Like most things in life, when you purchase a home, there are a number of costs aside from the actual cost of the home that must be taken into account. These can quickly add up and it is common for a person to spend several thousand dollars in closing costs.
Closing costs are the things that one must pay before taking ownership of a home. This includes things like attorney fees, title searches, and loan origination fees. A lot of people don’t realize it, but when you purchase a home, in addition to the down payment, it is common to spend between $2000 and $4000 in closing costs.
Since closing costs can add up so quickly, it is very important to take each cost line by line and determine if it is necessary and if there is anything you can do to mitigate it. Your lender and real estate agent should be able to provide you with estimates of closing costs before the actual closing day, so that you should not wait until the day of closing to question each cost.
There are many costs, which are simply part of buying a house. For example, you will need to hire a lawyer to prepare the paperwork and a legal assistant will need to be on hand during the signing of the contract. Other costs, such as a title search or a home appraisal are also par for the course.
However, it is also common for junk fees to be included with the loan, which are often negotiable. For example, often a lawyer may include a very high charge for sending the contract by courier. This is often unnecessary or highly inflated, so it should always be questioned. The lender themselves will also often add on a number of junk fees, such as extra points or certain loan fees, so each and every charge from the lender should be questioned.
For non-junk fees, such as lawyer costs, even though they are required, it is often possible to get a better deal simply by asking or doing a little calling around. So, once you have received an estimate of the costs, ask your real estate agent if you can get it any lower and if they can not help you, do a little calling around to real estate lawyers to see if you can find a better deal. In most cases, you can use your own lawyer, so it may be possible to save several hundred dollars. However, in certain cases, such as when buying a bank owned or foreclosed property, you may not have as much freedom when it comes to choosing your lawyer.
Closing costs add up very quickly and it is common for loan originators and lawyers to include a number of junk fees, so it is important to carefully examine and question all costs before going to your closing meeting. This can often save hundreds of dollars.
Purchasing a home is a big investment and like all big investments it is one that should be made carefully. There are quite a few advantages to owning a home, but there are also a number of disadvantages, especially if it is something you rush into.
One of the biggest disadvantages of owning a home is that it in many ways reduces your freedom, as most people are financially and legally tied to a home. This means that if you do not like your neighbors, you can not just leave, and if you do not like the city regulations, you can’t just move a little further out. This translates to a lot of reduced freedom, which is often taken for granted by renters, who whether they know it or not, are in most cases at most going to loose their deposit if they decide they would like to change location.
However, for many, this is not a disadvantage at all, as it does provide a strong sense of security and really helps the homeowner understand that it is more than just a few rooms and a bath, but it is actually some place you can call home. Still, it is something that should be considered and fully understood before buying a home.
Another disadvantage to owning a home is that if things break, you have to fix it, either by doing the work yourself or by paying someone, but ultimately, when the AC goes out in the summer, you can’t just call up and complain to your landlord. There are a number of federal and state regulations in place to protect renters, which ensure that rental properties meet a certain set of standards, so if your rental property isn’t meeting these standards, such as not having a heater, you have the power of the law behind you to ensure that the landlord meets these requirements.
While this can be a disadvantage for some, it is also a positive things for others. This is in part because it means you get to decide how you use and change your home. For example, if you do not like the living room, you can simply tear out the wall and start over, presuming it isn’t load bearing anyway. Along the same lines, if you would rather have a tank less water heater or a more energy efficient heat pump, you can install one and will not be held to whatever your landlord decides to install. Of course, this does mean it comes out of your pocket, but most of these types of improvements help improve the value of the home, so ultimately it ends up being, at least partially, a long term investment.
As the above examples show, there are not only advantages and disadvantage to owning a home, but it is never simply black and white either, with there usually being a positive side to most negatives. However, buying a home is a big decision and one that bears thought, so it is essential to consider all of the aspects associated with buying a home, including the mortgage or other loan sides.
Purchasing a home is something that can provide a number of benefits, both financially and emotionally. However, it is a big responsibility and since most people do not have the funds to buy the home outright, it means taking out a mortgage. Selecting the right mortgage lender is as important, if not more so, than choosing the right home, as for most home buyers, the mortgage represents their biggest investment to date.
