Your Guide to Buying a Home Financial Planning

Is Buying a Home for You? Renting vs. buying Consider your reasons for buying – Pride of ownership – Appreciation – Equity – Tax deferrals

Get your Finances in Order Order a free credit report Find a lender Determine a down payment Get a preapproval letter from your lender

Determine how much home you can afford… Rule of Thumb (set by BANKS): 2.5X your Gross Income There are a LOT of Calculators out there – BEWARE!!!!! – Mortgage Affordability Calculator at mortgage101.com seems to be realistic Mortgage Affordability Calculator

Lastly… Pick a Real Estate Agent – Hire experience – Get an agent you are comfortable with Look at a LOT of homes Make an offer and negotiate Inspect and Walk-Through CLOSE

Paying for your New Home When you have a mortgage loan, your monthly payment will generally include the following:mortgage loan An amount for the principle amount of the balanceprinciple amount An amount for interest owed on that balance ESCROW

Paying for your New Home What’s ESCROW? When a third party (usually your lender) holds money in a savings account for you and pays your bills when they are due Real estate taxes (about 1.2% of purchase price) Homeowners Insurance (about.6%) Private Mortgage Insurance (.5%) Only need to pay this is you put less than 20% down for a down payment

Paying for your New Home There are as many different types of mortgages as there are houses on the market… your lender (and some education) can help you decide what’s best for you… – Fixed Rate Mortgages – Adjustable Rate Mortgages (ARM)

Paying for your New Home FIXED RATE MORTGAGE Your rate never changes, so you pay the same about of principle and interest each month. Great idea when interest rates are low. 15 YEAR 30 YEAR

Paying for your New Home PROS OF A FIXED RATE MORTGAGE Rates and payments remain constant. Stability makes budgeting easier. Simple to understand, so they're good for first-time buyers who wouldn't know a 7/1 ARM with 2/6 caps if it hit them over the head. CONS OF A FIXED RATE MORTGAGE To take advantage of falling rates, fixed-rate mortgage holders have to refinance. Can be too expensive for some borrowers, especially in high-rate environments, because there is no early-on payment and rate break. Are virtually identical from lender to lender. Don’t allow for too much customization

Paying for your New Home Say you have a $150,000 mortgage. Let's compare how much money you would pay out in interest over 30 years vs. 15 years. Interest cost: 30-year vs. 15 year mortgages Loan termRate Monthly payment Total interest 30 years6.64%$961$196, years6.10%$1,274$79,304 Interest difference $117,001

Paying for your New Home ADJUSTABLE RATE MORTGAGE Your rate and monthly payment changes as the market changes Rate is fixed in the beginning for a certain period of time (3, 5, 7 or 10 years) Then usually adjusts annually after that Annual caps and lifetime caps apply

Paying for your New Home How to Read an ARM: 3/2 ARM with a 1/1/6 Cap Rate is fixed for first 3 years May adjust each year after that The initial adjustment cannot exceed 1% Each subsequent adjustment cannot exceed 1% 6% lifetime cap

Paying for your New Home Now YOU Try: 5/1 ARM with a 5/2/5 Cap Rate is fixed for first 5 years May adjust each year after that The initial adjustment cannot exceed 5% Each subsequent adjustment cannot exceed 2% 5% lifetime cap

Paying for your New Home How adjustable rates can rise Year of ARMRateMonthly payment First year5.75%$875 Second year7.75%$1,075 Third year9.75%$1,289 Fourth year (6% lifetime cap) 11.75% $1,514 ($639 more than first year)

Paying for your New Home PROS OF AN ARM Feature lower rates and payments early on in the loan term. Allow borrowers to take advantage of falling rates without refinancing. Help borrowers save and invest more money. Offer a cheap way for borrowers who don't plan on living in one place for very long to buy a house CONS OF AN ARM Rates and payments can rise significantly over the life of the loan. The first adjustment can be a doozy because some annual caps don't apply to the initial change. ARMs are difficult to understand. On certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing.

Paying for your New Home TIPS TO HELP YOU REDUCE YOUR MORTGAGE COSTS Make one extra mortgage payment/year. This can reduce your mortgage by YEARS. Make bi-weekly mortgage payments – this will reduce the amount of interest you pay Extend the life of the loan Refinance your mortgage if rates go significantly down