Financial Advantages of Making a Down Payment

While it is easy to see the historical 20% down payment as a major impediment to acquiring a new home, there are significant advantages to having this money when you buy your house. In addition to having an instant equity stake in one’s home, there are certain cost savings that are associated with the 20% level. Most lenders require Private Mortgage Insurance (PMI) for borrowers who have less than 20% equity in their homes. This is an additional level of insurance coverage that provides the lender with some protection in the case of a default. The charges for the premiums, however, are passed on directly to the borrower. If a borrower makes a 20% down payment, this charge is avoided. Additionally, even if the borrower is unable to hit the 20% mark right from the outset, getting to this of equity in the home can still yield the same savings.

The other significant cost savings that occurs when a home buyer makes a down payment is a dramatic reduction in the amount of interest paid over the life of the loan. Despite the fact that rates have remained low, the interest one must pay on each additional dollar that is borrowed adds up over the life of a typical thirty year mortgage. Over the course of a thirty year mortgage you may pay just as much in interest as you did for the house.

Here is a quick example. Let’s say you find a house that you like and really want to buy it to take advantage of low mortgage rates. The house is going for $175,000. Unfortunately, you don’t have $35,000 set aside for a traditional 20 percent down payment, but you find a lender that can work out a mortgage with just 2 percent down, or $3,500. It sounds great, but guess what? That loan would end up costing you about $120,000 in interest. But that’s not all. It would take roughly 11 years to get to the point where you have enough equity to eliminate PMI. If you assume about $150 a month for PMI on a loan of this amount, that ends up costing you nearly $20,000. Total cost to buy this home without the standard down payment: $140,000.

Let’s take the same house, same mortgage rate, and instead put the full 20 percent down. In this case you’ll only pay about $100,000 in interest over the life of the loan. In addition, you avoid PMI which saves another $20,000. All said and done you save $40,000 by coming to the table with a 20 percent down payment.

Is That Really a Savings?

I know what some of you are thinking. Why save up and dump $35,000 into a down payment today when you could basically finance that over the life of the loan? We haven’t discussed monthly payments yet. The terms of the loan in the first example would put the principal plus interest payment at around $820. Then when you tack on PMI your total monthly payment clocks in at about $970. With the full down payment and avoiding PMI, the monthly payment is just $670. A difference of $300 a month. That’s a nice boost to your cash flow and could go a long way toward making IRA contributions, adding to a college fund, or whatever the case may be.

Even so, people will crunch the numbers and play the “what if” game. What if I used the down payment funds to invest in something that earned more than what the mortgage was costing, what if I was able to get a piggyback loan to avoid PMI, what if…? There are a dozen possibilities, but that’s not the real reason behind striving for a large down payment.

It’s all about equity. Here’s the thing. Most people don’t live in their homes for the life of the mortgage. In fact, only about half of all homeowners stay in a particular home for more than 10 years. Because of the way mortgages work it takes a long time before you start to see the equity build up when making regular payments. So people who need to sell in the first half of the mortgage often end up with little equity without that down payment. And remember, even if you do have a little equity, there are costs to buying and selling a home. Things like real estate broker commissions and concessions to buyers can cut into your “profit” by tens of thousands of dollars, meaning you could end up walking away from the sale with almost nothing in your pocket. Or in the worst case scenario, you end up having to shell out money to get out of the house.

Sources of Funds

Saving to make the down payment on a new home can often be a daunting task given how much money it might take to reach a comfortable down payment. While personal savings is the most common source of down payment funds, there are other options that can be considered. Furthermore, properly managing that savings can make a real difference in shortening the time required to reach the needed amount.

There are several government agencies that provide help to first-time and low income home buyers. These include the Federal Housing Administration, the Veteran’s Administration and state housing authorities. Each of these offers different programs that are designed to assist individuals in meeting down payment requirements and securing home loans. Before committing to any particular method, it is worth checking with each of these departments to ascertain if a program is available that may be utilized.

An alternate source of funds that may be used for the down payment on a home loan is one’s retirement account. Under provisions of certain retirement plans, it may be possible to borrow from these accounts or make penalty-free distributions in order to purchase a new home. For example, some 401k plans offer a 401k loan for a home purchase, up to $50,000. In addition, IRAs have a provision where you can withdraw up to $10,000, without penalty, for the purchase of a home.

Keep in mind that tapping into retirement funds may not be the best way to go about coming up with the down payment. After all, you’re just robbing Peter to pay Paul. But you at least want to know what options are available to you.

