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How to Avoid Paying Too Much (back to top)
A Simple Guide to Help Avoid Overpaying For Your HomeSimply put, paying too much can jeopardize the integrity of your investment. Here is vital information to help you avoid over paying for your home.
Whether you're a first-time buyer or an old pro at the real estate game, buying a home can be a daunting process. It's an emotional time filled with difficult choices and each decision you make has money riding on it.
Finding the right home to meet your family's needs is hard enough. But knowing how to avoid paying too much for that home once you've found it is another job entirely.
As someone who has helped countless buyers find their dream homes and save money at the same time, I've developed this guide to help you avoid the pitfalls inherent in the home-buying process. I'll show you not only how to make sure you've found the right home, but also how to negotiate a price to your advantage.
In today's complex, fast-paced market, you can't afford to learn these lessons through trial and error. The tips contained in this report will go a long way toward making you a savvy buyer.
Before you begin shopping, understand that there are two homes out there vying for your interest the one that meets your needs vs. the one that fulfills your desires. In a perfect world, you'd find a home that satisfies both. But since this isn't a perfect world, you're going to find yourself confronted with choices.
Do you choose the three-bedroom home with room for your family to grow, or the one with the big back yard and deck that's perfect for entertaining? Is having a big kitchen more important to you than a few extra rooms?
When you start shopping, you're going to find homes you fall in love with for different reasons. That's why you should list the features you want before you start shopping. Use the form provided at the back of this report and break your list into two categories "Needs" and "Desires" and prioritize the items you come up with.
Understanding what you really need as opposed to what you'd like to have will help you keep your priorities straight as you shop around. I've seen people fall in love with a home for the wrong reasons, then regret their purchase when the home fails to meet their needs.
Don't let emotion cloud your judgment. Satisfy your needs first. If you find a home that meets your needs and fulfills some of your desires, so much the better. The important thing is to know the difference before you get caught up in the excitement of the hunt.
Getting a loan pre-approval is the smart way to shop for a home. It tells sellers that you're a serious prospect, and you know in advance the maximum mortgage you can afford. Make sure you get a commitment in writing. I've seen many buyers make the mistake of learning what they qualify for but not getting that pre-approval in writing.
The good news is that it's easier than ever to qualify for a home loan. Lenders have modified qualification rules and created programs designed to help people even if they have problems in their credit or employment histories. Many programs call for dramatically reduced down payments the biggest obstacle for first-time home buyers in particular.
Tip No. 1
Know what you're shopping for before you start.
Tip No. 2
Shop for a mortgage before you shop for a home.
Many programs call for dramatically reduced down payments; the biggest obstacle for first-time home buyers in particular.
From picking a mortgage to finding the right home to inspections to negotiating the best deal, it can be exhausting for even the hardiest souls. That's why most people have a Realtor® in their corner.
A good agent has the knowledge and experience that come from years of helping both buyers and sellers. He or she also has a team of other professionals to put at your disposal-lenders, lawyers, home inspectors, movers, etc.
Most sellers you encounter are certainly going to have professionals in their corner. Having a pro on your team is the best way to make sure you get the best deal possible.
Once you have a clear, detailed picture of the home you want, make sure your agent has the same picture. This communication is critical. Otherwise, you'll both waste your time looking at homes you're really not interested in. Also, make sure your Realtor® knows your priorities. Your shared goal is to find a place that meets all of your needs; your Realtor® will then try to satisfy as many of your desires as possible.
A good Realtor® will ask you several questions about what you're looking for and what you can afford. And they'll listen carefully to your answers.
The desirability and resale value of your home-to-be depend on location more than any other single factor. Again, don't let emotion get in the way of a wise investment. No home is an island, and the value of yours is affected by the homes that surround it.
Assuming you've already considered the elements that make up a desirable community-character, quality of schools, access to work places and services, recreational facilities, etc. There are several elements that combine to create a good location.
Your first consideration is the neighborhood. Every neighborhood has its own unique character; you need to make sure you'd be comfortable in the one you're thinking of living in. Take a long walk and observe carefully. Do people take care of their yards and homes? Are the yards fenced? Do children play in the streets? Talk to the neighbors and ask questions that give you a better feel for the area. But be careful not to appear judgmental-you might be talking to a future neighbor.
Tip No. 3
Pick a winning team to help you.
Tip No. 4
Make sure your Realtor® knows what you are looking for.
