House Buying Tips

Mortgage, down payments, up-front cost. These words and the fact that buying a home is one of the largest purchases most of us ever make can drive someone to renting an apartment. Do not let these words scare you out of buying your first home. Many of us seek help from our friends and family but sometimes that is not always the best solution.

Here are some common questions asked by first time home buyers:

How much can we afford?
The rule of thumb says you can afford twice your family’s gross annual income. But the final answer depends on the nature of your income, the amount of debt you are currently carrying, the size of your down payments and the type and term of the loan. Generally, housing expenses for your mortgage, insurance, taxes and special assessments should not exceed 25 to 28 percent of your gross monthly income.

What is the minimum down payment required?
First a down payment is the initial payment you make when you purchase a home. This varies depending on the price of the home. Typically, you will need a down payment of 5 percent of the price of the home, though Federal Housing Association (FHA) and Veterans Association (VA) loans require smaller down payments between 0 and 3 percent.

What other up-front-cost are there?
Up-front-cost are all the cost you may have to pay in order to purchase your home. A down-payment is just one of the up-front-cost. Up-front-cost may also include a real estate appraisal, credit report, documentation, lock-in fees, etc. Together these cost can amount to 2.5 to 3 percent of the loan. There are also prepaid expenses for interest charges during the period between closing and the first payment, real estate taxes, etc. Finally, there are attorneys’ fees, accessed by the title company who will handle the actual closing and other incidental cost.

Are the cost negotiable?
Sometime you can, sometime you can’t. It just depends on the deal. You may be able to negotiate on fees by offering to pay a higher interest rate. Typically you would pay .25 percent higher interest for every point you save.

What types of mortgages are available?
A mortgage is a loan on a house; that is all it is. There are three types of mortgages available: a conventional mortgage, a FHA-insured mortgage and a VA mortgage. You have a choice of a fixed rate, adjustable rate mortgage (ARM), a 30-year term, 20-year term or a 15-year term; and monthly, bimonthly, biweekly or weekly payment schedules.

Is a 15-year term or a 30-year term best?
With a 15-year mortgage, you own the homes in half the time you typically pay .5 to 1 percent less annual finance charges, and your total interest charges are even lower because you pay off the debt sooner. But your monthly mortgage payment is higher than with a 30-year mortgage, so you may not qualify for as large of a home as you wish to buy. A suggestion would be to take the 30-year loan so you can afford the house you want. Then as your income increases, make additional payments sufficient to make the loan pay off in less time.

Why do lenders require Private Mortgage Insurance?
Private Mortgage Insurance (PMI), protects the mortgage lender against loss should you default on your mortgage. This is required unless you make a minimum of 20 percent down payment.

What is a discount point?
A point is prepaid interest. It is another factor in the purchase of your home. If you want to have lower long-term payments you would have points added to you loan. If you want to pay less at the time of purchase then you would try and lower the points but as a result the loan rate would be higher. A discount point is an amount equal to 1 percent of the loan amount. Generally, the lower the rate you receive the higher the points. When comparing rate, always ask for the rate and corresponding points. However, the market rate would be a zero discount points.

What will our monthly payment be?
Your monthly payment consist of principal and interest and possibly an escrow amount to cover real estate taxes and mortgage life insurance. The actual amount will depend on the size of the loan, the interest rate and the term and whether it is a fixed rate or adjustable rate.

Can we get pre-qualified for a mortgage loan?
Yes. Typically it is as simple as a phone call to your credit union. A pre-qualification is based on information provided by you and is subject to written verification. Therefore, this is not a guarantee you will be approved for a loan, but it will give you an idea of what price range you should look at, how much money you will need and what type of monthly payment you will incur.