7 WAYS HOME BUYERS LOSE MONEY BEFORE THEY EVEN BUY A HOME

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A MORTGAGE IS THE BIGGEST DEBT MOST OF US WILL EVER HAVE. BECAUSE THE NUMBERS ARE SO BIG, THOUSANDS OF DOLLARS (OR POUNDS, SHEKELS, OR OTHER MONETARY SYMBOLS) CAN SLIP AWAY WITHOUT A BORROWER EVER NOTICING. HERE ARE 7 MONEY-DRAINING CRACKS THAT HOME BUYERS NEED THINK ABOUT.

1. Ignoring the true cost of home ownership

Owning a home comes with new expenses that surprise many buyers. Even experienced home owners can forget how much it costs to upgrade a home, improve outdated features, and fix hidden problems. It’s wise to take these costs into consideration before signing on the dotted line.

Before purchasing, calculate realistically what you’ll need to spend to get the home up to your standard. In some cases, you may be better off paying more for a home that’s already been upgraded than paying for a cheaper home that needs more work. 

On the other hand, if you are struggling to make a down payment on a more expensive home, then buying cheaper and putting money into it over time and using your own sweat (“sweat equity”) might offset the higher down payment you would have had to make on the more expensive home. 

A 20% down payment on a $300,000 is $60,000. If you can’t afford that, consider buying a nearby fixer-upper. That home might only cost $225,000, with a down payment of $45,000. The extra $15,000 might be enough for you to do many upgrades that would bring it close to the standard of the more expensive home, but you won’t need to come up with that extra $15,000 up front. This might be a good investment option—as long as you go into it with eyes wide open…along with a really good home inspection.

Ongoing Maintenance

The longer you own a home, the more you’ll want or need to make expensive fixes. A new roof may be in your future, as well as repairs to a cracked driveway or installation of a new fence. Some items can sneak up on you, like tree removal service, a broken water main, and termites!

As a rule of thumb, budget 1 to 2% of your home’s purchase price annually for maintenance. If your home will cost you $250,000, expect to spend $2,500 to $5,000 annually on unglamorous purchases like a new water heater or having your furnace serviced. The older your home and the larger it is, the more you’ll spend. 

Also consider a savings fund for big ticket items. If your roof has a life expectancy of 5 years, start putting aside a little each month now.

2. Becoming house poor

There are many places in your life where you’ll need to put money besides your house. Replacing a worn-out car. Saving for retirement. Building a college fund for the kids. Life-altering vacations. Even buying furniture for your home. If you’re spending too much on a mortgage, you won’t have money for these other investments.

A general rule for housing affordability is to spend no more than 28% of your gross income on a mortgage. So, if you earn $75,000 a year, you should spend no more than $1,750 a month on payments, including insurance premiums and association fees. You can use a mortgage calculator to see how much house you can buy for the amount you can afford monthly, and how much down payment money you’ll need.

3. Not shopping around for loans

While it may seem to the average consumer that all mortgage loans are alike, and a loan broker may not even offer any options, the truth is that you do have options. You may be more or less qualified for some kinds of loans that offer better rates or terms. A military veteran’s loan is a good example of this, offering a zero down payment for some people. There are also loans for teachers and other job types, and loans for buying in certain areas.

Aside from special loans, your standard loans also come with different price tags…

According to Sergei Kulaev on the website, Consumer Financial Protection Bureau, “Our research showed that a borrower taking out a 30-year fixed rate conventional loan could get rates that vary by more than half a percent. Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month. Over the first five years, you would save about $3,500 in mortgage payments. In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, while making lower payments.”

To compare prices, you can use one of many websites that allow you to request bids from mortgage brokers. One broker may know of a special loan that another doesn’t know about, and all may have different fees. The fees and interest rate differences between these loans can be huge, especially over the life of the loan. 

You can also compare loans by calling different loan brokers personally. Be sure to include one or two bank lenders and credit unions on your list. Many of these bankers have in-house loans that might be better than another company’s loans. 