Tip No. 5
It's a cliché, but ... location, location, location.
If the neighborhood is to your satisfaction, look at homes on the market in the area. Extremely large homes surrounded by smaller ones tend to appreciate less than a large home among other large homes. Conversely, the smallest home in the neighborhood tends to be "pulled up" by the other homes on the block. However, it might take longer to sell a smaller home when the time comes because many people are unwilling to pay extra for the neighborhood.
The outer edge of a neighborhood is usually not good for resale value. There are noticeable dividing lines between unlike neighborhoods. It could be a difference in architectural styles, home size, property use or something else. Look for a home in the middle of a community of similar homes; it will hold its value better.
An exception to this rule is a house on the edge of a neighborhood bounded by woods, park land, a golf course or other open space. Natural boundaries appeal to buyers, and these "edge" homes can actually command a better price. Of course, the exception to this rule is when there's an unpleasant use planned for the open space. An open field with a babbling brook is nice; a new freeway, strip mall or factory isn't.
Other things that can negatively affect property values are traffic, sounds, smells, etc. Be sure to give the neighborhood a long, hard look. The home you're interested in may be perfect, but if the neighborhood has problems, your investment won't be worth as much when the time comes to sell.
A good agent brings to the table an in-depth knowledge of the current housing inventory in his or her area, and continually updates that knowledge by touring homes as they are placed on the market. This is to your advantage. Trying to personally see every available home that might fit your needs would be an overwhelming process. If you are thorough in communicating your needs and what you can realistically afford, then your agent can help you narrow down the list of prospective homes to those that best suit your needs. This will save you much time and energy.
When the time comes to settle on one home, you can do it with the confidence that you've made a well-informed choice.
Tip No. 6
Use your agent to narrow the prospect list.
A complete working knowledge of the available homes in your area is your Realtor's® strongest asset. He or she updates this list every week.
As you tour the homes on your "short list," find something to admire in each one. If you don't show any interest until you've finally fallen in love with a home, then you've just put yourself at a competitive disadvantage. Never let anyone know how badly you want a home-it will cost you money!
Don't forget the purpose of your "Needs" and "Desires" lists. Shopping for a home is an emotional process. Your heart will cost you money; using your head will save it.
When evaluating the advantages and drawbacks of a particular property, be sure you know the difference between acceptable and unacceptable problems.
Some issues-peeling paint, worn carpeting, ugly wallpaper-are cosmetic and can be easily remedied. In fact, you can use these "problems" during negotiations to lower the asking price-after all, you'll need to spend money to bring the house up to snuff. Make careful note of what you see that can be used to your advantage. Don't nit-pick, however-if taken to extremes, you could end up alienating the seller and creating a hostile atmosphere.
Other problems may be warnings to walk away. Major foundation cracks, evidence of previous water damage, signs of serious dry rot or termite damage, antiquated electrical systems or plumbing-any one of these may be cause to reconsider your interest.
Don't let a house's positive attributes blind you to very real problems. If you do, the chances are good that you'll end up spending much more money than you ever expected down the line.
In my experience, spending a few hundred dollars on a professional home inspection is the best investment you'll ever make. A professional inspector brings experience in examining a great many homes, good evaluation standards and an unbiased perspective. And a written report can be an excellent negotiating tool.
Tip No. 7
Show a little interest in everything you see.
Tip No. 8
Shop with your head, not your heart.
Tip No. 9
Don't ignore red flags when evaluating a home's pluses and minuses.
Tip No. 10
Hire a professional home inspector.
A Typical Inspection Looks at:
- Foundation (slab, crawlspace, basement, etc.)
- Electrical, heating and plumbing systems
- Floors, walls and ceilings
- Attic
- Roof
- Siding and trim
- Porches, patios and decks
- Garage
- Property drainage
Make sure you accompany your inspector on the tour. You'll learn a lot about the home you're thinking of buying.
Once you have your evaluation, the decision to proceed is yours. A home inspector only gives you a professional opinion of the home's condition, not advice as to whether or not you should buy.
You may be the sort of person who looks at a home in need of significant work as a challenge and an opportunity to make money. Many people have bought fixer-uppers at below-market rates, invested a little sweat equity or more than a little money on renovation, then eventually put it back on the market at a profit.