Maximizing Your Savings

Under the current financial landscape, there are limited options to maximize savings while keeping risk low. Savings accounts these days are obviously safe, but with that safety comes limited interest. Here are some current high-yield savings options. Another option may be CDs. If you’re specifically saving for a down payment on a house that will be a year or two down the road, then CDs may be a better option in order to earn a little more interest. Finally, if you don’t mind a slight element of risk and your home purchase is at least a few years out, you could invest conservatively in bonds or a bond fund.

No matter how you slice it, coming up with that down payment is an important aspect of buying a home. You will save money, build equity, and provide yourself with a little flexibility. Since coming up with a significant down payment usually doesn’t happen overnight it is equally important to begin planning for that future home purchase early and put your money to work the best you can.

Many homeowners have begun to pour thousands of dollars into their homes to update and renovate their homes to modern standards, but many aren’t choosing the right type of updates. Even the necessary updates they are choosing simply aren’t getting the most out of every dollar spent. A strong update that is worth the investment is one that will not only reduce your cost of owning a home in the long run, but will also increase the home’s resale value. A few of these types of investments include:

Renewable Energy

Choosing to power you home with a renewable form of energy is definitely an investment. Geothermal and solar power energies are by no means cheap to install, with many systems costing between $15k and $30k. However, cheaper and just as efficient forms of solar power are becoming more readily available, and the special tax breaks and grants offered by both state and federal governments make the initial price tag a little more feasible.

The reason why choosing to update your home with renewable energy sources is well worth the investment is because of the savings it can provide you in the long run. With renewable sources, your utility bills will plummet, your home’s overall value will increase, your taxes will be lower, and your home’s resale potential will skyrocket. All in all, investing in renewable energies is the best investment you can make in your home. Yes, the initial costs can be steep and it may take a number of years to break even, if you plan on staying there for the long haul you will no doubt reap the rewards.

New Roof

Reroofing a home is a necessity that nearly every homeowner faces at some point or another. While it can seem like an expensive hassle, reroofing your home with the proper materials can greatly reduce the amount of energy you use each month and can significantly increase your home’s selling power.

When you reroof your home, don’t choose cheap materials. You truly do get what you pay for when it comes to roofing materials and labor. Make sure that you choose quality materials, such as metal roofing or recycled synthetic shingles, which will create less waste and have greater durability. You also want to make sure that you are hiring a roofer that is highly recommended and experienced so that your roof is truly as money saving and efficient as possible.

Insulation, Weather Stripping, and Windows

Old windows, poor insulation, and lacking weather stripping can all the similar effects on your utility bill as a faulty roof can. If these parts of your home are simply old or lacking in thickness, you can easily be wasting several hundred dollars a year in utilities.

While weather stripping is an inexpensive fix, new windows and insulation rarely come with a cheap price tag. However, tax breaks are available to those who update their homes with energy saving windows and insulation which is a nice perk. New windows in particular enhance a home’s value and can significantly reduce your electric bill. Insulation, on the other hand, which isn’t always a visible update can also prove a strong selling point for your home, and will also be sure to decrease your monthly utility bill.

While updating your home to be more energy efficient is definitely a great way to go green and save money, you only want to do the aforementioned updates if you intend to stay in your home for a long time due to the high costs. You will see savings immediately because of your lower utility bills, and while it will take time for your updates to pay for themselves, that repayment period could be in as little as a couple of years.  What’s that in the lifetime of a home?

What is a Condo?

A condominium, frequently shortened to condo, is a form of ownership in which some parts of a property are privately owned while others are owned collectively. For most condos, this means that a private indvidual owns an apartment or condo unit and also is a collective owner of the general property and amenities like a pool, gym, or laundry facility.

How to Find a Condo

If you are interested in buying a condo you can conduct your search in the same basic way that you would for a house. You can contact a real estate agent who can help you find a condo suited to your needs, or you can search on your own using real estate listings online and in newspapers. If there is a condo complex you know you are interested in, you can often contact the facility itself to learn more and schedule a viewing.

Condo Sales Contracts

One of the main differences between buying a single-family home and buying a condo is that you will have to sign an agreement with the condo complex in addition to the usual sales contract for a home purchase. This agreement outlines guidelines and regulations for the use and governance of a condo complex.

