HOME OWNERS - Important information

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HOME OWNERS - Important information

The first step is to think about how much you can afford to pay out each month for a mortgage payment. Keep in mind that a mortgage payment typically includes property taxes and mortgage insurance as well as the mortgage payment itself. The general rule of thumb is that no more than 30 percent of your gross monthly income should be spent on housing expenses. If you plan to borrow money from a lender then you might want to consider getting pre-qualified. Pre-qualification is helpful to the buyer for planning purposes because it gives you an estimate of the maximum mortgage amount you can afford based on your current financial situation. Unlike a pre-approval, pre-qualification is not a commitment on the part of the lender, but it does give you an idea of the mortgage amount you probably qualify for. Knowing this information in advance can help you figure out a price range for your new home.

When looking for a real estate agent ask yourself the following:

Is the Agent Full-Time? Is the Agent Experienced?

Look for an agent with at least a few years of full-time experience. As with many professions, real estate agents acquire most of their skills on the job.

Does the Agent Listen, and Communicate Clearly?

The agent must understand what’s important to you in your home purchase and be able to tell you what you need to know about a home.

Is the Agent Willing to Negotiate For You?

To get the best home for the best price you’ll have to negotiate with the seller. If the agent is not willing to show you houses that are 20 percent over your price range or to go to bat for you when negotiating with the seller, you should find a new agent.

Is the Agent Careful In His or Her Work?

You need an agent who will cover all the details that go into buying a home.

Here are some negotiating tips:

Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there. Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.

Know what comparable homes are selling for.

When the seller won’t budge on price try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself. Don’t forget the real estate agent’s commission. This is negotiable, too.

Depending on your particular situation, owning a home makes might make more economic sense than renting one. With home prices dropping and mortgage rates at historically low rates, people who are planning to stay in their homes long-term can build equity over time and reap the benefits of writing off mortgage interest on their taxes. A modest increase in value represents an even greater gain for people who make a typical down payment of 20 percent or less. The higher your income tax bracket, the better your return.

You may want to rent however if you can find cheap housing, such as a rent-controlled apartment or the cost of renting is substantially less than owning. If you are young and single, newly divorced, move often with your job, or just don’t want the responsibility of home ownership, then renting probably makes more sense. It’s tough to recover the costs of buying a home within the first five to seven years, so if you’re planning on moving before then renting is a better option. Retirees also may want to sell the family homestead and invest the proceeds. If you live in an area where housing prices are falling, then wait until the market bottoms out before you buy.

When considering a lock-in, ask the following questions:

  • Does the lender offer a lock-in of the interest rate and points?
  • When will the lender let you lock in the interest rate and points?
  • Will the lock-in be in writing?
  • Does the lender charge a fee to lock in the interest rate?
  • Does the fee increase for longer lock-in periods?
  • If so, how much? If you have locked in a rate, and the lender’s rate drops, can you lock in at the lower rate?
  • Does the lender charge an additional fee to lock in the lower rate?
  • Can you float your interest rate and points for now and lock them in later?
  • What rate will be charged if the lock-in expires before settlement? Will it be the rate in effect when the lock-in expires?
  • If you don’t settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?
  • If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration, will the lender charge an additional fee for the second lock-in?

The rule of thumb is to pay off your mortgage if there aren’t any better uses for your money. As far as loans go, mortgages have moderate interest rates, and interest payments are tax deductible. However, any investment that yields substantially more than the interest rate on your mortgage (such as tax-deferred retirement plans) is probably a good alternative. Paying off credit card balances is also a better use of your money than paying off a mortgage, but if you know you will just spend the money otherwise, paying off your mortgage is a good idea.

There are two basic kinds of mortgages: fixed-rate and adjustable. Fixed-rate mortgages carry the lowest risk and are an especially good deal when interest rates are low. Adjustable-rate mortgages typically cost less, but they can become expensive if interest rates rise substantially. Some of them also amortize negatively, which means that your payment does not cover all of the loan’s interest for the month. Your balance will increase, and you will owe interest on the interest. You can get either loan for different terms, typically 15 or 30 years.

It may depend on how much risk you can tolerate. A traditional 30-year, fixed-rate mortgage is still the safest way to go. Your monthly payment stays the same for the life of the loan. You are protected from increases in interest rates, and if rates go lower, you can always refinance.

Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to several lenders to find out what the current refinancing rates and what costs are associated with refinancing. Costs can include items such as appraisals, attorney’s fees, and points.

Once you have an estimate of what the costs might be, figure out what your new payment would be if you were to refinance. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). Be aware, however, that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for pre-payment), it makes good financial sense to prepay as much as you can every month, but there are some exceptions. For example:

You do not have an emergency fund stashed away. Once you’ve put away three to six months’ worth of living expenses, then you can begin paying down your mortgage. You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

There are a few individuals who might be better off not paying down their mortgages since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on an investment, and long-term investment goals.

  • Make cosmetic improvements to get the house looking as good as possible
  • Increase your home’s appeal to a wider range of potential buyers.
  • Make your home cozy and inviting when potentials buyers come by.
  • Offer a warranty. 
  • Create a home sale kit with your broker.
  • Let the broker show your home. 
  • Offer a bonus to your broker.
  • Take it off the market and re-list it later.

Find out as much as possible about the potential buyer.

Avoid being confrontational. The offers you receive will likely be 10 to 15 percent below your asking price. Do not be offended by this or by any “low-balling” techniques engaged in by buyers. Reveal as little as possible about your own situation.

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