But if it isn't priced low enough, you won't recoup your investment of time, trouble and expense. Before you proceed, do a careful evaluation of what you'll have to invest and consult with your Realtor® to learn what you can reasonably expect to make when you put the home back on the market. And be sure to include the unexpected as there's no such thing as a "sure thing."
Tip No. 11
Not all fixer-uppers are good buys.
Buying a home is a big investment. If you can stretch a little today to buy a home that you can grow in-whether it's having a child, running a home-based business, or having room to build an addition-do it. In the long run, it will probably be less expensive than moving up to a marginally larger home when the need does arise.
Good properties move fast. Once you've made up your mind to buy a home and you've lined up your Realtor® be prepared to make decisions quickly. If you find the right home today but aren't ready to buy until tomorrow, you may already be too late.
Make sure you know who the agent you're talking to represents. Any agent has a responsibility to be open and honest with you and to let you know who he or she represents-the buyer, the seller or both.
One way to ensure that you don't offer too much for a home is to ask your agent to prepare a written comparative market analysis. A CMA will show you the sale prices of comparable homes in the neighborhood. It also lists the asking prices of other homes in the area currently on the market.
You may find that the asking price is above what comparable homes in the neighborhood are actually selling for. Or you might even find another home in the area that's a better bargain. When you make an offer, you can use the CMA as evidence to show the seller why you believe your offer is a reasonable one.
It's true what they say: Knowledge is power. The reasons behind a sale can often be used to your competitive advantage during negotiations. For example, a seller whose company has transferred him to another city is probably more motivated to sell than someone who is still looking for a new home.
Tip No. 12
Choose a home with an eye toward future needs.
Tip No. 13
Once you're ready to buy, move quickly.
Tip No. 14
Clarify who your agent is.
Tip No. 15
Ask for a written comparative analysis.
Tip No. 16
Learn as much as you can about the seller's situation.
Other signs of a motivated seller include a vacant house, or a house that's been on the market for several months with several reductions in the asking price.
Information can be used against you as well. How much you're willing to spend, the size of mortgage you can afford, your move-in deadline-it all can be used to extract more money out of your pocket. Be sure to tell your agent everything he or she needs to know to be effective on your behalf-how much you have for a down payment, the size of the mortgage you can afford, etc. However, keep your personal circumstances and timeline to yourself.
Just as you have a time frame in which you wish to buy, the seller almost certainly has a deadline of his own. If you can learn the seller's deadline, it's another piece of information that can be used to negotiate a better deal.
One of the costliest mistakes you can make is letting the sellers know how much you love their home. Once you've let it slip, you can just about forget about negotiating the price-the other side knows how motivated you are. In fact, a seller may see it as an opportunity to squeeze a little more money out of you even when you've made a good offer to start.
No matter how wonderful a home is, no matter how much you want it, keep it to yourself.
While you want to move expeditiously once you're in negotiations, don't let the other side pressure you into a quick close. It may be a sign that there's something you should know, but don't. And the reason could be worth money.
Tip No. 17
Keep your own situation to yourself.
Tip No. 18
Use time to your advantage.
Tip No. 19
Check your emotions at the door during negotiations.
Tip No. 20
Don't be pressured into a quick deal if it doesn't feel right.
You may be the type of person who prefers a hard-and-fast price tag on everything. "I don't like to haggle," you say. But negotiation is the key to getting a good deal. If your goal is to get the best home possible for the least amount of money, then you had better be prepared to play.
Sometimes, the seller's Realtor® will try to scare a hesitant buyer with the threat of another serious potential buyer. Don't fall into this trap-it will only cost you money. If there is another buyer, then the seller's agent will try to get a bidding war going. In these situations, whoever wins also loses because the buyer ends up overpaying.
If there isn't another buyer, there's a good chance that "the other deal" will fall through and the seller's agent will come calling. Be sure to let the other side know that you might be interested if that happens before you walk away.
The good news for buyers is that the law now requires sellers to make complete disclosure of known material defects. Make sure you get it in writing. And carefully consider how these defects might affect what you're willing to pay.
There's more to buying a home than the mortgage. Don't forget to factor in mortgage insurance, appraisal fees, inspection fees, transfer taxes, title insurance and every other dollar you'll have to spend in order to know what you're really paying for your new home.
Tip No. 21
Don't be afraid to negotiate.
Tip No. 22
Stay out of bidding wars.
Tip No. 23
Make sure you get a written disclosure of all known defects.
Tip No. 24
Know your hidden costs.