When considering mortgage lenders, one of the most important factors is the interest rate that they offer, as well as the specific terms of the loan. The interest rate determines how much the monthly payment is and represents the profit that the lender will make. Interest rates can change on a hour by hour and even minute by minute basis, so one of the most important things to remember is that you can not rely upon printed mortgage rates, advertisements, or even quoted mortgage rates to be an accurate representation of the current mortgage rate.
However, while interest rates can change at a moments notice, it is possible to get a basic idea of the current mortgage rates by doing some calling around and visiting your bank. The reason it is a good idea to start with your bank, is because banks provide a nice metric for getting an idea of the standard mortgage rates in the area. Your bank will also often be able to provide you with a much quicker answer when it comes to applying for a loan and are more likely to not require any application fee until you actually close on the home.
Once you check the interest rate at your own bank, it is a good idea to spend some time exploring your other options. Mortgage brokers can sometimes provide a more competitive interest rate, as they have relationships with multiple lenders. However, a mortgage broker is not really a lender, but more of a middle man and they only get paid if you go through them to finance your mortgage, so it is important to keep in mind that they are looking to make a commission off of you. Many take points, which represent a percent of the total sale price, as their commission, which is in some regards a junk fee, meaning that it is negotiable and not necessarily a part of the actual mortgage.
Many real estate agents have relationships with mortgage brokers, so they may be able to steer you towards a reliable mortgage broker. However, keep in mind that this could also represent a conflict of interest.
There are also a number of mortgage banks, which are special banks that deal in mortgages, as opposed to the traditional checking and savings accounts found at your local bank.
Since interest rates can change so quickly, many people opt to lock in a mortgage rate with their lender. This simply means that an agreement is signed between the mortgage lender and the borrower stating that the lender will guarantee, or lock in, the interest rate for a specific period of time. This often means paying a fee or a deposit, but ensures that the interest rate will be honored, even if the interest rate goes up.
However, the flip side to this is that if the interest rate goes down, you may not be able to get them to lower it and they would certainly be under no legal obligation to do so. As a result, it is important to be very careful before entering into any type of agreement with a lender.
While the interest rate is one of the most important parts of a mortgage, it is very important to consider several other factors, such as whether there is a penalty for paying off the loan early. Subprime mortgages are mortgages that have less than optimal terms and interest rates, but they often look very appealing if you don’t look too hard.
For example, negative amortization loans are one type of subprime mortgage, which has a considerably lower initial monthly payment. However, the payment isn’t really low and instead a portion of each monthly payment is applied to the principal of the loan. So, with each payment, the amount owed on the home actually increases, which subsequently increases the monthly payment.
Evaluating the terms of the loan and comparing it to mortgage terms that you know are acceptable, such as those provided by most local banks, is an essential step in avoiding subprime loans.
As mentioned above, Junk Fees are extra costs on top of the standard fees that can often be negotiated down. When closing on a home, there are a number of extra fees, such as title searches, title insurance, inspections, lawyer fees, courier fees, and even credit checks. Some of these fees, like the title search or the lawyer cost, are strict and can not be negotiated. However, other fees can and should be disputed, as they are often unnecessary padding the pockets of the mortgage broker or lender.
Often the cost of a credit check and courier fee are added on, despite not really being needed or actually used. For example, most lenders check hundreds and hundreds of credit reports each year. As a result, they get a discount on their credit checks, so if they try to charge you anything more than $25, this is an indication that it is a junk fee. Since closing costs can easily cost over $3,000, it is important to carefully consider all of the costs, as well as question anything that does not feel right.
Buying a home is a big investment, in many cases the biggest investment a person will make in their life, so it is not a decision that should be taken lightly. It is very important to carefully weight the pros and cons of home ownership, to determine if it is right for you.
There are a number of advantages to owing a home, but one of the biggest ones is that instead of paying rent each month, a portion of your monthly payment is actually going towards the cost of the home. At first, the amount that goes towards the principal of the loan is very small, with most of the monthly mortgage payment going towards interest, but after about five to eight years, this slowly reverses.
Assuming the home increases in value over time, this means that even if you have not completely paid off the mortgage yet, you should be able to sell the home, getting back some of your investment and hopefully even turning a profit.
One of the other main advantages of owning a home is that there are a number of tax benefits to home ownership. For example, all of the interest you pay on your home can be deducted from your taxes, which can have a major effect on how much you get back at the end of the year.
Also, repairs and renovations can also be claimed as a deduction, so there is a big motivation to fix and renovate ones home. Not only does this make living in the home more enjoyable, but it also helps to increase the value of the home, which is a win-win situation.
