How much home can you afford?
Qualification & Financing
Points and What They’re All About:
Whether called POINTS, DISCOUNTS, LOAN BROKERAGE FEE or NEW LOAN FEE – they’re all the same. Points provide the MAGIC behind over 90% of the home sales made in this area. Without points, most new loans and sales with low down payments would not be possible. So, since POINTS are a very vital part of today’s home-selling picture, and understanding of them is important.
- WHAT ARE POINTS?
Through the use of POINTS, money is paid to lending institutions (Banks, S&L’s, Mortgage Companies, etc.) so lenders will be able to make loans on property under the money market conditions. POINTS result in INCREASING THE YIELD or RATE OF RETURN to lenders.
- HOW ARE POINTS FIGURED?
Very easily – ONE point is just 1% of the new loan amount. So if the current market is “5 points” it means that the points on a $100,000 loan would be 5% X $100,000 or $5,000.00. Not that the POINTS are figured on the amount of the new loan, NOT the selling price of the property.
- WHY ARE POINTS NECESSARY ON NEW FHA AND VA LOANS?
In order to allow more people to buy their own home, the U.S. Government established the maximum interest rate borrowers may be charged on any government secured loans. It is important to realize that the government does not loan the money, but secures its repayment to the lender. The most important factor is that the INTEREST RATE FIXED BY THE GOVERNMENT ON VA LOANS (and followed by FHA) IS NOT ENOUGH TO ATTRACT TODAY’S WISE LENDING INSTITUTIONS. There are many places where money can be invested, such as stocks, bonds, conventional loans – where the rate of return to a lender may exceed the obtainable from FHA or VA loans. To make government loans sufficiently attractive in order to compete with other types of investments, the idea of paying POINTS was developed. POINTS made the difference and enabled lenders to make FHA and VA loans. It should be noted that the majority of conventional loans may also include a charge for POINTS*.* As of 11/18/93, the government (VA) no longer established a rate, but will go with the “market rate”.
- WHY DO POINTS VARY?
The “cost” of borrowing money goes up and down, depending on the demand for money and the supply available. It is perhaps similar to the stock market, the price of any stock will rise or fall depending on its demand. Heavy demands on the available money supply through business expansion, requirements of a military effort or government anti-inflation policies all have a major effect on the availability of money. THE RESULT IS THAT MONEY FOR THE HOME MORTGAGE MARKET BECOMES MORE SCARCE AND MORE EXPENSIVE, THUS ACCOUNTING FOR THE VARIATION IN POINTS.
- WHY SHOULD THE SELLER PAY POINTS?
By paying the necessary POINTS, the seller makes it possible for his/her property to be sold. In our area, the overwhelming majority of home buyers obtain FHA or VA loans. The low down payment, low interest rate, long term loans result in reduced monthly payments that enable many people to buy homes who otherwise could not afford to do so. Because a new loan can be placed on an existing home as well as on most condos and townhomes, a seller can effectively compete with the builder of new homes buy also being able to offer a minimum down FHA or VA loan. (The builder must pay POINTS too.)
- HOW ABOUT JUST ADDING POINTS TO THE SELLING PRICE?
On FHA or VA loans, an approved appraiser must appraise the property. Generally a buyer will not be willing to pay more than the value placed on the property by the Government appraiser. So, if adding the POINTS to the overall selling price make the new selling price greater than the appraised value the result is that the property is overpriced and much less likely to sell. On the other hand, you will find that most of the comparables used in arriving at a Fair Market Value of your home included the cost of discount points. IF you are unwilling to pay these POINTS, the Market Value of your home will be LESS than the comparable.
To sell the majority of property today we not only need a buyer ready, willing and able to buy – we also need to obtain financing. The Government regulated FHA and VA programs allow most people to become buyers with a small cash outlay. WE can obtain the financing because of POINTS. Through the use of this tool, lenders are able to invest their money in FHA and VA loans and still realize a rate of return comparable to other investment opportunities. Thus, it can be said that POINTS ARE INDEED THE MAGIC INGREDIENT BEHIND THE MAJORITY OF ACTIVITY IN THE WORLD OF REAL ESTATE.
HOW MUCH HOME CAN YOU AFFORD?
Before you begin to shop for a home, ask your lender, or your REALTOR, to help you determine what you can afford. You will need to consider three factors: the down payment, your ability to qualify for a mortgage, and closing costs.