A word of advice is to be aware of additional costs above and beyond the final negotiated price of your home. Know how much you are really paying for your new home.
As you can imagine, there is no learning curve that forgives mistakes made during the home-buying process. If I had to choose only one tip from the several I just listed, it would be this: Get yourself a good Realtor® someone whose sole interest in the deal is to watch out for your interests. If you take this advice, the rest will follow. A truly sharp agent will make sure that you follow all of the other suggestions I've included in this report. And please feel free to use the checklist I've supplied with this report to help in your home search.
Now, armed with this knowledge, you stand a much better chance of avoiding overpaying for your home.
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Please feel free to call me if you would like further explanation on any of these topics, or if you have any real estate questions at all. I simply see my mission as striving to be as helpful as I possibly can to area home owners. I hope this special report provides the information you need to be an informed home seller.
A Critical Guide to Home Loans (back to top)
Your Options And How They Affect Your FutureChoosing the right mortgage will affect your very financial future. Here is vital information to help you weigh your options and make sound decision.
An Insider's Guide to Understanding Mortgage Loans
There was a time in the not-so-distant past when financing the purchase of a home was relatively uncomplicated. You went to your local savings and loan and signed up for a 30-year, fixed-rate mortgage loan.
Those days are gone, probably forever. Today, you have what seems like an endless array of choices-different rates, terms, down payments, fees, etc. (One lender told me there are literally more than 40,000 available loan options on computer database!) So how do you pick the combination that makes the most sense for you?
Having spent many years helping buyers understand the ins and outs of financing a home, I've developed this guide to assist you in evaluating which mortgage is best for you. More than any other single factor, choosing the right mortgage will influence whether or not your investment is a good one. Let's say you get a great price on a home, but you end up with a mortgage that has high fees and a high interest rate. You could see the money you saved disappear in a very short time.
Keep in mind that a great mortgage for one person may be terrible for you. Each of us has different circumstances that determine whether a particular loan is a good deal or not-whether you're just starting out or nearing retirement, how secure your job is, how long you plan to be in the home, etc. You can be sure that the best loan for a first-time home buyer planning to move up in five years is quite different from the best loan for a couple who's staying for the next 20 years.
First things first... know what you can afford
You can save yourself a lot of time and trouble if you take a few minutes to figure out the loan amount you can afford. The general guidelines are:
- No more than 28 percent of your gross monthly income should be spent on housing expenses (principal, interest, insurance and taxes). This can vary upwards if you have a good credit history, liquid assets, or if you're already spending more than 28 percent on your housing expenses.
- Your total debt (mortgage and consumer debt) shouldn't exceed 36 percent of gross monthly income. Again, people with good credit and liquid assets can often creep above this line.
As you compare your income to your potential housing expenses, keep in mind that your mortgage principal and interest are not your only costs. You also need to allow for any association fees, property taxes, insurance payments, etc.
Having said this, I should point out that the rules are looser than ever today. The "28 over 36" rule is no longer the ironclad guideline. Both the federal government and mortgage lenders have gotten very creative in their efforts to attract first-time buyers to the market. Today, there's a loan program out there to put all but the worst-risk people into homes. But for your own safety and confidence down the road, your best bet is to adhere as closely as possible to the above guidelines.
Avoid unpleasant surprises
Talk to your Realtor® or loan officer about checking your credit history prior to applying for a mortgage. There's no reason to waste time and money in the application process if you have credit problems that will cause you to be rejected. Once you know about any potential problems, you can work on clearing them up before you apply.
You can save yourself a lot of time and trouble if you take a few minutes to figure out the loan amount you can afford. Once you know about any potential problems, you can work on clearing them up before you apply.
Shopping for a mortgage lender
There are several potential lenders in today's marketplace. They include:
- Mortgage Banks-A mortgage banker is a direct lender. He or she qualifies applicants, finds the best available loan and funds it. Because this is their main business, mortgage banks can offer very competitive rates-but are not necessarily the cheapest.
- Mortgage Brokers-Brokers don't lend money; they find lenders for a fee in addition to the traditional application and processing costs. While a good broker might be able to find you the cheapest mortgage, make sure the fee doesn't offset any savings. Since most brokers' fees are paid by the lender in the form of a commission, their services cost you nothing-that is, no out-of-pocket costs. Something also to remember-a mortgage broker is the legal agent of his or her client and does not work for the lending institution. So, a mortgage broker will have access to the widest spectrum of loan options-whereas a bank or savings and loan representative will draw from only "in-house" loan options. Going by this information, a reputable mortgage broker would most likely be your cheapest source for home loans and refinancing.
