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BUYING A HOME

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					BUYING
A HOUSE
                          Financial Reasons

The Decision to Buy

   Why buy a house?
–   Investment/Forced savings
–   Tax deduction
–   Rent keeps going up
                             Non-financial
                                reasons
The Decision to Buy

    Why buy a house?
     –   Settle down/sense of permanence
     –   Fix up/decorate
     –   Yard/garden
     –   American dream
Advantages of Renting

   Less responsibility
   Easier to move
   Invest down payment money in
    something else
   Smaller monthly payment
Financial Comparison

  $200,000 house, 20% down payment, 6.5% interest


Rent                 1,000        Mortgage          1,011
Electricity             50        Electricity          75
Heat (included)                   Gas                  75
Interest income        (133)      RE Taxes            200
Insurance                40       Tax savings        (286)
                                  Insurance            85
                                  Repairs             100
                       957                          1,260
The real financial benefit of home
ownership – APPRECIATION and
FORCED SAVINGS

   Home equity loan to pay for
    college
   Mortgage-free retirement
   Sell and down-size when kids are
    grown
Can you afford to buy a house?
 Down Payment

    How much?
     –   20% is best – lower mortgage rate
     –   But – it’s possible to get 95%, even 100% financing


Price of house         $100,000      $150,000       $200,000
    20%                 $20,000       $30,000        $40,000
    10%                 $10,000       $15,000        $20,000
     5%                  $5,000        $7,500        $10,000
Where do you get the down
payment?

   Savings
    –   What investment vehicle should you use while
        you’re saving?
   Gift from family
   Loan from family? Probably not.
   Retirement account
Planning Point

   Don’t spend your last dollar on the down
    payment
    –   Emergency fund
    –   Closing costs
    –   Moving expense
    –   Furniture, decorating
    –   Repairs
Can you afford to buy a home?
The MORTGAGE

   The monthly payment
     – Amount of the mortgage – Principal
     – Interest rate
     – Amortization period
        30 years
        15 years
        Other?
Can you afford to buy a home?
The MORTGAGE

            divide by 12               Ignore these


    =PMT(rate,nper,pv,fv,type)

   # of                    Mortgage amt – put
   months                  in as a negative
Can you afford the mortgage?
   Add up:
     – Mortgage payment
     – Real Estate Taxes
     – Insurance
     – Condo Association Fees
   May not exceed 28% of your monthly income

   Add other debt payments
   May not exceed 36% of your monthly income
Paying for taxes and insurance

   Lender may require these to be added to
    monthly payment, held in escrow
   Alternative – pledge a savings account at the
    bank
   When equity is sufficient, no longer necessary
    to escrow these payments.
   PLAN AHEAD.
Repairs

             Build into budget
             Set the money aside. Costs
              don’t come on a monthly
              basis.
             Know the vulnerable spots.
              –   How old is the roof, heater, etc.
              –   Exterior painting?
Can you afford a home?

   You may qualify for the
    mortgage, but ask
    yourself – “Can I really
    afford it?”
   Importance of your
    personal budget.
   Don’t become a slave to
    your house.
Choosing a Home
Choosing a Home

   Single family detached
   Townhouse
   Condominium
   Cooperative
Choosing a Home

   Location, location, location
    –   City vs. suburb
    –   School district
    –   Safety
    –   Convenience
    –   Surrounding properties
    –   Views
Choosing a Home

   Size of house
   Size of lot
   Condition – “Move-in” vs. “Fixer-upper”
   New construction vs. older house
What features are important to
you?

   Lots of bedrooms
   Master bath
   Formal dining room
   Basement
   Family room
   Large rooms vs. many rooms
   Character/ style
Will the house go up in value?

   Don’t buy the largest or most luxurious house
    in the neighborhood.
   Watch out for unusual layout, features, or style.
   Location is most important to appreciation.
   Single family detached tend to appreciate more
    than condominiums.
   Supply and demand – If they are still building
    houses in the subdivision, yours isn’t likely to
    appreciate for a couple of years.
Will the house go up in value?

