Leveraging Your Money
One of the
greatest financial aspects of buying a home is the ability to
leverage your money. Simply put, leverage allows you to use a
small down payment and financing to purchase a larger
investment. For example, if you bought a $125,000 home with 10
percent down, you leveraged the $12,500 down payment to purchase
an asset worth 10 times that amount!
Appreciation
The benefits of leverage really become apparent with
appreciation, or the rise in value of a property. Using the
above example, say you were to live in the house for 5 years,
and during that time property values in your area were to rise
an average of 2.5 percent a year. Your home would then be worth
over $141,000. By putting only 10 percent down, you get to enjoy
the appreciation for the full amount!
Paying
yourself
In addition to the 10 percent down, you'll also have to make
mortgage payments. But with each payment, a certain amount of
money is being used to pay down the principal balance that you
owe. This is called building equity. So in the event you sell
your house, not only can you realize a profit from your
leveraged money, you also have a chance to pay yourself back for
the money you've put in over the years. No wonder so many people
consider a home an excellent investment!
15-Year, 30-Year, or a Biweekly Mortgage?
In the past,
the 30-year, fixed-rate mortgage was the standard choice for
most homebuyers. Today, however, lenders offer a wide array of
loan types in varying lengths--including 15, 20, 30 and even
40-year mortgages.
Deciding what
length is best for you should be based on several factors
including: your purchasing power, your anticipated future income
and how disciplined you want to be about paying off the
mortgage.
What are the
benefits of a shorter loan term?
Some homeowners choose fixed-rate loans that are less than
30 years in order to save money by paying less interest over the
life of the loan. For example, a $100,000 loan at 8 percent
interest comes with a monthly payment of around $734 (excluding
taxes and homeowner's insurance). Over 30 years, this adds up to
$264,240. In other words, over the life of the loan you would
pay a whopping $164,240 just in interest.
With a 15-year
loan, however, the monthly payments on the same loan would be
approximately $956--for a total of $172,080. The monthly
payments are more than $200 more than they would be for a
30-year mortgage, but over the life of the loan you would save
more than $92,000.
What are the
advantages to a 30-year loan?
Despite the interest savings of a 15-year loan, they're not for
everyone. For one thing, the higher monthly payment might not
allow some homeowners to qualify for a house they could
otherwise afford with the lower payments of a 30-year mortgage.
The lower monthly payment can also provide a greater sense of
security in the event your future earning power might decrease.
Furthermore,
with a little bit of financial discipline, there are a variety
of methods that can help you pay off a 30-year loan faster with
only a moderately higher monthly payment. One such choice is the
biweekly mortgage payment plan, which is now offered by many
lenders for both new and existing loans.
Biweekly
mortgages
As the name implies, biweekly mortgage payments are made every
two weeks instead of once a month--which over a year works out
to the equivalent of making one extra monthly payment (compared
to a traditional payment plan). One extra payment a year may not
sound like much, but it can really add up over time. In fact,
switching from a traditional payment plan to a biweekly mortgage
can actually shorten the term of a 30-year loan by several years
and save you thousands in interest.
If you're
interested in a biweekly payment plan, make sure to check with
your lender. In many cases, lenders also offer direct payment
services that automatically withdraw funds from your bank
account, saving you the trouble of having to write and mail a
check every two weeks.
Making extra
payments yourself--do it early!
Another way to pay off your loan more quickly is to simply
include extra funds with your monthly payment. Most lenders will
allow you to make extra payments towards the principal balance
of your loan without penalty. This is especially attractive to
homebuyers who are concerned about their future earning power,
but still want to be aggressive about paying off their loan.
For example, if
you had a 30-year loan, you might decide to send the equivalent
of one or two extra payments a year (which could shorten the
overall length of the loan by many years). But if your financial
situation suddenly took a turn for the worse, you could always
fall back on the regular monthly payment.
One important
note, though, is that if you do decide to send extra funds, make
sure to do it EARLY in the life of the loan. This is because
most home loans are calculated in such a way that the first few
years of payments are almost entirely interest, while the last
few years are mostly applied towards the principal balance.
Thus, you can get the most bang for your buck by making the
extra payments early in the life of the loan.
How Much Can You Afford?
Understanding
how much you can afford is one of the most important rules of
home buying. Depending on your individual situation, your budget
can affect everything from the neighborhoods where you look, to
the size of the house, and even what type of financing you
choose.