In addition to the regular tax deductions, there is also a First Time Homebuyers Tax Credit Available offered by the Federal Government, which provides up to $8,000 that does not need to be paid back. This is currently available to those who have purchased a home in 2009 and the first part of 2010. In the past, there has traditionally also been a tax credit available that is basically a no-interest loan, but it has to be paid back.
One of the other main advantages to owning a home is the freedom to renovate and modify the home without having to ask anyone. This means if you want to knock down a wall to make your bedroom bigger, you don’t have to ask permission, only ensure that it can safely be done without affecting the homes structure. This applies to smaller changes too, such as changing the color of a room.
While there are many advantages of owning a home, there are also some disadvantages. One of the main disadvantages is that you are effectively tied to the home through a mortgage. This means you can’t just pack up and leave if you get a job in a different part of the country or if you don’t like your neighbors. Instead, you must always consider the mortgage when you are thinking about moving or leaving the area.
Also, while the ability to do pretty much whatever you want to the home can be very nice, this comes with responsibility. If a pipe breaks or there is some other sort of emergency, you can not call your landlord up like you would if you were renting. Instead, it is necessary to handle the situation on your own, including the cost.
There are also some risks of owning a home, with the main risk being that the home will loose its value. Sometimes, as can be seen in the current economic crisis, the home looses its value as homes flood the market and there end up being more low cost options available, driving the value of homes down across the board. In the case of subprime mortgages, it is also possible for the terms of the mortgage to cause how much is owed to the bank to increase faster than the value of the home increases. For this reason, it is essential to spend some time shopping around for loans and make sure to steer clear of subprime mortgages, which have higher interest rates and bad terms, such as penalties for paying the home off early.
With the current financial situation, many people are asking themselves whether now is a good time to buy a home. This is actually a very personal question and there is no stock answer that will be right for everyone. Instead, it is important to evaluate your individual financial situation and personal needs, before making what is for many the biggest single investment of their life.
With that said, there are a few silver linings to the current economic situation, making buying a home a very attractive decision, especially for first time home buyers.
The number of foreclosures is still on the rise and while this is quite sad for those who are facing foreclosures, it means that there is an increased number of homes available on the market, which are priced significantly below what would have been considered fair market value even just a few years ago.
With many banks wanting to get the bad debt off their books, there are numerous opportunities for someone to buy a foreclosed home at significant savings. This is not reserved to only homes in poor neighborhoods or in bad condition either, as millions of homes all over the country are currently empty.
An increase in foreclosures also has an impact on the price of other homes, as with so many options available, home values across the country are dropping.
With that said, it is important to consider what this means about the generally accepted value of a home. Many of the root causes of the current financial situation can be traced back to the commonly held belief that “home values will always rise,” leading many to become involved in homes they can not afford. It is commonly held thought that home values are not actually at an all time low, but are instead reverting back to their actual value.
Interest rates are at an all time low, in part because the FED, which regulates interest rates on borrowed money, have set the interest rate at basically zero. While the FED interest rate is not the same one that lenders offer, mortgage banks base their interest rate off of the FED rate, which is why we are seeing historically low interest rates.
Where even just a few years ago, getting a fixed rate below 6% was all but unheard of, many lenders are now offering rates that are closer to 4% or even lower. This low interest rate can save thousands and thousands of dollars in interest.
Last year, President Obama initiated the First Time Home Buyers Tax Credit, which offered up to $8,000 in the form of a tax credit that did not need to be paid back. The first time home buyers tax credit was intended only for those who had not owned a home in the last three years and was considerably different than the previous credit, which was a no-interest loan.
This tax credit was set to expire in December of 2009, but congress voted to not only extend it, but also offer a slightly reduced tax credit to people who have owned a home in the last three years.
These new tax credits for homeowners can significantly reduce costs and since it does not need to be paid back, it is a very attractive offer making buying a home in 2010 much more affordable. Those that can afford it can significantly reduce their interest payments by applying it towards the principal of the home or simply using it to help cover their bills.
Real estate can be an excellent investment, but since most do not have the money to purchase a home up front, it is usually necessary to use a mortgage. Mortgages are a long term loan and, like any loan, there are sometimes when it may be in your best interest to refinance the mortgage.
Refinancing a mortgage simply means taking the total amount owed and transferring it to a new mortgage and possibly a new lender. While there can be many advantages to this, it is important to determine if refinancing is right for you, as it is necessary to pay closing costs, similar to those paid when the home was purchased.