Remember – for the first couple of years,
 transaction costs are likely to eat up any
 appreciation.
There’s no perfect house

   Every decision involves trade-offs
   Compare at $200,000 –
    –   One bedroom condominium in downtown Chicago
    –   4 bedroom house with family room in far out suburb
   Quality vs. size
Most Important

   What’s right for you
    and your family?
   You should like the
    house
   Your wife should like
    the house
Understanding the Process
How do you start?
            Read the Newspaper
            Visit open houses
            Make some preliminary
             decisions
             –   Location
             –   Single family vs. condominium
             –   Price
            Contact a realtor
Working with a Realtor

   Sellers’ agents vs. Buyers’ agents
   Realtor should work for what she earns
    –   Get you information on listings
    –   How long on the market?
    –   Compare comparable properties
    –   Advise on negotiations
    –   Pick out properties for you to look at
Get pre-approved for a mortgage

   Know what you can afford
   Improve your bargaining position
   Pre-approval vs. pre-qualification
Making the offer

   Standard form contract supplied by realtor
   How much should you offer?
    –   How long has property been on the market?
    –   Compare other properties
    –   How much can you afford?
    –   Advice from realtor
   Realtor must submit all offers.
   The “insulting” offer
What to include in the contract

   Price
   Earnest money
   Mortgage contingency
   Inspection contingency
   Title insurance
   Condo provisions
What to include in the contract

   Real estate tax pro-ration
    –   110%? 115%?
   Attorney review – usually 5 days
   Disclosure statement
   Closing/ possession date
Working with an attorney

   Engage the attorney
    early
   Ask Realtor for
    recommendations
   Give contract to
    attorney immediately.
Do you need an attorney?

   The biggest investment of your life
   Make sure your interests are protected
   Deal with problems that arise
   Explain documents/ procedures for closing
The Home Inspection

   To uncover major problems
   Not an opportunity to re-negotiate the deal
   But you can back out if there are serious
    problems
   Ask Realtor for recommendation
   Go with the inspector; take notes
Home warranty

   Added benefit, if you can get it
   Usually covers 1 year
New Construction

   “Substantial completion”
   Occupancy permit
   Punch list
   Warranty
   Who stands behind the warranty?
   Builder’s reputation and track record
   Is closing date fixed?
                        Important dates

   Attorney review contingency – 5 days
   Inspection contingency – 10 days
   Mortgage contingency
   Walk through
   Closing date
Applying for a Mortgage
Where to Apply

   Your bank
   Other local institution
   Mortgage broker
   Realtor recommendation
Application Process

   Financial data
    –   Assets
    –   Debts
    –   Income
    –   Expense
   Credit report
   Bank will verify financial data
Credit Report

   3-agency credit report w/ credit score - $39.95
   Without credit score - $29.95
   Single-agency report - $9.00
   Yahoo.com – click “Finance”
   Equifax.com
   Equifax 1-800-685-1111
   “Free” credit report – watch out
Application Process

   Application fee
   Property appraisal
   Title Insurance
   Lock-in fees
   Other fees? Get estimate up front
Mortgage rates

   Compare
    –   Newspaper
    –   Web
   Should you pay points?
    –   How long do you plan to stay in the property?
    –   Points are deductible on a new purchase. On a
        refinance, you must spread out the deduction
Fixed vs. adjustable (ARM)

   How long do you plan to stay in the property?
   Are rates high or low right now?
   Are there caps on ARM’s rate increases?
   Make sure you can still afford the ARM after
    the maximum rate increase
Term of the Mortgage

   Amortization period
    –   30-year mortgage is typical
    –   Consider 15-year for lower rates
   Balloon mortgage
    –   5/23 or 7/23
If you buy a fixer-upper,
you may want to arrange
additional financing at the
outset to pay for the costs
of fixing the place up.
Mortgage Insurance

   PMI required by lender if less than 20% equity
   PMI is expensive. Cancel as soon as possible
   Homeowners’ Protection Act



Should you buy mortgage life
insurance to protect your family?
FHA/ VA loans

   Low or no down payment
   More paperwork/ red tape
   Seller may be required to make repairs, pay
    points
   Maximum amount available
                              www.hud.gov

Maximum FHA Loans

   Chicago Metro                Indiana
     – Cook, DuPage,               – Lake, Porter
       Lake, McHenry,                counties & most of
       Kendall, Will, Kane,          Indiana
       Grundy counties
   $234,150                     $154,896



          VA Maximum - $200,000
Seller Financing

   Installment Agreement for Warranty Deed
    –   Also called “Land Contract”
   Deed and Carry-back
   Lease - option
Seller Financing - Risks

   Risks to Buyer
    –   Seller may sell to someone else, too.
    –   PROTECTION: Title insurance; Record the contract
    –   Due on sale clause in underlying mortgage
    –   Seller defaults on underlying mortgage
    –   PROTECTION: Buyer make payments directly to
        mortgage company.
Seller Financing - Risks