Be sure to read over the condo agreement carefully before signing. You will want to consider how the complex is run and governed, and what issues are of particular concern and relevance to you. You should be sure that there are no guidelines or regulations you will be unhappy with and that disputes or complaints will be handled fairly. You want to be sure that the condo complex is well-run both for your satisfaction living there and to ensure that your unit will maintain its value in the future.

While financing for a condo is very similar to financing any other property purchase, there are a couple of hidden costs with condos. Owners of condos usually have to pay condo association fees that are used for upkeep and maintenance of the common property. You may have heard that buying a condo is expensive because of these fees, but actually the costs can vary widely, so it is important to find out the details. Also, as home owners, condo owners do have to pay property taxes. And as always, you want to find the best mortgage so you can save money over the long run.

Why a Condo?

When asking yourself “Should I buy a condo?” there are a number of factors to consider. Condo prices tend to be lower than comparably-sized single-family homes, and condo regulations often maintain high property values, ensuring your purchase is a solid investment. Also, buying a condo rather than renting an apartment or condo offers the benefits of tax deductions for home-ownership.

One of the added benefits of living in condos is the increased socialization offered by living in closer quarters with others. Some condo complexes also come with attractive amenities such as swimming pools, fitness centers and on-site laundry facilities that may make the association fees well worth it.

Buying a condo is also a more reasonable, affordable option for those wanting to purchase a vacation home in a popular destination. Sometimes there are even condo associations in these destinations that function similarly to hotels, allowing owners to visit frequently but rent their condo out short term for extra income.

What’s next?

While single-family homes may be the first thing that comes to mind when considering home-ownership, condos deserve to be considered as a more affordable option with added amenities. In areas where real estate is very expensive, buying a first condo may be the best fit for new homebuyers. Sure, they aren’t for everyone, but a condo may be right for you.

Tired of living in a shabby apartment? Interested in updating the dingy carpets and scuffed paint job? Think that you’ll have to live with what you have just because you’re a renter and not an owner? Not only is it possible to renovate a rented property, but you may even get your landlord to shell out some of the renovation funds.

Naturally, renovations that are seriously needed such as damaged or broken items will need to be taken care of before aesthetics, but even minor cosmetic updates may be something you can negotiate. Your landlord will probably not approve your request for new hardwood floors paid for out of his own pocket, but he’ll likely be willing to consider re-tiling a bathroom with scuffs and broken tiles, painting a dingy, dirty wall that’s hard to clean, or updating old and dated fixtures.

If you are considering an update to your rental, here are some steps to follow when trying to get your landlord to pay for renovations:

Establish yourself as an exemplary tenant.

Landlords like tenants who pay their rent on time, sign longer leases, don’t disturb other tenants, or call to complain about every little thing. If you stay in your landlord’s good graces you will gain bargaining power. You’ve been an excellent tenant, so why shouldn’t the landlord help you out by paying for renovations? While you shouldn’t act like you’re owed a renovation, you can mention the fact that you’ve been an ideal tenant, and it doesn’t hurt to throw a promise to sign a longer lease after the renovation into the mix.

Point out unreasonable living conditions in writing.

Landlords do have the responsibility of meeting reasonable standards concerning the livability of the rented property, so if you feel that the area needing renovation does not live up to standards, that’s your starting point. Record proof of the problem with a camera and make at least two sets of prints. Mail one to your landlord via a certified letter, along with an explanation of the issue and a request for a renovation. It’s helpful to not sound combative in the letter; it’s more likely that a landlord will side with you if you give them the benefit of the doubt before getting accusatory. Remember, honey works better than vinegar.

Keep a record of your communications.

In case you’ll need to prove that your landlord was aware of the needed renovations or that they agreed to the renovations, but never completed them, it’s best to keep a detailed record of any communication you have with your landlord. The easiest way to do this? Keep your communication in writing; regular mail is best, but e-mails can suffice if necessary.

Do the leg work for your landlord.

Landlords often don’t want to spend the time finding a contractor, getting estimates, and comparing prices, even if they’re willing to pay for renovations. To prompt your landlord to take action, offer to find a contractor and get some quotes on your own. This way, the only thing the renovation will cost your landlord is money with none of his time wasted. And don’t forget to throw it out there that it’s a tax deduction for them and it is improving the value of the property. Sure, it may be somewhat superficial, but if they know that you understand how they are personally invested in the decision it can help.

Figure out the payment before the renovation begins.

Before a contractor lays one tile or puts a paint roller to the wall, make sure your landlord understands that he has agreed to pay for the renovation, and be sure that the method of payment is agreed upon. Is your landlord going to pay the contractor directly, or is he going to give you money to give to the contractor? Make sure you have this payment agreement in writing in case your landlord fails to pay the contractor and you’re left with a half-finished renovation.