There are many different reasons to refinance a home, but the most common reason is to change the term or rate.
Refinancing to change the rate involves taking out a new mortgage that has a lower interest rate. Refinancing to change the term means taking out a new mortgage, which has a lower length than the previous mortgage. Often, people will do both and refinance to change the term and rate. Knowing when to refinance the term or rate involves identifying your break even point.
Refinancing a mortgage to cash out is the process of taking out a loan and using it to remove the equity from the loan. Equity is the amount of money you have put towards the principal of the loan.
So, for example on a $100,000 mortgage, after 10 years, the total owed to the bank is $85,000. This means there is $15,000 in equity in the home. A Cash out loan will give the borrower $15,000 in cash, but they will start over owing the lender $100,000.
In practice, however, cashing out a loan usually also includes the appreciation of the home. For example, in the above example, say that in those 10 years, the value of the home increased by $20,000. Now, even though the homeowner has only paid $15,000 in equity, technically, they have $35,000. This is the amount of actual equity plus the value of the appreciation.
This means that instead of only receiving $15,000 the homeowner could take out a $120,000 mortgage on their home.
Consolidating Debt works similarly, but involves bringing other debts, such as medical bills, credit card bills, or school costs into the loan. So, for example if the borrower owed $20,000 in student loans, they could add this to their mortgage and spread out the payments over the life of the mortgage.
These types of loans are the most heavily advertised, as they are the most profitable for the lender. However, it is not always in the best interest of the homeowner, because ultimately you are taking a big step backwards. With that said, cash out loans and consolidating debt can be a great way to pay off other lines of credit and bring them together under one large loan.
Another common reason for refinancing a mortgage is to remove someones name from the deed. Often this is after a divorce, but it could be a friend, relative, or business partner who simply wants to move in a different direction.
Whenever there are multiple people on the deed of a home, each person is considered to have an interest in the home. It is not even truly necessary for the person to be on the deed, because, as is the case with certain gifts, warranty deeds are often issued. Warranty Deeds indicate that others have an interest in the property and even though their name may not appear on the deed itself, if anyone buys the home, they will need to have all parties removed.
Since there are a number of instances where there is a need to remove someones name from a deed, often refinancing is the quickest and easiest way to remove the name. This can be especially tricky in cases of divorce, because even though a court may assign ownership of a home to one person or the other, this ruling is not honored by the lender.
Private Mortgage Insurance(PMI) is sometimes required on mortgages with less than 20% down. It is a type of insurance that covers the risk to the lender. It does not cover the entire cost of the home, but instead only the 20% down-payment.
In some cases, the PMI may be tax deductible, so there is little incentive to remove it, however if it is not and the homeowner has at least 80% equity in the home, refinancing to remove the PMI may be a good idea. It is important to note that it is the homeowners obligation to remove PMI and typically the bank will make no effort to have it removed.
Typically, the foreclosure process begins when the homeowner misses three consecutive payments, however recent legislation has made it a little bit more difficult for lenders to foreclose in some cases. Even once a home has entered into the foreclosure process, it is almost always possible to reverse it, providing the missed payments are made up.
There are several loans, often called Foreclosure Bailouts, which are designed to allow the homeowner to refinance the home, any missed payments, and any fees owed to collections agencies. However, it is very important to be careful when accepting foreclosure bailouts, as they are a type of subprime mortgage.
Initially, they offer relief, but over time it ends up costing the homeowner much more. Of course, when facing foreclosure, often subprime mortgages are the only option.
There are a number of other reasons why refinancing a home may be a good idea. For example, if the home has liens on it, it is sometimes possible to refinance and remove the liens, absorbing them into the total loan amount.
It is also becoming common to refinance a home and take out additional funds for remodeling. For example, if the home needs a new roof, but the homeowner can not afford to pay for it, it is sometimes possible to refinance to include the cost of the renovations.
For each reason to refinance, there is a reason not to. Many of the offers most homeowners receive to refinance are from subprime lenders and while they may seem like a good offer at first, will end up costing the homeowner much more in fees.
It is always important to explore all of your options and make sure you calculate the break even point, which is the number of months it will take for the closing costs associated with refinancing to be offset by the saving of refinancing. There is no set rule, but it is generally not recommended to refinance if the break even point is greater than 48 months.