   Risks to Seller
    –   He becomes a lender. Has to foreclose if buyer
        doesn’t pay
    –   Due on sale clause in underlying mortgage
    –   Seller is personally liable on underlying mortgage
    –   Interest rate risk
    –   PROTECTION: 5- or 10-year balloon
Lease-option

   Helps save for a down payment
   Make sure contract adequately spells out the
    terms
    –   How much of the rent applies to down payment?
    –   How much time to exercise option?
    –   What if option is not exercised?
Meanwhile……

             Arrange movers
             Address changes
             Utilities
             Time off from work
             Get money ready for
              closing
The Closing
The Cast of Characters

 Seller(s)            Seller’s Realtor
 Buyer(s)             Buyer’s Realtor
 Seller’s Attorney    “Closer” (Title
 Buyer’s Attorney      Company
                        Employee)

          Where is the lender?
Seller must prepare or obtain
documents

 Title insurance       Transfer tax
  commitment             declaration
 Survey                  – State
 Deed                    – County
 Affidavit of Title      – City?
 Bill of Sale          Payoff letter
 ALTA statement        Seller’s Closing
                         Statement
Buyer needs to bring

   Insurance certificate
   Certified Check
     – Find out the amount one or two days ahead
     – Better to have a little extra. Title Company
       will give refund.
What happens at closing?

   Buyer signs all the documents in “lender’s
    package”
    –   Note & mortgage
    –   APR disclosure
    –   ALTA statement
    –   Much more
   Closer makes sure that lender’s requirements
    are satisfied
What happens at closing?

 Closer prepares RESPA statement
 Seller hands over deed and other
  documents
 Closer approves documents, clears title
 Buyer turns over money
 Lender approves disbursement
 Closer balances and cuts checks
Seller’s Closing Costs

   Owner’s title policy
   Commission
   Transfer tax
    –   Local transfer tax may be paid by buyer
   Survey
   Seller’s attorney
   Recording fees – release deed
Buyer’s Closing Costs

   Lender’s title policy
   Local transfer tax?
   Mortgage fees
   Points
   Recording fees – deed & mortgage
   Buyer’s attorney
Pro-rations and prepaid items

   Real estate tax
    –   Seller gives Buyer credit
    –   Lender may take the credit back
    –   Re-proration Agreement
   Condo association fees
    –   Buyer gives Seller credit
   Mortgage interest
    –   Buyer may pre-pay with mid-month closing
Taking title to real estate

   Tenants in common
   Joint tenants with right of survivorship
   Tenants by the entireties

    If husband has credit problems, may
    want to take title in wife’s name (or
    vice versa). But then only wife’s
    income is considered to qualify for
    mortgage.
Title Insurance

   Chain of title/ Recorder’s office
   What is title insurance?
   Why is it important?
   Extended coverage
   Inflation rider
After the Closing
Important Papers

   Remember the first mortgage payment
   Closing documents
    –   Original recorded deed
    –   Title insurance policy
    –   RESPA (closing statements)



                    Create a permanent file.
The Condo Association

   Monthly Maintenance
   Rules and Regulations
   You have a vote
   Serving on the Board
Planning for the Future

   Make additional mortgage payments, when
    possible
   Make improvements that increase the value of
    your home
Re-financing

   If rates go down
   But watch out for costs
    –   Title insurance
    –   Appraisal
    –   Other fees
   How long do you plan to stay there?
Refinancing

When refinancing, instead of
seeking a lower monthly
payment, try for a shorter term
mortgage.
Convert a 30-year mortgage
into a 15-year, or a 15-year
into a 10-year.
Home Equity Loan

   Often no cost
   Low interest rates
   Interest rate is not fixed
   Required monthly payments are interest only
   Balloon, usually 5 years
Why take out a home equity loan?

   Home improvement
   Pay off other debts
   College costs


Tax deductible?
Home equity loan can be very
useful, but it can also be dangerous

   Make sure you have a plan to pay it back –
    interest and principal
   If you pay off credit card debt, don’t run up the
    credit cards again. BUDGET
   Foreclosure risk – you can lose your home.
   REMEMBER – if you take out all your equity
    now, you won’t have any left when you sell.
When it’s time to sell
Working with a Realtor

   Exclusive Listing Agreement
   Commission
    –   6% is usual
    –   7% on lower value properties
    –   5% on high value properties
    –   10% on vacant land
   Market analysis
Buying and Selling

   Do you buy first or sell first?
   Contingent contracts
   Interim financing
   Coordinating the closings
Gain on the sale

   Gain on sale of principal residence is exempt
    up to
    –   $250,000 – single
    –   $500,000 – joint return
Questions????

				
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