Offer to do some renovations yourself.

If you take pride in your living space and foot some of the bill for minor updates your landlord will take notice and understand that you simply care about your dwelling and aren’t just trying to take advantage of him. If you simply want to paint a bedroom, update the blinds, or plant some flowers out front, go ahead and ask permission and say that you’ll foot the bill. These are inexpensive things to do, but it shows good intentions and will build a case later for when you ask for a possible renovation down the road.

As a landlord myself I know a good tenant when I see one. If you come to me with an excuse to why your rent is late every month, don’t treat the house with care, and then come to me expecting to throw in a new stove just because even though the old one isn’t broken, I’m not going to bend over backwards to make it happen. On the other hand I’ve had a tenant that pays on time, takes very good care of the property, and has requested to put in a bit of their own landscape and replace the shades on their own dime. I have no problem with this and when they later came to me about an issue with an appliance or other update they wanted done to the house I’m far more willing to accommodate.

It’s not impossible to get your rented property renovated on your landlord’s tab as long as you know how to negotiate. Set yourself apart as a perfect tenant, paying you rent on time every month and causing no trouble, and do the research yourself to save your landlord time. Keep a record of communications and show your landlord that the apartment needs the renovations through pictures. Follow these steps, and you may get those updates you’ve always wanted. But as always, keep in mind that unless it’s a safety issue, broken item, or something covered in the lease agreement, they generally aren’t obligated to make cosmetic renovations. You can do your best to convince them to pay, but every tenant-landlord relationship is different.

It’s not that they are wrong, but like most financial rules of them, they are simply not universal truths that apply to everyone, or even most people. Unfortunately, this causes people to rush into some financial decisions without being completely informed. And when you’re talking about buying a home, it can be a very costly mistake.

The Actual Value of the Mortgage Deduction

The first mistake many people make is simply assuming they will be getting a big tax break with their new mortgage interest and property tax deductions, but that’s jumping the gun a bit. In reality, the value of the deductions is only the amount that goes above and beyond the standard deduction. You see, even if you’ve never owned a home before, you’ve been getting a pretty hefty standard deduction every year (assuming you don’t itemize). Since claiming the mortgage interest and property tax deduction requires you to itemize deductions instead, you’ll have to ensure your itemized deductions tally up to more than the standard deduction.

As a quick example, let’s say you bought a house and over the course of the year you paid $10,000 in mortgage interest and had a $2,000 property tax bill. Good news, that’s $12,000 in tax deductions right there. But guess what? In 2010 the joint standard deduction was $11,400. Assuming you had no other itemized deductions, your net tax deduction gained by using the mortgage interest and property taxes was just $600. And remember, this is a tax deduction, not a tax credit. So if you’re at the 25% tax rate you’ve only saved $150. Suddenly all of those dreams of a huge tax break go right out the window.

Of course this is just a high level example. You may have other deductions that can be itemized and your tax situation may be different which yields a bigger deduction, but this is to show you how to really place a value on the mortgage deduction. It isn’t the full amount that’s meaningful, but the amount above and beyond the standard deduction.

Why Many Homeowners Don’t Even Qualify

The other realization first time homeowners come to is that it may not even be worth claiming these so-called huge tax breaks. The reality is that you need to carry a mortgage large enough to make the tax deduction even worthwhile. Those who are buying less expensive homes or don’t need to borrow as much may find there’s really no benefit at all.

Another quick example: Let’s say you buy a $150,000 house and put 20% down and finance the rest at 5%. Guess what? In the first year you’ll pay less than $6,000 in mortgage interest. Even if you had a $2,000 property tax bill, a married couple would still fall over $3,000 short of meeting the standard deduction. So, unless you were able to come up with significant itemized deductions elsewhere you’d have no reason to claim any mortgage interest deduction.  As you can see, many homeowners who buy modest homes, especially in the low mortgage rate environment we have now, won’t even see the tax benefits that everybody loves to talk about.

The Diminishing Deduction

Even if you do qualify for the mortgage deduction there’s another caveat. Because most mortgages are front-loaded with interest, you’ll pay less and less in interest with each passing year. So, between the standard deduction amount increasing most years and the amount of interest you pay going down each year it isn’t uncommon to find that just a few years into a mortgage it’s no longer beneficial. So, keep that in mind. The deduction will diminish or be gone entirely long before the loan is repaid.