Bear in mind,
however, that lenders will look at more than just your income to
determine the size of the loan. Likewise, you may find that
there are some creative financing options that can help boost
your purchasing power.
Loan
prequalification vs. preapproval
One of the best ways to determine your budget is to have your
real estate agent or lender prequalify you for a loan.
Prequalification is different from preapproval, because it is
only an estimate of what you'll be able to afford. On the
other hand, preapproval is a more formal process where a lender
examines your finances and agrees in advance to loan you money
up to a specified amount.
What factors
are important to lenders?
Banks and lending institutions will use several criteria to
determine how much money they'll agree to lend. These include:
 | Your gross
monthly income
| Your credit
history
| The amount
of your outstanding debts
| Your
savings--or the amount of money you have available for a
down payment and closing costs
| Your choice
of mortgage (i.e. 30-year, FHA, etc.)
| Current
interest rates |
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Two
important ratios
Lenders also use your financial information to figure out two,
very important ratios: the debt-to-income ratio and the housing
expense ratio.
| Debt-to-income
ratio
Many lenders use a rule of thumb that the amount of debt
you are paying on each month (car payment, student loan,
credit card, etc,) shouldn't exceed more than 36 percent of
your gross monthly income. FHA loans are slightly more
lenient.
| Housing
expense ratio
It is generally difficult to obtain a loan if the mortgage
payment will be more than 28 to 33 percent of your gross
monthly income.
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Down
payments make a difference
If you can make a large down payment, lenders may be more
lenient with their qualifying ratios. For example, a person with
a 20 percent down payment may be qualified with the 33 percent
housing expense ratio, while someone with a 5 percent down
payment is held to the stricter 28 percent ratio.
Other ways
to improve your purchasing power
| Gifts
If you're having trouble saving money, many lenders will
allow you to use gift funds for the down payment and closing
costs. However, most lenders require a "gift
letter" stating the gift doesn't have to be repaid, and
will also require you to pay at least a portion of the down
payment with your own cash.
| Negotiating
Closing Costs
Through negotiation, some sellers may agree to pay all or
most of your closing costs (for example, if you agree to
meet their full asking price). If you choose to try this,
make sure to ask your real estate agent for advice.
| Loan
Programs
Many local governments have special loan programs designed
to help first-time homebuyers. Loans may be available at
reduced interest rates, or with little or no down payments.
Check with your local housing authority for more
information.
| Loan
Types
Some homebuyers choose Adjustable Rate Mortgages (ARMs)
because of low initial interest rates. Others opt for
30-year loans because they have lower monthly payments than
15-year loans. There are significant differences between
different loans, so make sure to discuss the pros and cons
of different loans with your agent or lender before making a
decision. |
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Understanding Different Types of Loans
Today's
homebuyer has more financing options than have ever been
available before. From traditional mortgages to adjustable-rate
and hybrid loans, there are financing packages designed to meet
the needs of virtually anyone.
While the
different choices may seem overwhelming at first, the overall
goal is really quite simple: you want to find a loan that fits
both your current financial situation and your future plans.
Though this article discusses some of the more common loan
types, you should spend time talking with different lenders
before deciding on the right loan for your situation.
General
categories of loans
Most loans fall into three major categories: fixed-rate,
adjustable-rate, and hybrid loans that combine features of both.
| Fixed-rate
mortgages
As the name implies, a fixed-rate mortgage carries the same
interest rate for the life of the loan. Traditionally,
fixed-rate mortgages have been the most popular choice among
homeowners, because the fixed monthly payment is easy to
plan and budget for, and can help protect against inflation.
Fixed-rate mortgages are most common in 30-year and 15-year
terms, but recently more lenders have begun offering 20-year
and 40-year loans.
| Adjustable-rate
mortgages (ARM)
Adjustable-rate mortgages differ from fixed-rate mortgages
in that the interest rate and monthly payment can change
over the life of the loan. This is because the interest rate
for an ARM is tied to an index (such as Treasury Securities)
that may rise or fall over time. In order to protect against
dramatic increases in the rate, ARM loans usually have caps
that limit the rate from rising above a certain amount
between adjustments (i.e. no more than 2 percent a year), as
well as a ceiling on how much the rate can go up during the
life of the loan (i.e. no more than 6 percent). With these
protections and low introductory rates, ARM loans have
become the most widely accepted alternative to fixed-rate
mortgages.
