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

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: • An amount for the principle amount of the

balance • 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 term RateMonthly payment

Total interest

30 years 6.64% $961 $196,304

15 years 6.10% $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 ARM Rate Monthly payment

First year 5.75% $875

Second year 7.75% $1,075

Third year 9.75% $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