Buying A Home
You’re not buying a home. You’re buying an investment portfolio, and
you’re funding the portfolio with a mortgage. What does this mean for
1. Know what you’re doing.
Don’t try to use debt to get ahead unless you know what you’re
doing and you understand the costs involved. You don’t need to be an
economist, but you need to have a strong sense of where you are and where you’re going, financially. Take the time to do some calculations. Make sure you’re ready to purchase a home.
Reread MLR’s Back from the Dead
post, in which he spends a paragraph or two detailing the money he’s
saving as a homeowner. You think this happened by accident? As with all
things, calculate the costs involved before you move forward.The best way to monitor your financial situation is through effective budgeting.
Read the linked article. If you haven’t completed all of the steps
outlined there, you’re probably not ready to buy a home. And that’s just
a place to start. Talk to a trusted mentor or financial professional and discuss your options.
Don’t buy a home for social reasons. It might be nice to own a home,
but unless you’ve got a family of five and you need the room to expand,
your home is a financial product.
2. Every lender is different.
The first and most important part of taking on a mortgage is
finding the lender or mortgage broker that offers the best rate on the
investment. Most lenders offer similar rates. But similar does not mean identical, and closing fees and loan terms differ. The speed with which a given lender can close your loan makes a difference, too.
MLR’s Note: When I was going through my
process to get pre-approved for a lender, I can tell you, I was quoted
very similar rates, but my expected cost varied wildly. Between some
charging points, lock in fees for the rate, appraisal fees, etc… some
lenders with a slightly lower rate wound up being much more expensive.
Compare lenders and the mortgages they offer. You can check out current mortgage rates
provided by multiple lenders at Lender411.com, Bankrate.com,
LendingTree.com, or any other major internet mortgage site. For the sake
of disclosure, be aware that I work for Lender411.com.3. Get preapproved, not prequalified.
Prequalification is a meaningless thing. It’s an unofficial
guess as to how much money you’ll be able to borrow. The guess is made
by a lender who has received nothing more than a verbal statement from
you regarding your own income and credit history. Prequalification won’t give you any financial backing to negotiate with.
Preapproval is different. It’s like applying for the loan in advance.
Lenders will look at tax returns, pay stubs, bank statements, and your
official credit report to determine what loan amount you’re qualified to
receive. You’ll receive an official preapproval document that carries
real financial weight. With this in hand, sellers will be willing to
negotiate with you and you’ll close your loan much faster.
4. Avoid mortgage insurance.Private mortgage insurance
(PMI) is required for all conventional mortgages and Federal Housing
Authority (FHA) mortgages in which the borrower purchases less than 20%
of the equity of the home at closing. In other words, if you don’t make a
20% down payment, you’re going to have to pay for PMI. How much does
PMI cost? It depends on the cost of your home, but you can expect to pay
at least $50 or $60 per month, or $5,000 or more over the life of the
The best way to avoid PMI is to make the 20% down payment. But many young home buyers can’t do this. The next best thing to do is to make at least one if not two additional mortgage payments each year toward the principal balance of your loan. This will build your equity faster than otherwise.
If your mortgage has a longer term length or you’re making minimum
payments or, horror of horrors, missing payments now and then, it will
take longer to gain the 20% equity required to eliminate the PMI. The
best thing you can do is manage your mortgage well and make additional
payments to bring down the principal.
5. Don’t take out an adjustable rate mortgage.
An adjustable rate mortgage gets you a low initial
introductory rate for a brief fixed period. If you’re able to refinance
into a low fixed rate before this period is over, it’s possible to use
an ARM to your advantage. But most of the time, an ARM is a bad idea.
Please, just don’t get one. This may sound a bit dramatic, but unless
you have a good idea of where the mortgage marketplace will be in seven
years when your rate begins to adjust, you’re asking for uncertainty at
best and financial terror at worst. Get a mortgage with a fixed rate.
6. You can negotiate closing costs.
Negotiation is a wonderful thing. Just about every closing
expense you’ll have to pay, from the rate lock fee to the broker
commission, is negotiable to some extent. Your success
will vary depending on the lender you’re working with and your
negotiating abilities. Here’s a list of a few fees you may be able to
Origination fee. This is simply the lender’s profit. Profit can always be negotiated, though you may not have much leverage to bargain with.
Assumption fee. This one doesn’t apply in every case, but if
you’re assuming a mortgage of a previous borrower, many lenders will
charge you an assumption fee. Assumptions don’t cost lenders any
additional money, which makes this fee unnecessary.
Appraisal fee. This is the worst. Many lenders will charge
you for the appraisal even after you’ve paid for it yourself. It’s just
standard practice. Keep careful records and watch out for this.
Mortgage insurance application fee. Exactly what it
sounds like. Any private mortgage insurer worth working with will waive
this fee. If your lender is charging it to you, dig deeper and find out
Document preparation fee. Sometimes this fee is used to hire
an attorney to review certain documents, but most of the time, it’s
charged for no reason at all.
This list of closing costs and fees hosted on Zillow.com is pretty extensive and will give you an idea of the various costs you may have to cover at closing.
Oh, and MLR’s post reminded me of one more thing…
7. An emergency fund is a wonderful idea.
One missed payment on your mortgage will destroy your credit
score, and there’s no better way to hinder your future financial success
than a poor credit score. As in MLR’s case, it’s better to make a smaller down payment and retain an emergency fund than to pay everything you can up front.
MLR’s Note: I went back and forth with
myself over this dilemma. In the end, having a year of living expenses
in my bank account as a safety net is worth the bit in PMI I will pay
for a few years. Because I have that safety net, I am paying additional
on top of my mortgage to accelerate paying down the mortgage and get rid
Be intentional about your mortgage.
This is really the point. Remember the bread story. Even with a
product as simple as bread, you can save money if you take the time to
research your options and do it right.
Copied from Best Blog February, 2011
Author:Dorothy Lee Phone: 615-973-6363 Dated: October 5th 2013 Views: 2,745 About Dorothy: Dorothy Lee’s 20+ years extensive knowledge and experience in Real Estate provides her a unique v...
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