4. Ignoring the APR

Some lenders advertise low interest rates but make up for the low rates with high up-front fees. If you were to spread the cost of those fees out over the life of your loan, you might discover that your effective interest rate is actually higher than you could have gotten with another mortgage. Sometimes a lower rate loan has a higher “effective” APR…making your loan more expensive over time.

APR means Average Percentage Rate and includes all the fees as though spread over the life of the loan. For instance, imagine a $100,000 30-year fixed-rate loan with an interest rate of 3.85%. Now imagine the lender charges two points (a 2% buy-down of the interest rate), a 1% origination fee, and $1,500 in other closing costs. That brings the “real” interest rate from 3.85% to 4.215% APR.

Next, imagine a $100,000 loan at 4.05%, but with no points (no buy-down), a 1% origination fee, and just $800 in other closing costs. That loan’s “real” rate is 4.199% APR.

The first loan looks cheaper on the surface, but it’s really more expensive. The difference may only amount to $10 or $11 per year, but that’s your money, year after year. If you paid your mortgage for 30 years, you would pay an additional $3,650. That’s money you could have in your hand at the end to pay off another bill, put into your retirement account, or take a vacation!

Of course, if you plan to sell in 5 years, the extra $50 might not matter to you, in exchange for working with a broker you like, or someone more willing to give you a loan based on your credit rating.

5. Making a small down-payment

Most loan programs require a 20% down payment to get the best rates and avoid paying mortgage insurance — an extra cost that typically adds $100 or more to your monthly payments! You want to avoid paying that extra premium if possible. It goes away after the home’s value rises to more than 20% of the loan value, but until that time, you could be paying an extra $100 per month for many years, with nothing to show for it.

If you can’t afford 20% down, consider three things:

1. Maybe you should wait until you’ve saved up enough down payment.
2. Maybe you should buy a cheaper home, where you have a 20% down payment.
3. Maybe you can put 15% down…that will help.
4. If you have to buy now and pay the mortgage insurance premium, but you plan to make renovations, consider getting a reassessment of value as soon as possible. Ask the lender how soon you can do that…some loans won’t reassess under two years, leaving you stuck with $2,400 in extra payments! 

6. Not checking and fixing credit reports

Checking your credit report should be a part of your annual financial health checkup anyway, but when you are about to apply for a mortgage, it’s extra-important. Why? Because credit rating equals interest rate. 

A low or poor credit rating will result directly in higher interest rates and higher monthly payments. The worse your credit, the higher the rate. Conversely, a lower rate might mean you can buy a more expensive (nicer) house. 

But many credit reports make mistakes. Sometimes it may be a legitimate financial shortcoming on your part, but one that you “fixed” a long time ago, such as an unpaid library bill. It should have been removed from your report, but lingers. You have a right in most countries to contest that item and have it removed. Then have your credit rating rebalanced. 

Doing this can mean the difference of many thousands of dollars, and even determine whether or not you get the home of your dreams.

Also, keep an eye on your credit usage. A high credit usage will cause lenders to be concerned that you are over-extending yourself. Lower credit usage demonstrates wise or controlled spending, which they like. However, don’t pay off or close your credit lines entirely. Keeping some credit also demonstrates credit-worthiness more than keeping no credit at all.

7. Not waiting until you’re more financially stable

As alluded to earlier, sometimes a buyer just needs to wait until they have more money before buying a home. 

Down Payment—Coming up with a 20% down payment can be financially wise. It will result in less to pay off, and a lower monthly payment, and it will save on the mortgage insurance premium. It can be hard to wait, to delay gratification, but it can make a huge difference over the years to come.  

Quality of Life—Also, making sure there is enough income to afford the maintenance, and be able to enjoy life besides, are strong reasons to plan long term for a home purchase. 

Balance of Interests—However, there are legitimate reasons to buy a house, even if it stretches you financially. If it seems that house values are rising fast, or you’re able to score a great deal, or you need to purchase for another personal reason, then you may be better off jumping now, rather than waiting for the perfect financial picture.