Buying a Home for the Right Reasons

So, is the mortgage deduction worthless? Not at all. The point here is that even though everybody loves to talk about the great tax breaks from owning a home, you have to look at it in context. What seems like a huge benefit is often little more than a few hundred dollars in actual tax savings, if there’s any savings at all.

The real danger is that people who aren’t aware of how this tax deduction actually works may rush into buying a home, or buy more home than they can afford simply because they think it will be offset by big tax savings. This happened a lot in the great real estate bubble. People would justify spending more on a home by talking about a bigger tax break. While on paper that may be true, spending money is spending money no matter how you look at it, and the added costs, either direct or indirect, will far outweigh any tax savings.

This is why it’s important to buy a home for the right reasons. There are many reasons why buying a home is a good idea. But doing it just for a tax break isn’t one of them.

Buying a home is one of the largest purchases you’ll ever make. Because it’s such a large purchase and there is a lot of money at stake it only makes sense to get the best possible financing. After all, most home loans last for decades, so a poor choice up front can end up costing you for years to come. The problem is that not all lenders are created equal, and even trying to compare similar loans can make your head spin. So, let’s take some of the confusion out of shopping around and finding the best mortgage deals.

Most people assume that finding the best interest rate is the most important aspect of finding a loan, but that is only part of the overall picture. Interest rates are very important, but what looks like a good rate on the surface might be overshadowed by excessive costs or unfavorable terms elsewhere in the loan that aren’t immediately apparent. If you know what to look for you can be sure you’re comparing apples to apples. Having just gone through the process of trying to find a loan to buy a house there are a lot of things I noticed over the past few weeks that can help you save money when shopping for a mortgage. Here’s what you need to do to find the best possible mortgage rates. In fact, Quicken Loans is offering some of the lowest rates in the country.

Check Your Credit

Before you even start shopping around for loans you should first check your credit. If you haven’t already, it’s a good time to use your free annual credit report from annualcreditreport.com. You are entitled to a free credit report from each of the three main credit bureaus each year. The idea here is to make sure your credit report is accurate and if there are any errors, you have enough time to fix them before applying for loans. If you do encounter an error, use this time to call the creditor and see what you can do to get it rectified. In many cases it could be just an honest mistake, but it could also be an indication of something more serious. And while it’s good to make sure there are no errors on your credit report, that alone won’t tell you your credit score, which is ultimately what lenders use to determine your rate.

You are going to want to check your credit about 30 to 60 days before you begin applying for loans if at all possible. This is because many creditors only update their records once a month, meaning even if you are able to fix an error right away it may still take another month or so before it gets updated on your credit report. It’s easier to wait for an error to be dropped from your report than to go to a lender with a blemished report and then try to explain the situation to them.

It’s also a good idea to get your credit score prior to applying for a loan. Yes, once you apply for a loan you’re going to have your credit pulled by the lender anyway and you will likely get a copy of your score, but a lot of pre-qualifications (not pre-approvals) are done with rough estimates of your income, debt, and estimated credit score without actually pulling your credit. This helps when you’re shopping rates and simply making quick phone calls to various lenders as you can give them an idea right up front as to what your credit score is so they can have a better idea of what you might qualify for. Of course, the score they actually pull once they go through the application will be what is used, but you can make things a little easier by giving them as much information as possible up front.

You won’t get your credit score with your free credit report, so this is something you’re going to have to do separately if you want to know. Two of the best options for obtaining a credit score are Go Free Credit.com and Credit Sesame. Credit Sesame is free and provides some neat features to help you monitor your score and make improvements. I used Credit Sesame while we were applying for our mortgage and one thing I did notice was that there was a huge discrepancy between my wife’s score that the banks were obtaining and what Credit Sesame was showing. The difference was nearly 100 points. At the same time, Credit Sesame  was showing my credit score as dead on. So, just keep that in mind. It might cost a few dollars to get an official credit score, but it’s worth it if you want to know what you’re up against when dealing with something as important as a mortgage. In fact, you can use your score when calling lenders to ask about rates to get a better idea of what you’re looking at long before you go through the application process. This can help you weed out the bad deals early on.