DOWN PAYMENT REQUIREMENTS:
Most loans today require a minimum down payment of at least 3.5 percent. If you are able to come up with a s 25 percent down payment, you may be able to take advantage of special fast track programs from some lenders.
QUALIFYING FOR THE MORTGAGE:
Most lenders require that your monthly mortgage payment (principal, interest, taxes and insurance, or PITI) range between 25 percent and 28 percent of your gross monthly income. (Remember, when you buy a home, you qualify for a major tax advantage that will effectively increase your take-home pay as all interest is deductible.) Your total monthly PITI and all debts – from installment to revolving charge accounts – should range from 33 percent to 38 percent of your gross monthly income. That’s a general rule of thumb but four key factors specifically determine your ability to qualify for a home loan:
In addition to gross monthly income, this includes history of employment, stability of income, potential for future earnings, education, vocational training and background, and any secondary income, such as bonuses, commissions, child support, and dividends.
- Credit Report:
This encompasses your history of debt repayment, total outstanding debt and total available credit. In many cases, your highest monthly debt balance can be considered in determining your credit history.
Calculated by cash on hand and other liquid assets for the down payment, including savings accounts, current checking account balances, CD’s, stocks, and bonds. IF you are receiving your down payment as a gift, that can be considered an asset too.
The home you are buying must be appraised to determining that it has adequate value and is marketable to ensure it will secure the loan.
Pitfalls to Avoid:
Work hard to avoid any late payments on your credit accounts. If you do have derogatory credit items, be prepared to explain each occurrence. Some experts recommend that you avoid major purchases until after you’ve settled into that new home (furniture, car, appliances, etc.) to limit your total debt and keep your assets high.
Don’t forget to think ahead. After you have found your dream home, remember that in addition to the down payment, you will be required to pay fees for the loan and other closing costs, in cast at the time of the final transaction, unless you choose, and are able, to include these in your financing.
It is best to seek your lender’s and realtor’s advice; they can help estimate the total fees and closing costs before you complete the final transaction. Typically, total closing costs will range between 2 percent and 5 percent of your mortgage loan.
A SHORTER TERM MORTGAGE WILL BUILD MORE EQUITY FOR YOU IN A SHORTER PERIOD OF TIME!
How long your mortgage will run is another important consideration in obtaining your financing. Bear in mind that the average family stays in a given house only about 7-10 years. Chances are, you’ll be paying on a particular mortgage for far fewer years than the contract specifies. The shorter your mortgage, the less interest expense you’ll have – and the faster your debt will diminish. The less you own on your mortgage when you sell, the more cash you’ll get in your pocket.
Shorter mortgages have higher monthly payments. However, the difference is not as great as you might think. A $50,000 mortgage, for example, for a 25-year term, will have monthly payments only about $15 higher than will a 30-year mortgage. A 20-year, $50,000 mortgage will have monthly payments only about $42 more than the mortgage written on a 30-year term.
What’s your position after 10 years on each of those $50,000 mortgages? With the 30-year mortgage you’ll still owe roughly $45,300 after 10 years. With the 25-year mortgage you’ll still owe roughly $42,000 after 10 years. And with the 20-year mortgage you’ll still owe roughly $36,250 after ten years! Compare all these factors before you make your final financing decision. It can mean money in your pocket.
IT MAY NOT BE TO YOUR ADVANTAGE TO PAY OFF YOUR MORTGAGE EARLY!
Whether by work or windfall, you’ve accumulated a large sum of money. You’re debating whether or not you should use it to pay off your mortgage. Again, some arithmetic, with the help of your lender, can disclose the value of doing so. Contrary to what many people thing, it may not be best to use those funds to reduce your mortgage debt.
You may be able to put the money to better use in your business. You may want it readily available as an emergency fund. Or, if you’re careful, you may be able to invest it prudently and earn more than the mortgage will be costing you. Remember that once you’ve paid the money on the mortgage, you can’t get it back out without refinancing or selling the house.
A PRUDENT REFINANCING OF YOUR MORTGAGE CAN GIVE YOU VALUABLE FINANCIAL FLEXIBILITY!