Contact me for smart home buyer representation BEFORE YOU START HOUSE HUNTING! WE’LL HELP YOU AVOID SOME OF THE HIDDEN EXPENSES.  Simply reach out to Kevin and Jennifer Hanley, REALTORS The Hanley Home Team of Keller Williams Realty Atlantic Partners Southside 904-515-2479 http://www.HanleyHomeTeam.com Team@HanleyHomeTeam.com

When Should You Stop Renting and Buy Your 1st Home?

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This choice often comes down to a financial decision: Can you afford what you want? But that’s not the whole story. There are more things to think about when trying to decide if it’s time to take your first real estate plunge.

Cost-Benefit Analysis is the term for figuring out if something is worthwhile doing or not. When you analyze a situation and decide that the benefits are greater than the cost, then you may want to go forward. Conversely, if the cost exceeds the benefits, you may decide to wait.

Sometimes when you weigh the benefits against the cost, the benefits are higher, but not high enough. In that case, you might want to increase the benefits or lower the cost before taking action. These are exactly the thoughts you should be having as you plan to buy your first home.

To help you weigh the benefits and costs of buying vs. renting, this report offers key elements to think through, including evaluating the monthly payments correctly, estimating home ownership costs, weighing location against price, evaluating purpose and home investment strategy, and improving credit and interest rate to decrease payments. 

The most important factor when thinking about buying is to not “panic buy.” Don’t jump in just because interest rates might rise or prices might rise. Buy when you are ready and don’t let the market dictate your timing.

What are the benefits of renting? 

• One benefit is living in a property without having to spend great chunks of money to replace the roof or fix the plumbing. 
• Another benefit is that you may be able to rent a type of home or in a location that you could never afford to buy. 
• You have no stress or worry about maintenance. That’s the landlord’s job.
• You can pick up and move without wondering if you can sell your house. 
• If your income drops, you can rent somewhere less expensive. It’s a pain to move, but you won’t face a foreclosure or fire sale. 
• If you are late with a payment, you can discuss it with the landlord. 
• You probably won’t get a serious ding on your credit if you’re a month late. 
• In many places, renting is the only option because there isn’t enough housing for sale, or the prices are beyond reach for the average mortal.

What are the costs of renting? 

The landlord charges you X amount and as long as you pay that amount, you get to live in that property. The cost is X. But there are other costs:

• By renting, you lose the opportunity to build equity (the money you gain if you sell the property). So when you move, you move with no money in your pocket.
• You lose the opportunity to pay off the house and eventually own it outright.
• You lose the opportunity to put down permanent roots, do what you like to the property, and raise capital by getting a second mortgage or home equity loan.

What are the benefits of owning?

• Build equity through rising values and making payments. 
• Pay off the home and eventually have the security of owning outright. 
• Be able to increase your wealth…by selling and profiting, by renting it to someone else, or by getting a home equity line to use the money in some other way.
• Put down deep roots in the house and community.
• Do what you want to the house…paint it orange and pink if you want (as long as you don’t live in a Planned Community or Condominium).

What are the costs of owning?

• Monthly fixed and variable maintenance costs are significantly higher than renting.
• Interest on your mortgage loan (which may be a tax deduction, so that may actually be a benefit)
• Time involved in maintaining a home that would not be involved when renting.
• Possible falling values making it harder to sell when you want to. 
• Inability to work with the loan holder when you’re late with a payment.
• Possibly higher monthly payments than would be with renting.
• Possibly not being able to live in the community you want because you can’t afford to buy there.

Compare Costs and Benefits 

Here are several questions that will help you decide if it’s time to buy, or if you should keep renting.

What can you REALLY afford to pay each month?

Let’s look at an example. (This example uses US$.)