Know What You Need and What to Expect

Before shopping for your home loan you should have a good idea of what you need. This means understanding what types of loans are out there and what your specific situation warrants. Do you want a 30-year or 15-year fixed mortgage? Do you qualify for FHA or will you need to seek another type of loan? Do you have 20% to put down to eliminate PMI or will you piggyback your mortgage with a second loan to eliminate PMI? These are all questions you should ask yourself before heading to a lender because if you can tell them exactly what you’re looking for, they can better find what they have available for you. Do your homework ahead of time so that you can narrow your search. If you go to the bank and simply say you want to buy a house for X amount of dollars they might come back and give you a handful of different loan options that may or may not be appropriate for you and it just makes things more confusing for you.

Not only do you need to know what you want, but you should know what to expect in the current market. First, you should check on current interest rates. One of my favorite sites for a quick update is simply bankrate.com. There you can find the average interest rates for a number of loan types. After all, if you don’t know what the going rates are, how will you ever know if the quote you get from the bank is a good one or not? This is also where knowing your credit score can come in handy. For example, if you have a score under 700 it’s safe to assume that you probably won’t be able to get the lowest rate out there. Knowing this, if you see a bank come back with a quote for a very low interest rate it might be a red flag that points to a loan that’s padded with points or other fees that ultimately make it a bad deal for you. So, if you can go into the mortgage shopping process by having some expectations of what you might qualify for and for what rate, you can better determine whether or not your quote is a good deal or not.

Start Shopping Around

Once you’ve determined what you want and know what to expect in the current market, it’s time to start checking with various lenders to see what they can offer. At this stage you should expect to inquire with at least 5-10 different lenders. A lot of people are concerned that this could be detrimental to their credit score because of all the credit inquiries, but don’t worry. Hard inquiries made during the most recent 30 days are not factored into your current credit score. In addition, any inquiries within the 14-day period before that only count as one inquiry. So, as long as you plan ahead and do your loan shopping within a month or so you’ll have no negative impact on your credit score.

To start, you might as well check with the institutions where you currently have your finances. Whether it’s a bank or credit union, existing customers can often get slight discounts. Plus, since you already have a relationship with them it’s easy enough for them to pull a lot of your information and see what you might qualify for. This doesn’t mean you’ll get the best rates, but it’s a good starting point.

After you’ve talked to your current bank you might want to make a few phone calls to other local banks that you might not currently do business with. Banks and credit unions are always looking for new business and will be more than happy to take your call. So, see what kind of rates they can offer and see if it’s worth pursuing.

Finally, thanks to the internet you have a vast number of lenders available at your fingertips. You can look to banks that might not even be in your area or find lenders that otherwise would have gone undiscovered if you stuck to your local yellow pages. Again, this doesn’t always mean you’ll get the best deal with a company you see online, but it can at least be worth a shot. You might also want to look at lendingtree.com for some good comparison shopping.

Assemble Your Documents

After you go through a quick phone call or initial meeting with a lender the next step will be to submit various financial documents that the bank will use to get you pre-qualified. Generally speaking, the bank wants to see verified sources of income, debt obligations, employment history, and so on. To make both your job and the lender’s job easier, you should start getting these documents prepared ahead of time and make multiple copies. If you’re going to be applying with a half dozen lenders you don’t want to rely on one set of originals and have to wait for each bank to get those back to you before applying with another.

Documents typically requested:

• W-2 forms from the past two years.
• Tax returns from the past 1-3 years.
• The last two months of bank statements (both checking and savings accounts).
• The most recent statements for all investment accounts (IRA, brokerage, 401(k), etc.).
• Employment history and current employer contact information.

If you have all of these documents ready to go you’re going to save yourself a lot of time. And the sooner you can present these to the lender, the sooner they can get you pre-approved. The lender will appreciate the fact that you’re prepared and this can help ensure your application gets through the process as fast as possible.

Pre-Qualification vs. Pre-Approval

It is very important to note that during your initial shopping stages you will most likely be doing a pre-qualification and not pre-approval. There is a big difference and both consumers and lenders often mix and match the words. Pre-qualification is simply when a lender asks you for some basic information such as income, debt levels, assets, and estimated credit score to determine if you’ll likely qualify for a loan or not. At this stage nothing is verified, no credit reports are pulled, and the loan officer is simply trying to see if you might be someone they can do business with. Getting pre-qualified does not mean the bank will lend you the money, but it gives you a rough idea of what you might qualify for with that specific lender.

When you get to the process of actually having the lender pull your credit report, submit W-2s, tax returns, verify employment, and fill out all of the disclosures, then you’re looking to get pre-approved. Once you’re pre-approved that means based on the information you’ve provided and subsequently verified by the bank, the lender is willing to lend you the money baring any major changes to your credit or income and the appraisal and title search on the house you wish to buy come up ok. It is at the pre-approval stage where you will receive a good-faith estimate and can tell sellers and real estate agents that you’re a qualified buyer.