- Savings and Loans-Once the primary source of home financing, savings and loans hold a much smaller piece of the market today. But some experts recommend checking their offers before looking at a-bank.
- Banks-Commercial banks have come on strong in recent years. Some have made home loans a significant part of their business.
- Credit Unions-A good source often overlooked by borrowers. Credit unions function like brokers because they generally don't lend their own money.
Whichever route you ultimately take, be sure to shop around. What lenders charge might differ by as much as two or three percentage points. That's pretty significant when you look at the impact on a 30-year fixed-rate mortgage-depending on the size of the loan, the difference could be a few hundred dollars a month!
What a Realtor® can do for you
If you're using a Realtor® to help you find a home, ask to be put in touch with a lender he or she works with on a regular basis. In most cases your Realtor® is not a loan officer, but it is his or her job to help people buy and sell homes. A good real estate professional has long-standing relationships with home mortgage professionals and can point you in the right direction to answer any questions you may have. He or she can also share insights into what they've seen work-or not work-for others in situations similar to yours.
Something also to remember-a mortgage broker is the legal agent of his or her client and does not work for the lending institution.
Which loan is right for you?
Adjustable. Fixed. Balloon. It's easy to get lost in mortgage verbiage. Here's a rundown of the most common loans.
Adjustable-Rate Mortgages-Your interest rate (and monthly payment) rises and falls with the index to which it's tied. Because they start out two to three percentage points below fixed-rate mortgages, they're particularly popular when fixed rates are high. To protect you against interest rate hikes, the best loans put a cap on annual rate increases of two percentage points a year, with a lifetime increase of no more than five percentage points above where you began.
The most popular arm indexes are those linked to three-month, six-month and one-year Treasury Bills, the 11th District Cost of Funds (cofi), the prime rate and the London Interbank Offer Rate (libor).
As a rule, arms make more sense if you don't plan on staying in your home longer than five years at most. Which index is good for you depends on two things: the economic forecast and your personal comfort level.
Libor and T-Bill indexes, for example, react more immediately to changes in the economy-a good thing when interest rates go down, not so good when they rise. Whatever happens, you'll see it pretty quickly in your monthly payment.
More conservative buyers prefer indexes linked to the prime rate or the cofi because they're more stable and move up (and down) more slowly than other indexes. That's good when rates are low and rising, less so when they're high and dropping.
Is an arm a good choice for you? Well, if you need a lower monthly payment to afford the home you want and you're planning to stay there less than three to five years, then yes. But make sure you can handle the higher payments that might come down the road. A prudent approach is to always plan financially for the "worst case" scenario: Assume that your loan will always rise the maximum amount. If you wouldn't be able to afford it, then consider another loan. You know your own personal "comfort level." Use it to make your decision.
Let's say you're buying your first home. You have a modest income today but a bright future. Even so, you need to keep your payments low. A long-term arm makes sense even though your interest rate could rise over time. If you move in the next two or three years, you won't be around for any significant rate hikes. If you choose to stay longer, a rise in income will help you keep pace. Or you can always refinance to a fixed-rate mortgage.
A prudent approach is to always plan financially for the "worst case" scenario: Assume that your loan will always rise the maximum amount.
Fixed-Rate Mortgages-People usually opt for a fixed-rate loan for the security it offers. You know exactly what you'll be paying each month for the life of the loan. If interest rates fall, you can refinance at a lower rate. Lenders are offering more loan programs based on fixed rates, such as lower down payments-that is, five percent down or less. Adjustable rate loans generally require a larger down payment. The most common fixed-rate loans are for terms of 15 or 30 years. If you can afford the shorter term, it's a good way to build equity fast and save tens of thousands of dollars over the life of the loan. (However, I can show you how it will be a more savvy move to go with a 30 year fixed and pay an extra payment each month above and beyond your established mortgage payment. Just be sure to indicate your extra payment is for principal paydown only, not interest. This way you could even pay off your mortgage sooner than 15 years and save tens of thousands of dollars. You also have the "safety net" of paying your lower established mortgage payment should things get tight one month.)