• Suppose you feel that you can afford to comfortably pay $1,500/mo. in a mortgage payment. 
• Now, imagine putting aside a little each month to pay for maintenance and improvement projects (painting, new roof, new kitchen, emergencies, etc). Let’s say 10% per month for homes in decent condition. That’s $150/month, based on your $1,500 comfort level.
• Now, instead of paying $1,500/mo, you’re really looking at paying $1,500 + $150 = $1,650. Can you afford $1,650? If not, then you need to be looking at a monthly mortgage closer to $1,350.
• That small difference in monthly payment can mean a difference of $30,000 in your purchase price, so it is important to calculate maintenance costs before buying. 

If you don’t include maintenance costs up front, then the costs will come from somewhere else after you buy—your vacation budget, your new car budget, etc. You could become what’s known as “house poor,” a term that means you have a house, but a lower quality lifestyle.

So before you buy, try to look at you monthly payments realistically, inclusive of your lifestyle goals.

What mortgage would you qualify for?

You may feel comfortable paying $1,500/mo, but the important question is ‘What loan amount will that qualify you for?’

Several factors go into determining what the lender will decide you can pay and what you can buy:

• Your loan amount is based on your income, debt, and interest rate.
• Your interest rate is determined based on your credit rating—which is based on your history of paying your debts, as well as the amount of overall debt you carry.
• The interest rate you are given may mean a $20,000  to $40,000 difference in the price of home you can buy. 

So, although you feel comfortable paying, say $1,500/mo, the mortgage lender might say that based on your income, debt, and credit score, you really are more comfortable paying $1,400/mo.

And that means, instead of getting a mortgage for $239,000, you can only get a mortgage of $219,000.

So work with your mortgage professional, and go through the entire loan application process. Fill out the loan application. Provide the documentation. Yes, it’s arduous. But it’s the only way to get accurate figures, and get the coveted “pre-approval letter” that you need when buying a home.

Why do you really want to own a home?

Here are your choices: 1. Financial reasons.  2. Pride and roots reasons. Of course, it’s both for most people. As a first time buyer, you’re aware that ownership has financial benefits. And you also want to live in a place you love and put down roots.

 Unfortunately, for many home buyers, the price of a home in their desired location is too high for them. That means that first time buyers need to focus on the first choice: buying for financial reasons. 

Look at lower cost alternatives that allow you to build equity and eventually buy up into the area you want to put down roots. Here are a few ideas for first time buyers to make their first home a smart investment:

• Buy a much smaller home or condominium near the
  area you want to live.
• Buy a fixer-upper near where you want to live.
• Buy a home in an area you don’t want to live. After a few years, decide to either keep it, and put a renter in it, perhaps using the equity to buy another home, or sell it and use the cash to move up.

Each choice has its own costs and benefits. With each choice, the goal is to increase equity so that you can sell and have a larger cash down payment on a home in your preferred location. Create a long-range plan. Then work towards that goal by increasing savings, building equity, and improving your income. And always, always work on reducing debt.

Is your rent low enough?

If you’re paying $1,000/mo in a $3,500/mo area, and you have a good landlord, maybe you’re better off investing in other things instead of buying a home. Or perhaps buying an investment home in a cheaper area. It is OK to not own the home you live in, if it makes financial and emotional sense not to. 

But be smart about it. Do the analysis. There are many factors involved in home ownership that may benefit you, such as rising values, interest rate deductions, and the potential to control an asset.

Using a Mortgage Calculator

Mortgage calculators should be used as guidelines only, as just another data point. Once you’re really serious about buying, the only truly accurate way to know what you can afford and what your payments will be is to go through a full pre-approval process with a mortgage professional. 

But until then, mortgage calculators can be a useful tool to help you see how adjustments in down payment, interest rate, and income can affect purchase power.  Just be dead sure that the estimate you get is includes Principle, Interest, Taxes, Insurance, and Extras charged on the loan, such as Private Mortgage Insurance. If you leave out any of these costs, you will be surprised when your mortgage professional shows you a figure lower than you thought.

 Calculators come in several varieties. Here are four calculator suggestions you can look up on Google. Use a calculator designed for your country.