Comparing Loans With the Good Faith Estimate

Once you go through the application process if you come back approved, you’ll typically get what’s called a good faith estimate. There is where you’ll begin to see the nuts and bolts of the loan and can hopefully spot what makes one particular lender’s offer better than another. Generally speaking, they must provide this to you within three days of applying for the loan.

The GFE will contain a lot of information regarding the closing or settlement costs. As I mentioned above, getting a good interest rate is important, but even more important can be the closing costs and how the fees are structured. The closing costs are also where a lot of lenders make their money by sticking it to borrowers with inflated or unnecessary fees and then just rolling them into the loan. Your GFE should itemize all of the closing costs, how much you’re being charged, and who is responsible for paying them. Some of the fees you might encounter are:

• Property appraisal
• Credit report
• Lender’s inspection
• Mortgage insurance application
• Assumption
• Mortgage broker fee
• Tax-related service fee
• Application
• Commitment
• Rate lock
• Processing
• Underwriting
• Wire transfer
• Abstract or title search
• Title examination
• Document preparation
• Notary
• Attorney
• Title insurance
• Recording
• City/county tax stamps
• Transfer tax
• Survey
• Pest inspection
• Condominium application
• Prepaid items such as interest, hazard insurance, property taxes, mortgage insurance and flood insurance

If you’ve never purchased a home before this list might scare you. Yes, there are a ton of fees that are involved with buying a home, and as you can see, a lot of opportunities for the bank to make money on your behalf. So, it’s when you get your good faith estimate that you need to scrutinize each quote to see what kind of a deal you’re really getting. Is that 0.25% lower loan such a good idea when it’s padded with excessive fees at closing that ultimately get rolled into the loan? That’s what you need to determine.

As an example, while we were looking over our loan offers I was simply shocked to see how different banks are when it comes to some of the fees. For instance, one lender only charged $12 for the credit check while another listed it at $60. One lender had a wire transfer fee of $20 while another had it listed at $125. And even the appraisal itself often came in more than $100 different between lenders. If some of these fees seem out of line, they may be negotiable so it doesn’t hurt to ask.

Finally, keep in mind that the good faith estimate is just that, an estimate. While it should be reasonably close to what you finally expect to pay, things can change.

An Informed Shopper Makes Better Decisions

I hope this has helped you understand some of what is involved with finding the best deal on a mortgage. It can be a time-consuming and tedious process, but the more you know and the more prepared you are, the better off you’ll be. This is a major financial decision in your life so it pays to put in a little work to make sure you’re getting the best deal available to you.  If you know what kind of loan you want, what terms to expect, and know how to spot the features of a low-cost loan you’ll be well on your way to finding the best mortgage.

What Exactly is PMI?

Private mortgage insurance is something that lenders will require most people who take out a mortgage on a home to pay extra for. The private mortgage insurance is there to help protect the lenders who own the mortgage. The PMI is there to minimize the risk of the home losing value or the borrower defaulting. Sometimes home prices may fall, and this could be a problem for the lender because if the home owner doesn’t have enough equity in the house and defaults on the loan, the lender could lose a lot of money. If the home isn’t worth what it was originally valued at and the payments go into default, the private mortgage insurance will allow the lender to pay off the house without taking a substantial loss.

However, not just the lender benefits from PMI. Thanks to this insurance, it allows many homeowners to buy a home when they otherwise wouldn’t be able to. The general rule of thumb is that you need 20 percent down when buying a home and avoiding PMI. Well, given today’s home prices that could mean some people may never be able to buy a home.

How can PMI be eliminated?

One way to avoid PMI completely is to put down at least 20 percent or more of a down payment on the home. By putting down at least 20%, the mortgage lender should be well protected in terms of enough equity in the home. However, this option can be difficult to achieve for people who don’t have a lot of savings or assets which can be converted to cash easily.

If the home owner does not have a 20% down payment up front the PMI will have to be paid. The PMI is usually a separate payment, but gets lumped into your monthly mortgage payment. This is what makes it tricky for homeowners because they rarely pay attention to how much it’s actually costing them. In some cases it can be a few hundred dollars a month.
Legislation was passed that says that home owners must be notified of any PMI they will be paying. The law requires the procedure and qualifications for having it canceled are spelled out clearly. This will allow the cancellation of the PMI when there is enough equity in the home.