Fixed-rate mortgages make the most sense when interest rates are low and if you're planning to stay put for the next seven or more years. They offer safety to people on fixed incomes who might not be able to afford a rising housing bill. If you need to lock in your level and can afford the monthly payments, consider a fixed-rate loan.
Let's say you make a good salary working for a large company. You're comfortable and job security is pretty good, but there's not much chance of further advancement. In other words, you don't anticipate moving anywhere else in the foreseeable future, and you want to avoid the possibility of higher house payments down the road.
A fixed-rate, long-term mortgage makes sense in this situation. Although you're probably paying one to two percentage points more than an adjustable loan, you also have the security of a fixed payment each month. And if interest rates drop three or more points, you can refinance at the lower rate.
Fixed-rate mortgages make the most sense when interest rates are low and if you're planning to stay put for the next seven or more years.
Graduated-Payment Mortgages-This one is more of a risk. Your early payments are so low that they don't cover the interest due, which results in negative amortization-which means you owe more each month, not less. Your monthly payments gradually increase to cover principal and interest, and you end up paying more than you would have for a regular loan. Some GPMs are fixed, others are adjustable.
Given the fact that lenders have literally rewritten the rules to get more people into homes today, I can't think of a good reason to consider a GPM.
Graduated-payment mortgages are more of a risk. Your early payments are so low that they don't cover the interest due, which results in negative amortization.
Intermediate Fixed Mortgages-These are a family of 20- or 30-year loans that are fixed for a set amount of time, such as 5 to 7 years, then they readjust once for the remainder of the loan. This readjustment is based on a predetermined index. Some may refer to these as "balloon" mortgages, but this term is falling out of favor because of negative connotations associated with balloon mortgages of the past-which were fixed for 5 to 7 years, at which time the entire balance of the loan became due.
Today, they are more commonly known as intermediate fixed loans or extended balloon mortgages. Some of these loans are not for the fainthearted. You enjoy low fixed payments from one to seven years, and then the loan readjusts-as long as certain conditions are met, such as interest rates haven't risen more than five percentage points, you haven't made any late payments in the previous 12 months, etc. If conditions aren't met, there are no guarantees, so beware. It's best to consult your Realtor® or loan officer if you have questions regarding these loans.
If you're a first-time home buyer who plans to trade up before the loan comes due, you might want to consider a balloon mortgage in order to have lower monthly payments. But be sure to get all stipulations in writing and review them carefully. (There's a new family of intermediate loans becoming available that are similar to these other balloon mortgages, but when they become due after 5 to 7 years, they adjust and become variable rate loans. They also do not carry the rigid stipulations that balloon loans carry, making them a little easier to live with if you don't move before the loan is due.)
There are various other loan types-including roll-overs, wraparounds, zero-interest-rate mortgages and buy-downs-but the ones I've listed here are most common. If you decide to opt for something more exotic, discuss it with your Realtor® and loan officer carefully to make sure you know what you're getting yourself into. If you get in over your head and can't meet your obligations, you could end up losing your home and doing serious damage to your credit.
When it's a good time to refinance
Whatever you decide is the best option for you today may change as economic conditions or your personal circumstances change in the future. So how do you know it's time to refinance?
Whether or not you should refinance usually depends on three things: what you think interest rates will do in the near future, how much monthly savings you'll enjoy, and how long you expect to be in your home.
Refinancing is not something you consider lightly because it can be expensive. The total cost of your loan can rise as much as five percent when you add in the up-front points, fees and costs.
A good rule of thumb is to start looking into refinancing when interest rates drop 1 to 11¦2 points below what you're currently paying. The reason is that some lenders offer loans that cost little or nothing at all. As soon as interest rates drop below your rate, start talking to your agent or loan broker.
If you're a first-time home buyer who plans to trade up before the loan comes due, you might ask your Realtor® about a balloon mortgage.
Next, figure out what you'll have to pay up front. Then calculate your monthly savings. With these two numbers, you can figure out how long it will take you to cover the cost of the new loan. For example, if refinancing costs you $5,000 up front and saves you $200 a month in mortgage payments, it will take 25 months to cover your costs. If you're not planning to move for several years, refinancing makes a lot of sense. But if you're going to look for a new home in two years, you wouldn't really be around long enough to reap the benefits. In fact, you'd lose money in this situation.
If you refinance today and rates drop even further in the next few months, you'll miss out on additional savings. If you refinance to save $10 or $20 off your mortgage payment, then you'll have to stay in your home forever to see it pay off.
