May 31st, 2017 5:49 AM by Jackie A. Graves, President
Renting might be ideal for people who don't want to be tied down
or deal with costly home repairs. Although renting has its advantages, there's
no escaping the fact that rent never ends and owning is sometimes cheaper than
Owning a home also presents an opportunity to earn equity and
write off mortgage interest. But even considering these financial rewards, the
process of buying a home is pricey. There are costs before, during and after a
purchase. And if you don't prepare, you'll get more than you bargained for.
a Low Mortgage Rate
Mortgages come with interest, which is the price borrowers pay
for using a lender's money. Interest factors into the mortgage payment and how
much you pay for the property in the long run. Since mortgage rates vary from
lender to lender, it's important to shop around and compare rates among
Some mortgage programs only require a minimum credit score
between 580 and 620, but you'll need a much higher score to qualify for the
best interest rates — around the mid-700s or higher. Paying your bills on time
and paying off debt can improve your credit score and help you snag a cheap
rate because these factors make up 35 percent and 30 percent of your credit
score, respectively. Additionally, order your credit report to dispute errors
improvements to raise your credit score.
"The quickest way to boost your score is to reduce balances
that are more than 30 percent of your credit limit," said J.R. Duren,
personal finance writer for Highya.com,
a consumer-focused website. "By doing so, you can give your scores a
boost, sometimes in the range of double digits. This simple action could raise
your score enough to save a few tenths of a percent on your interest rate,
which over the course of 30 years can save you at least $10,000."
the Bank a 20 Percent Down Payment
You don't need a 20 percent down payment to get a mortgage loan.
A conventional loan only requires 3 to 5 percent down, and an FHA loan requires
as little as 3.5 percent down. The drawback is that you'll pay private mortgage
insurance (PMI) if you buy a home with less than a 20 percent down payment. PMI
protects the lender in case of default.
Brian Davis, co-founder and the lead real estate and personal
finance blogger at SparkRental.com,
recommended avoiding mortgage insurance or having an exit strategy for it.
"Generally, homebuyers need to make at least a 20 percent
down payment in order to avoid mortgage insurance. If that's not possible, try
to find a mortgage that allows the mortgage insurance to be removed as soon as
the homeowner reaches 20 percent equity in the property," said Davis.
"FHA loans no longer allow mortgage insurance to be removed, which means
FHA borrowers need to refinance to get out from under the expensive mortgage
Extra Mortgage Payment
If you hate the idea of paying on a mortgage
for 30 years, one option is selecting a shorter term and paying a higher
monthly payment. Another option is agreeing to a 30-year mortgage and then making
an extra principal-only payment every year. Since an extra payment reduces the
principal amount, you end up owing less interest and you're able to pay off your home sooner.
Set a reminder to make this extra payment each year on the
anniversary of your mortgage, or divide your monthly payment by 12, and then
submit an additional principal payment for this amount each month. Either strategy
could shorten your mortgage term by four years.
a Home Warranty
Home repairs are inevitable. To help reduce your out-of-pocket
expenses, get a home warranty to lower the costs of repairing your home's appliances,
electrical, plumbing and HVAC system. When a problem arises, give the warranty
company a call and they'll send a partnered service technician to your
property. You'll pay a flat service fee, typically $50 to $125, which offsets
the cost of repairing covered items.
If the technician can't fix a broken item, the warranty company
pays the replacement cost of the item. There are certain exclusions and
limitations, so shop around and compare coverage before purchasing a plan.
Less Than You Can Afford
Just because a mortgage lender approves you for a specific loan
amount doesn't mean you should spend this much on a property. Since a home
warranty doesn't cover every single home repair, you'll need an emergency fund
for other costs like new windows, a new roof and so on.
To prepare for these expenses when buying a home, consider
spending less than what you can actually afford. Typically, mortgage lenders
allow borrowers to spend up to 28 percent of their gross monthly income on a
mortgage payment. If you purchase a property under your max budget, you'll
reduce the likelihood of being house poor and you'll have more disposable
income to build a cash reserve.
Skip a Home Inspection
Home inspections are optional when buying a home, but highly
recommended since these inspections can uncover hidden — and potentially costly
— issues with the property.
"When my husband and I bought our first house, spending
hundreds of dollars for the most highly recommended inspector seemed out of our
budget," said Ali Wenzke, moving expert and writer at The Art of Happy
Moving blog. "Several months after we purchased our first home, the gas
company shut down our gas lines because we had eight gas leaks in our
Home inspectors conduct a visual examination of a home's
foundation, plumbing, roof, walls, attic and the electrical, heating and
cooling systems for damage or defects. If you submit a purchase offer that's
contingent on a satisfactory home inspection, you have every right to ask the
home seller to fix items on the inspection report. If the seller doesn't have
the money to resolve these issues, you also have the right to negotiate a lower
sale price to compensate for repairs you'll have to deal with upon moving in.
"We learned our lesson when we purchased our third house
[and] paid top dollar for the best home inspector in town," said Wenzke.
"He told us that our dream house was going to be a nightmare, and we
walked away from that home purchase, saving ourselves from financial
In addition to your down payment, you're also responsible for
paying closing costs when buying a home. These fees can range between 2 percent
and 5 percent of the sale price. Since some mortgage lenders don't give the
option of rolling closing costs into the mortgage loan, Davis recommended
asking the seller to pay these costs and lower your out-of-pocket expenses.
"Closing costs add thousands of dollars to your bill at
the settlement table. But what's
better than financing them? Having someone else pay them entirely," said
Davis. "Negotiate to have the seller cover them for you as a seller
First-Time Homebuyer Programs
If you're a first-time homebuyer, you might be eligible for
programs offered through your bank or credit union, or through city or state
agencies. Ask your real estate agent or mortgage lender for details on programs
available to you. These programs vary, but typically involve some sort of
financial assistance, such as help with paying your down payment or closing
When Andres Portela, a recent college graduate and public
relations manager, purchased a home with his wife, the couple put down about
$5,000 while the city they moved to put down about $13,000.
"Some cities and counties are increasing incentives to get
homebuyers to choose their city," said Portela. "Tucson offered us 20
percent of our costs with the contingency we live here for five years. This
allowed us to purchase a home right out of college and pay a low mortgage
rather than paying rent."
Buying a home can be a rewarding and profitable investment, but
it's not without costs. For that matter, it's important to learn about
different mortgage-related expenses and get your finances in order before jumping
into ownership. The more you know, the easier it'll be to manage the expenses
associated with buying and owning a property.
By Valencia Higuera - To view the original article click here