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Understanding Homebuying
 Click here Payment Calculator A home loan is a long-term commitment. Understanding each aspect of the process can make you more comfortable and confident in your negotiations. Here is a quick review of the basics regarding a purchase transaction: The purchase price = Your downpayment + the amount of your loan The lender extends the buyer a loan for the price of the home over and above the down payment. When you sign a mortgage agreement, you are agreeing to pay back the "principal" amount (which is the amount you are actually borrowing) plus interest, which is what the lender charges for the money. Interest Rates will vary, depending on the type of loan and your ability to repay. The buyer agrees to make monthly payments to the lender to repay the money borrowed, plus interest at the rate charged. When budgeting, remember your monthly mortgage payment is only a portion of the total costs involved in owning a home. Keep in mind that taxes, insurance and other costs incurred when owning a home may add substantially to your total monthly housing costs. Monthly payments into an impound account (also called a Tax and Insurance Reserve or escrow account) may be required if the lender is paying property taxes, mortgage insurance and hazard insurance for you. Before closing, your purchase agreement may go through escrow, which is the process through which all required money and documents are delivered to a third party to hold until the buyer, the seller and the lender have fulfilled all of the conditions of the agreements. A lender may charge a loan origination fee or points. Charged at the beginning of the loan, points are part of the cost of borrowing money. Each point is equal to 1% of the amount you borrow. You may decide to pay additional points in order to reduce the interest rate, margin or lifetime cap. If so, those extra points are considered a buydown fee and may not be tax deductible. Check with a tax adviser if you have questions. What Are Your Assets? The first thing you have to examine when deciding how much you can spend on your new home is how much you are worth, taking into account your income, savings, investments and other holdings such as Individual Retirement Accounts (IRAs) or Keogh plans, the cash value of your life insurance, pensions or corporate savings plans, and equity in real estate. Lenders will need this information before deciding to extend you the loan. Often, the amount you earn may not be as important as how you earn it. Bonuses and commissions can vary greatly from year to year, and some lenders are reluctant to depend on them. Some lenders allow use of this income if you can show a two year running history. The same holds true if some of your salary is based on overtime pay. To get a realistic view of what your income level actually is, average your income (including bonuses, commissions and overtime) for the past two or three years. While turning your savings, investments and other holdings into cash (making them "liquid"), remember that you will probably have to pay tax on most of it. One source of tax-free money often overlooked is a gift, or money given by a parent or other relative that need not be repaid. A person may give another person up to $10,000 per year without either person being taxed. Your parents, for example, could give you and your spouse up to $40,000 tax free. Liabilities Your liabilities are those expenses for which you are responsible each month. These include outstanding loans, such as student, auto, personal and so on, as well as credit card balances. When calculating your liabilities, use the entire balance for your credit cards as if you had to pay them off entirely this month. That way, you give yourself some breathing room should you run up an unusually high balance during your mortgage term. Emergency Funds It is always wise to put a little money away "for a rainy day", especially when you are paying off a mortgage. If something arises such as unexpected medical costs or substantial auto repairs, you would want to be able to pay those expenses without jeopardizing your ability to meet your mortgage payments. Most financial experts suggest that you always have six months income on hand in case of an emergency. Lending requirements generally require two to three months mortgage payments plus taxes and insurance in reserve after buying the home. Annual Income When calculating your annual income, remember to take into account all sources. You may, for example, get dividends from investments, alimony or child support payments. Annual Expenses This list should get you started, but you may have special expenses that are not listed here. Remember that when you buy your house you will no longer have to pay rent, and your utilities costs will change. You can use this money for your mortgage payments or other operating costs associated with your new home. Private Mortgage Insurance In the event that you do not have at least a 20 percent down payment, lenders will allow a smaller down payment - as low as 5% in some cases. With the smaller down payment loans, however, borrowers are required to carry Private Mortgage Insurance. Private Mortgage Insurance will require an initial premium payment of 0.5 percent to 1.0 percent of your mortgage with a 10 percent down payment. This would mean a premium payment of $338 to $675 for the first year and an extra $15 to $20 a month in subsequent years. The Costs of Homeownership Of the costs of homeownership, the ones listed on the next page are the most important. Homeowners insurance premiums usually run about $400 to $700 per year, and property taxes and maintenance costs will vary, of course, depending on the size, age, and condition of your new house. Estimates for the costs of utilities, maintenance and improvements can be obtained from Realtors, local utility companies and others. Some homebuyers will also have an additional cost of homeownership if they are buying into a condominium or co-op. Condo or co-op fees are additional amounts usually paid monthly on top of the mortgage payments. Some homeowners will also incur a home owners association fee for their block or neighborhood. These fees vary greatly from location to location.
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