Warning: The math is easy for fixed-rate loans, not so easy when you're talking about arms. If you don't feel comfortable running the numbers yourself, ask your lender or Realtor® for help.
Questions to ask while shopping for your loan
Before you can effectively compare mortgages, there are a number of questions you'll need to ask the loan officer. Some are obvious, others are not. Be sure to ask them all.
Kinds of Financing-Fixed? Adjustable? What about government-backed programs? Any special deals you should be aware of? Make sure you've got a complete picture of the product menu.
Interest Rates-Rates differ not only between different types of loans. The same loan at three different lenders could have three different rates!
Terms-There are options beyond 15- and 30-year terms. Find out how different terms affect interest rates and how they impact the final cost of your home. This is especially important if you plan to be in the home for a long time.
Down Payment-What's the minimum required for different loans? Today's down payment can range from as high as the old standard 20 percent to nothing at all in certain targeted programs.
Loan Limits-Many lenders set limits based on a loan-to-value ratio. For example, with an 80 percent loan-to-value ratio (LTV) you can only borrow $80,000 on a $100,000 home.
A good rule of thumb is to start looking into refinancing when interest rates drop even one point below what you're currently paying because there are some loans that cost little or nothing at all.
Loan Qualification-Different lenders may qualify you using different formulas. Make sure you understand how you're being evaluated.
Points-Think of these as prepaid interest charged by the lender. One point equals 1 percent of the face amount of your loan. In some cases points are paid up front; in others, they're bundled into the loan. The latter saves you money up front but costs you more over the life of the loan. No-point loans also save you money up front, but lenders usually charge one-quarter to one-half point more than in the case of loans with points. Be sure to look at what your total costs will be over the life of the loan.
Prepayment Penalty-If you decide to pay off your mortgage before the term is up, or refinance when interest rates go down, you may have to pay a prepayment penalty.
Special Deals-Some lenders reduce interest rates for customers who avail themselves of other services offered. For example, your bank might take a quarter of a percentage point off if you agree to automatic prepayment from your checking account.
Time to Approval-Find out how long it will be before you'll have a decision on whether or not your loan application has been approved by the lender. A week or two is pretty normal.
Loan Commitment Period-Make sure you know how long your lender's commitment is good for. The last thing you need is to decide on a loan amount at a certain rate, find the right home and discover your interest rate went up in the meantime.
Many lenders now offer lock-in programs. This means that the lender will guarantee in writing your loan at a certain rate for a certain period of time. Common lock-ins are for 10-, 12-, 21-, 30-, 45- and 60-day periods. The longer the lock-in, the more time you have to shop and iron out hitches in the loan process. But a lender might charge you more in points for longer periods. Then again, a short lock-in period can be next to useless given the amount of time the loan process can take. The lesson here is to be very clear of what a lock-in offers-and doesn't offer.
Once you have this and other information on various loan programs from different sources, you can make an informed decision as to where to shop for the best mortgage.
The longer the lock-in, the more time you have to shop and iron out hitches in the loan process. But a lender might charge you more in points for longer periods.
Don't get stung by unexpected fees
One of the most common errors I've seen borrowers make is in not considering the various fees they will end up paying in figuring out the final cost of a home. Let's take a look at what you can expect.
Think of these as prepaid interest charged by the lender. One point equals 1 percent of the face amount of your loan.
Loan Application Fee-This is what the lender charges you for applying. It isn't refundable, even if you're refused.
Appraisal Fee-This flat fee is usually charged by the prospective lender to pay an independent appraiser to inspect the home and estimate its fair market value. This fee is also nonrefundable whether or not your loan goes through.
Loan Origination Fee-This charge, which covers the lender's administration costs, can either be a flat amount or a percentage of the loan amount. It's paid in cash at closing.
Tips for the best deals
Now that you know a little more about mortgages and where they come from, I'll share with you my tips for getting the best deal and saving yourself a lot of headaches in the process.
Prequalify Before You Shop for a Home-Smart buyers make sure to know exactly how much they can afford to borrow before beginning to look at homes. You can bet that the seller's agent will ask if you've been prequalified; if you haven't, they may decide you're not a serious buyer. Having a deal in your pocket is always good ammunition in negotiations. (However, I generally have my buyers "preapprove" before they start looking at homes. This is a much more savvy way-you have it in writing, providing you even more leverage when making offers and during negotiations.)