As the years go by, your monthly payments serve to reduce your mortgage debt. This, in effect, increases your equity in the property. If and when the need arises, you can refinance the mortgage and put some cash in your pocket. Or you can refinance without getting fresh cash – simply to lower your monthly payments. Any time you wish to refinance you have to carefully weigh the costs of doing so against the advantages.
A PROFESSIONAL INSPECTION, BEFORE YOU BUY, CAN BE SOUND SMALL INVESTMENT TO PROTECT YOUR BIG INVESTMENT!
In most cities there are firms which specialize in house inspections. The cost – which will vary from house to house and from city to city – will be nominal when you think of what it might save you. An inspection will cover the house from foundation to roof, including everything in between: plumbing, wiring, heating plant, and so on. The whole process takes only a few hours, so it need not delay your negotiations. If there are no such firms in your community, a contractor can accomplish the same task for you.
YOU CAN GET WARRANTY PROTECTION WHEN YOU BUY A HOUSE, WHETHER IT’S OLD OR NEW!
When you buy a new hoes the builder should give you a warranty to protect you against faulty materials or workmanship. New home warranties of as long as one year are common. If the builder doesn’t offer it, you should ask why he doesn’t.
With used homes, buyers can now obtain warranties that will protect them against more ordinary flaws and breakdowns for at least the first year of occupancy. The warranty may be offered by the seller as part of his overall package. It may be paid for by the seller or buyer or both. Most Real Estate Companies offer the buyers a Home Protection Plan, where permitted by state regulations. Needless to say, even with a warranty, you should still carefully examine the premises before you sign a contract to purchase any dwelling.
THE WAITING GAME IS A LOSING GAME!
In recent years many families have put off buying house, waiting from prices to level off – or, hope against hope, to come down. The facts prove that those who play the waiting game will most likely end up losing. Housing prices may stabilize, but interest rates on mortgages may increase. Or vice versa. Your chances of catching both in a leveling or declining situation are very slim. Meanwhile, as you wait, you and the family are spending money every month on payments that could be going towards your new home. When your family and financial situations dictate that it’s time to buy, get moving. The longer you wait, the more it will cost you.
YOUR EQUITY IN A HOME BUILDS FASTER IF YOU ASSUME A SEASONED MORTGAGE!
It is worth looking for a home that lets you assume an older mortgage. The older mortgage will likely have a lower interest rate than what’s currently available. You’ll also build equity faster with the older mortgage.
Here’s an example: On a brand new 30-year mortgage, you’ll have paid off only about 10% of your financial debt during the first ten years. But if you assume and existing 30-year mortgage that had already been around for 10 years, you’ll pay off about 25% of that debt during your first 10 years on that mortgage.
When you assume an existing mortgage, you probably will need a larger down payment. But it can be well worth it. Let your lender and real estate broker help you with the arithmetic. This is a decision that should be based on facts, not by guesswork.
THERE ARE MANY DIFFERENT MORTGAGES TO CHOOSE FROM!
While availability may vary from state to state and from lender to lender, there are now a number of different kinds of mortgages available to homebuyers. The interest rate, the amount of down payment required, and the size of your monthly payments can change greatly depending on which type you choose.
These differences will affect your pocketbook. Ask about conventional, FHA and VA mortgage loans. Also inquire about some fairly new types of mortgages: the Graduated Payment Plan, your monthly payments are lower than they normally would be during the first few years of the loan – a nice break to help you get started in a new home. In later years, as your income rises, the payments are increased. In the Adjustable Rate Mortgage (ARM), the interest rate can fluctuate up and down – within preset limits – over the life of the loan. You may be lower than average in some years, higher in others, as compared with a fixed payment plan.
Do the arithmetic – with the lender’s help – to determine which plan is best suited for your own needs and financial abilities.
A BIGGER DOWN PAYMENT ISN’T NECESSARILY THE WAY TO GO!
It’s often thought that bigger is better when it comes to how much of a down payment you should make on a house. In many cases this might be true. However, the arithmetic will differ from case to case. The bigger down payment means smaller monthly payments, and a lower interest expense for as long as you remain with the mortgage. That’s important for many home buyers.
But if you can put your available fund to work for you so that they can earn more than what the interest on the loan would cost, you could be dollars ahead with the smaller down payment. For example, the money might be put to more profitable use in your business or professional practice. There’s no clear-cut rule of thumb on this issue, except that it’s worthwhile to do some calculating. Seek the help of your lender to determine which is the better way to go.