best choice for you and even save money. Lenders follow these two simple rules to determine how much you can afford in monthly housing costs: The first affordability rule that many lenders suggest is that your monthly housing costs shouldn't be more than 28 percent of your gross monthly income (before taxes and other paycheck reductions). Housing costs include including mortgage principal and interest, hazard insurance, real estate taxes, and PMI (mortgage insurance - if applicable), but exclude utility bills.
FHA Loans
If you don't have great credit and don't have much money for a down payment, your best bet might be an FHA loan. These loans have the lowest down payments available (other than VA loans). Currently the minimum down payment for FHA loans is 3.5%. These are good loans and are helping lots of people who can't come up with the higher down payment required with conventional loans.
Here are a few more things that you will need to understand in buying a home:
Mortgage insurance: Which is also known as private mortgage insurance (PMI), is required for some loans (all FHA loans). It protects your lender, should you default on your loan. According to the Federal Reserve Bank of San Francisco, "Under [The Homeowner's Protection Act of 1998], mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan."
Escrow: With a purchase as large as this, it is important that one party doesn't run off with all the funds and that there be a neutral party to handle the funds. This is where an escrow comes into play. All necessary and agreed upon funds are put into a third party account. When all terms have been met, then the funds are released to the appropriate parties.
Offer or purchase agreement: When you have found a home you like, you'll discuss with your agent how much you want to offer for the house. This will sometimes be than the price the seller is asking and sometimes it may be more. It will be based on the current market in your area and the condition of the home, and the price of homes in the neighborhood. Remember, your offer is the price you are willing and able to pay for the property. Listen to your Realtor's advice on how much to offer.
Property taxes: Property taxes are paid each year to your local county government. In Riverside County we pay twice a year. Property taxes are generally a percentage of the value of your property. But in Southern California, some developments and neighborhoods have additional taxes (mello roos and special assessments). Read about Mello Roos taxes. Those are usually a flat fee that is paid in addition to the base tax rate. The more expensive your home, the more you will spend on property taxes.
Hopefully, this will help prepare you as you get started looking at homes. When the time is right and you find a house that you would like to make an offer for, make sure the asking price in line with prices of similar homes in the area, the price is in line with how long the home as been on the market and be sure to consider how much competition with buyers there is in the market at that time. Your agent can provide information on the prices of similar homes - usually called "comps" or comparable homes.
Read about First Steps for First Time Buyers
The Perfect House Does Not Exist
