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Your home is likely the largest purchase you’ll ever make, and there are a number of things you should know and understand before you buy...
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Your home is likely the largest purchase you’ll ever make, and there are a number of things you should know and understand before you buy. We’ve included ten of the most important things here:
1. While many have learned this lesson the hard way, it’s worth repeating here: your home is not a bank. Thousands of homeowners have lost their homes because they used home equity loans to finance any number of purchases. When the value of their home decreased, and the interest rate, along with their mortgage payments, increased, they were unable to continue paying their mortgages.
2. If you are a first time homebuyer, understand that there are many costs involved with the purchase of a home in addition to the actual mortgage payments. Depending on the type of loan you are seeking, you’ll be expected to provide at least 3.5% of the home price as a down payment, plus other expenses such as closing costs, an escrow account, property insurance, taxes, HOA fees and possibly mortgage insurance.
3. Pay attention to the Annual Percentage Rate or APR. The APR more accurately reflects the actual cost of the loan. It will reflect not only the interest, but also mortgage insurance, points, and so on, which will allow you to plan your finances more precisely.
4. If you are confused about the term “points,” you aren’t alone; many homebuyers have no idea what this means and yet they hear it thrown around all the time. A point is equal to 1% of the loan amount – a point on a $100,000 loan would be $1,000 – and buyers often pay points up front to help lower the interest rate. Paying one point, for example, could lower the interest rate by 0.25%.
5. One benefit that homeowners have over renters is the interest they pay on their mortgage is tax deductible. This adds up over time, and it effectively lowers the interest rate a homeowner pays on the mortgage.
6. No matter what kind of mortgage you are seeking, make certain that you understand all the nuances of your loan. Don’t hesitate to direct any questions you might have to your mortgage professional. You’re likely borrowing a very large sum of money to finance a structure that helps keep you warm, safe and dry, so understanding even the fine print is essential.
7. Understand that there are significant costs to maintaining a home once you buy it, and you’ll need to factor those things into your budget. For instance, what happens if the furnace conks out in the dead of winter? Not only are you responsible for the cost of the new furnace, but for the cost of the installation as well. Unlike renting, where the property owner would typically be responsible for these types of mishaps, a homeowner is in charge of all of it, whether it’s the actual replacement cost or the responsibility of finding a competent repairperson.
8. When you buy a home and live there for at least two of the last five years, you can make up to $250,000, as a single person, or $500,000, if you’re married, and not have to pay any capital gains tax upon selling it. The two-year time limit does not have to be sequential, nor do you have to be living in it when you sell to qualify for the 2-year exclusion.
9. You will likely have to pay Private Mortgage Insurance (or just Mortgage Insurance) as part of your monthly mortgage payment if you put less than 20% down towards the purchase of your house. This protects the lender in case you default on your loan.
10. The Real Estate Settlement Procedures Act (RESPA), was established to protect borrowers by requiring lenders to disclose certain types of information. This includes the amount of all closing costs, any business relationships the lender might have with other parties in the transaction, a Good Faith Estimate regarding the charges, and whether or not the lender intends to transfer the loan to another lender. Most of these things must be provided to borrowers within three days of the application.
If you want to get a better understanding or perhaps have a more in-depth discussion regarding any of these ten things, be sure to talk to your mortgage professional. |