1. House Price, Based on Payment

2. Payment, Based on House Price

3. Payment, Based on Income

4. Rent vs. Buy

Final word

As a first time buyer, you are swept up in the excitement of buying—the dream of owning. You look at homes online and imagine putting in your own garden, painting the baby’s room, and decorating the way you want. 

But you are smart. You know you’re making a financial decision, not simply an emotional one. You know the factors that go into deciding when to stop renting and buy a first home are complex.

There are no simple answers. But we’d like to leave you with this final word:

Don’t let fear of buying stop you from buying a home. There are plenty of professionals out there who can guide you through this decision and help you make a sound financial choice. If not me, then find a real estate consultant you trust to sit down with you and discuss the ideas presented in this report. Work with a mortgage professional to get accurate figures. 

We want you to know that I’m always available to you—or your friends and family—for a home buying consultation. And we want you to know that we’ll spend whatever time you need to answer your questions so you can make the right decision in your own time.

 Call to arrange a consultation appointment – Simply call 904-515-2479 OR email Team@HanleyHomeTeam.com Thank you! Kevin and Jennifer Hanley, REALTORS Keller Williams Realty Atlantic Partners Southside

The difference between Home Warranty & Home Insurance

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When purchasing a new home, it’s important to do in-depth research on all facets of the homebuying process. One thing you’ll need to understand is how to best protect yourself and your investment if anything were to go wrong. Check out the information on home insurance versus home warranty below to educate yourself on your options.

Home Insurance

Homeowners insurance pays for any accidental damages and loss that are caused by fire, lightning strikes, windstorms, and hail, however, damage from earthquakes and floods is typically not covered. It also covers the replacement of personal property in case of theft or damage and liability if a person were to get injured in your home or on your property. According to American Home Shield, the average annual cost of a homeowner’s insurance policy ranges between $300 and $1,000 and the bank usually asks you to obtain a policy before the mortgage is issued. Make sure to keep in mind that each type of coverage in the policy is subject to a limit and, in most cases, you will have to pay a deductible.

Home Warranty

A home warranty is designed to cover the cost of repairs and replacements of larger appliances and crucial systems in your home that may fail or break due to age and wear and tear. This includes but isn’t limited to HVAC, electrical, or plumbing components, kitchen appliances, and your washer and dryer. With a home warranty, you are required to pay premiums year-round, even if you do not use it, and it won’t cover damages if appliances were not maintained properly or if the damage is from a fire or other disaster.

Give us a call today; we are happy to lead you in the right direction.

Kevin and Jennifer Hanley, REALTORS Keller Williams Realty Atlantic Partners Southside 904-515-2479 http://www.HanleyHomeTeam.com

Homebuyers need to act now

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CHICAGO – Feb. 4, 2015 – Homebuyers need to move fast if they want to spend less, according to Jonathan Smoke, chief economist at realtor.com.

“Delayed purchases will only result in higher monthly mortgage payments as prices and rates rise,” Smoke writes. Realtor.com forecasts that affordability may decline as much as 10 percent over the year.

The Federal Reserve continues to remind the financial markets that it plans to raise its target federal funds rate this year, which will cause mortgage rates to rise. Many economists predict that 30-year fixed-rate mortgages will average near 5 percent by the end of the year.

For now, mortgage rates are near historical lows for homebuyers and homeowners. Freddie Mac reported last week that the 30-year fixed-rate mortgage averaged 3.66 percent (last year at this time it averaged 4.32 percent), and 15-year fixed-rate mortgages averaged 2.98 percent (a year ago, it averaged 3.40 percent).

“Right now, the Fed is using the word ‘patient’ to describe its approach to picking the time to raise the target rate,” Smoke notes. “However, when the Fed ‘loses patience,’ rates will go up at least 20 to 40 basis points in anticipation of the target rate officially going up. … So, buyers beware: The clock on these low mortgage rates may be ticking.”

Source: “2015: Buy Now, Before the Fed’s Patience Ends,” realtor.com® (Jan. 30, 2015)

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