| Hybrid
loans
Hybrid loans combine features of both fixed-rate and
adjustable-rate mortgages. Typically, a hybrid loan may
start with a fixed-rate for a certain length of time, and
then later convert to an adjustable-rate mortgage. However,
be sure to check with your lender and find out how much the
rate may increase after the conversion, as some hybrid loans
do not have interest rate caps for the first adjustment
period. |
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Other hybrid
loans may start with a fixed interest rate for several years,
and then later change to another (usually higher) fixed
interest rate for the remainder of the loan term. Lenders
frequently charge a lower introductory interest rate for
hybrid loans vs. a traditional fixed-rate mortgage, which
makes hybrid loans attractive to homeowners who desire the
stability of a fixed-rate, but only plan to stay in their
properties for a short time.
Balloon
payments
A balloon payment refers to a loan that has a large, final
payment due at the end of the loan. For example, there are
currently fixed-rate loans which allow homeowners to make
payments based on a 30-year loan, even thought the entire
balance of the loan may be due (the balloon payment) after 7
years. As with some hybrid loans, balloon loans may be
attractive to homeowners who do not plan to stay in their house
more than a short period of time.
Time as a
factor in your loan choice
As has been discussed, the length of time you plan to own a
property may have a strong influence on the type of loan you
choose. For example, if you plan to stay in a home for 10 years
or longer, a traditional fixed-rate mortgage may be your best
bet. But if you plan on owning a home for a very short period (5
years or less), then the low introductory rate of an
adjustable-rate mortgage may make the most financial sense. In
general, ARMs have the lowest introductory interest rates,
followed by hybrid loans, and then traditional fixed-rate
mortgages.
FHA and VA
loans
U.S. government loan programs such as those of the Federal
Housing Authority (FHA) and Department of Veterans Affairs (VA)
are designed to promote home ownership for people who might not
otherwise be able to qualify for a conventional loan. Both FHA
and VA loans have lower qualifying ratios than conventional
loans, and often require smaller or no down payments.
Bear in mind,
however, that FHA and VA loans are not issued by the government;
rather, the loans are made by private lenders but insured by the
U.S. government in case the borrower defaults. Remember too,
that while any U.S. citizen may apply for a FHA loan, VA loans
are only available to veterans or their spouses and certain
government employees.
Conventional
loans
A conventional loan is simply a loan offered by a traditional
private lender. They may be fixed-rate, adjustable, hybrid or
other types. While conventional loans may be harder to qualify
for than government-backed loans, they often require less
paperwork and typically do not have a maximum allowable amount.
BUYERS AGENT
Why
Do I Need A Buyers Agent ?
Purchasing
a home is one of the most important
investments one can make, and it is very important
that you, as a Buyer, be represented in this
transaction. From zoning issues to soil studies, a
Buyers' Broker can make sure that you purchase a
property in the right area, at the right price, at the
most favorable terms.
Remember -- Not all real estate agents are alike! The
agent you engage to represent you and your interests
can mean the difference in time, money, stress and
future investment potential! Whether you are
purchasing a resale home, new home, land on which to
build your custom home, condo, townhouse, etc. -- you
need an agent with EXPERIENCE & KNOWLEDGE -- one with
YOUR BEST INTEREST in mind!
You might not be aware of the fact that, in most
cases, the real estate agent who is marketing a
property is working for the Seller of that property.
His/her fudiciary duty is to that Seller, according to
the laws of agency. In many cases, that agent cannot
negotiate for you effectively, and in most cases, you
would be better represented by a Buyers' Agent who is
representing you, exclusively.
In the state of Nevada, "dual agency" is legal and
ethical. This means that the "listing agent" can
certainly sell you a home that he/she has listed for
sale. But a Buyers' Agent will search out the best
properties based on your requirements so that you can
look not only at a few homes, but at many that would
fit your needs.
We work most often for Buyers exclusively. We strive
to negotiate the best price, the most favorable loan
programs and work very hard to see each escrow through
with minimal stress and hassle to you, the Buyer! Each
detail is significant in a purchase such as the one
you are about to make.
In almost all cases, our fee/commission is still payed by
the property owner (Seller). We can find you homes
that are currently listed on the market, as well as
homes that might be your "dream home" but are not even
listed yet! And we do work with "For Sale By Owner"
properties, as well as with out of state investors who
have vacant properties that are available but not
actively being offered for sale and HUD and VA Repo's.
Shop for your home with confidence and know that
someone is looking out for you!
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