Lock in a Rate (or not)-In the time it takes you to find a home and close your mortgage, the interest rate on your loan could fluctuate upward. If it looks like rates are heading up, lock it in. If rates appear to be falling, let it float. If your lender agrees to a lock, make sure you get it in writing. (Get the advice of your Realtor® or your mortgage broker. Their knowledge and experience can really help you in this decision.)
Apply for an FHA- or Veterans Administration-Backed Mortgage-The Federal Housing Administration and the Veterans Administration don't actually make loans, but they do guarantee loans offered through traditional lenders. With an FHA loan, you can put down as little as 3 percent, depending on the value of the property. VA loans often require no down at all, but they carry eligibility requirements based on service in the armed forces.
Negotiate the Points-If you're considering a large mortgage, your lender may be willing to lower the points charged to get your business. You lose nothing by negotiating. If you're planning to stay in your home for less than five years, lower your points paid by accepting a higher interest rate. If you're sticking around longer, consider more points against a lower mortgage rate. You pay higher costs up front but can save money in the long run. Just remember there are three components to your mortgage loan: the interest rate, the points and the lender's charges.
The smart buyer makes sure to know exactly how much he or she can afford to borrow before beginning to look at homes.
Watch Out for Prepayment Penalties-Make sure you won't be penalized for paying off your mortgage ahead of schedule if you choose to do so. (When making an additional payment above your regular mortgage payment, always be sure to specify that the additional amount is toward principal!)
Watch Out for Mortgage Protection Insurance-Some lenders may offer you mortgage protection insurance which will make your payments in case you die, become disabled or lose your job. Check around; you often may find the same kinds of protection through your regular insurance agent at a lower cost.
Private Mortgage Insurance (PMI)-Private mortgage insurance is required by the lender on loans with down payments of 10 percent or less. The cost can run from one-third of a percent to 1 percent monthly. Once your equity reaches 20 to 25 percent, you may be able to cancel your insurance. While some look at this required insurance as a nuisance, without it, there wouldn't be loan options with only 3% down or 5% down-all loans would probably require the more restrictive 20% down.
Consider the Benefits of an Early Paydown-There are several benefits to accelerating the payments on your mortgage. Every extra dollar you put into your mortgage can save you up to three dollars down the line in interest savings. You'll build equity in your home more quickly, which puts you in a better position to trade up in a shorter time period. It also forces you to save money you might otherwise spend rather than invest. But make sure you verify with your lender that there won't be a prepayment penalty.
Accelerating your monthly payments won't save much if you're in your home for only a few years, but for longer-term situations it makes a lot of sense.
(If you refinance your home, you may consider this option: Continue to pay your old mortgage rate instead of your new one-stipulating, of course, that the extra money is to pay off principal. By doing this, you will pay off your loan sooner and save tens of thousands of dollars.)
The affordable lending boom
In the past few years, lenders have come to realize that they can safely make loans to people who previously didn't believe they could qualify for a home mortgage.
A recent national study by the Consumer Bankers Association showed that 96 percent of the 130 institutions surveyed have cut their down payment requirement-the single biggest obstacle to home ownership for many Americans. Where once a 20 percent down payment was the standard, today 5-, 3- and even zero- percent downs have become commonplace. Loans up to 90, 95 and even 97 percent of the purchase price are quite common today.
Make sure you won't be penalized for paying off your mortgage ahead of schedule if you choose to do so.
Accelerating your monthly payments won't save much if you're in your home for only a few years, but for longer-term situations it makes a lot of sense.
Lenders have also adopted much more lenient standards in terms of debt-to-income ratios. The standard 28 percent has moved up to 33 percent, and even as high as 38 percent in some programs. In addition, lenders are more flexible in their assessments of creditworthiness, employment histories and other factors that used to result in rejection for many. The point is simple-there's never been an easier time to qualify for a mortgage.
There's enough information out there on mortgage loans to fill several books. But I hope this provides you with a good general overview of what to look for and what to expect as you shop for the best home loan. Real estate financing is a complicated subject. This special report is for general informational purposes only. As with any complex legal and/or financial matters, always consult with a qualified professional before making any decisions or proceeding with your home loan or refinancing.
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Please feel free to call me if you would like further explanation on any of these topics, or if you have any real estate questions at all. I simply see my mission as striving to be as helpful as I possibly can to area home owners. I hope this special report provides the information you need to be an informed home seller.