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      What will your home be?
Single family, Condo, Co-op or Rent?

Owning a Home
1) Federal Income tax deduction of mortgage interest and
property taxes if you itemize.
2) Inflation Hedge – an inflation hedge is an investment of asset
that appreciates in value faster that the inflation rate. Be careful –
don’t buy on a nuclear was site or other hazardous material site.
3) Its your castle and you can do what you want for the most part.
1) Down Payment
Folks often borrow to get the house, but the bank usually will not
finance 100% of the purchase. So a down payment must be
Banks figure a loan to value ratio by
Loan amount/value of house. Banks will set this at an amount
– say 85%. This means you would have to have a 15% of the
value of the house as a down payment.
Help with a down payment
-save early
-Ask your parents/grandparents
-Tax Relief Act of 1997 says first time home buyers take out
up to 10000 of retirement money to make down payment, but
have to pay tax on the money taken out of retirement plan –
this is a penalty
-Fannie Mae – organization that helps folks with down
payments – you have to be eligible.                            3
Other costs
2) Points or mortgage points are fees charged by lenders. 1
point equals 1% of the borrowed amount.
Impact of points – exaggerated example.
Borrow $2 at 5% for 1 year, 100 points as the fee.
You pay back $2.10. But you really only get $1 in loan value.
So you get $1 and pay back $2.10 Interest here is really 110% -
figured from 1 growing to 2.10 or 2.10 = 1( 1 + i), or i = 1.1
Points really mean the effective or real interest rate is much
higher than listed.

3) Closing Costs – these are other fees and charges paid at the
time of getting the loan. These costs have the same basic impact
as fee.
Affordability Ratios
The lender uses a few rules of thumb as a guide to a borrows
qualifications for a loan.
1. Monthly mortgage payment/monthly gross income can not
exceed 25 to 30%
2. Monthly installment debt/monthly gross income can not
exceed 33 to 38%.
So monthly, (mortgage payment + installment debt)/gross
income can range from 58 to 68% and you would qualify for the
4) Property taxes and Insurance costs
You will have these costs and have a choice of how to pay.
A – pay out of pocket when incurred
B – pay into an escrow account each month and use that
account to pay when incurred.
Property and insurance payments are typically incurred every 6
5) Maintenance and operating costs
You know these, utilities, painting and plumbing, mowing the
lawn and the like.

Other issues with getting a house
-you may want to try to prequailfy for a loan. You do this before
you shop for a house. It helps you understand what you can
-Earnest money – this is money you put up when you make an
offer to buy on a house. You could lose the money if you back out
without cause.
-Title Check – this is done by a lawyer or title insurance company
and verifies the person selling the home is the ‘real owner.’

Types of Mortgages
-Fixed Rate mortgages – the rate of interest is the same over the
life of the loan. The term can be 30 years, 20 years or even 15
-Balloon-payment mortgage – could be a 30 year mortgage, but
every 5 years or so the rate is redone. This type is somewhat
risky because the new rate could be higher.
-Adjustable Rate Mortgages – Arms – Here the main idea is that
the rate of interest is changed relatively frequently – could be as
much as every three months. Think back to the amortization
schedule we had before. At the end of a period they know how
much you owe. They refinance that at the new rate for the
remaining time. This can be good if you expect rates to be
relatively stable and trending down. Plus, compared to a 30
year fixed the initial rate is typically a few points below the 30
year fixed rate.
Who backs the loan?
Conventional loans – the lender assumes all the risk of you not
paying back.
FHA – Federal Housing Administration, for a fee or charge up
front will pay off your loan if you can’t. There are details.
Guaranteed Loans – An example of this is a VA loan guarantee.
The Veterans Administration guarantees the loan for veterans.
The difference between FHA and this is fees are less. Your
group membership is worth something.

Things to consider when refinancing.
Of course, if the new rate is better that is a good deal, but you
may have to pay points and other fees. It could still be a good
deal, but often you have to stay in the house for a few years for
the benefit to be real. So if there is a chance you might move
refinancing may not be worth it.


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