This process usually involves having to mail a letter to the mortgage lender. Most lenders will have an official form which would need to be completed. The home buyer must then also include proof that the home has a 20% equity level. This usually involves having a state-certified appraisal done.

Another method in which a PMI may be eliminated is through something commonly called a piggyback mortgage. It is also commonly referred to as an 80-10-10 mortgage. This is accomplished by a second mortgage being given either through refinancing the home at a later time or a second mortgage being taken out during the initial purchase.

There can be multiple forms of a piggyback mortgage; however what follows is the most typical type used. The 80 comes from 80% of a lien put on the home. One of the 10s stands for a 10% down payment. The other 10 represents 10% of a second mortgage.

The piggyback loan can be beneficial to home buyers in the form of equity. The payment is putting at least some equity back into the home. Whereas, when a home buyer has to have PMI, that portion of the mortgage payment isn’t going towards the principal and putting equity in the home and instead goes to an insurance company.

It used to be that the piggyback mortgage was the only option of the two which allowed for tax benefits. Second mortgage payments are tax deductible. However, congress passed laws which make the portion of the mortgage payments made to cover the PMI also tax deductible and will remain so through 2011.

It Will Cost You Either Way

Whether you opt to pay PMI because you can’t put 20 percent down or go for a piggyback mortgage, not having the down payment will cost you. It will either be in the form of an added insurance premium or a little added interest with the second mortgage. That being said, it’s obvious that the best idea is to come to the table with a large enough down payment, but that isn’t always a viable option.

So, just understand going in that you’ll be paying a little something extra. Also keep in mind that any down payment is better than no down payment. Even if it’s just 10 percent, as long as the market value of your home doesn’t drop significantly, that means you’ll reach your 20 percent equity sooner and be able to cancel PMI in a relatively short amount of time.

It’s time to make an offer. This part of the process is not to be taken lightly because an accepted offer becomes a binding contract. If you realize too late that you may have made a mistake you could end up losing your deposit or earnest money at the very least. So, before you make that offer it’s your last chance to negotiate the best deal. Don’t squander the opportunity. Here’s what you need to know before making an offer.

1. Never Fall in Love With a Property

This is the cardinal sin of buying real estate. When you’ve spent a month or more walking through countless homes and finally find the one that’s perfect you’ll obviously be excited. Your hard work and patience has paid off so you’re thrilled to be moving forward with the process. The problem with falling in love with a house is that you become emotionally attached to it and that can cloud your decision making process. The seller has you right where he wants you.

Once you’ve emotionally committed yourself to a particular home you’ll stop at nothing to make sure you get it. This might mean stretching your budget more than you had planned, getting a mortgage that isn’t ideal because you don’t want to wait, and most importantly, you’ll lose the negotiation game. Rather than trying to get a better deal for yourself you’re far more likely to take whatever the seller is offering just to make sure you get the home. This is a mistake that could literally cost you tens of thousands of dollars. Don’t fall in love with a single property, and even if you did find the perfect home, keep a clear head and make sure you do what you can to get into the home with the best deal possible.

2. Find Out What You Can About the Property and Owner

The listed price isn’t always what the home is worth. It’s that simple. Homes go up for sale for a variety of reasons. Some need to move out of necessity, some people simply want to upgrade to a bigger home if they can, and others might be just looking to cash in on the equity they’ve built. You could take the same exact house and a seller in each of those situations would value and price their home at very different levels.

Someone who needs to sell their home because of a financial hardship or relocate for a new job is usually going to price their home far closer to the true market value than someone who really has no need to sell other than to hopefully make a little money on the sale. This can also help you identify areas to negotiate on.

Granted, you may not be able to just flat out ask the owner why they are selling, or even get a true answer if you were able to, so it’s up to you to do a little detective work. Start by looking at the history of the listing. When was the house listed and how long has it been on the market? Has the seller reduced the price over the months or has the price remained firm? These two pieces of information alone will tell you a lot about the owners. A home that’s been on the market for six months and seen little if any reduction in price is more than likely owned by someone who isn’t in a rush to sell and isn’t likely to negotiate much. It’s also a sign that they have put a price on the home that isn’t in line with reality. On the other hand, if you come across a property that’s only been on the market for six weeks and the seller has already reduced the price a few times you could be on to someone who really needs to get out as soon as possible and they are likely willing to negotiate.

Have a little spare time on your hands? Try searching your county’s public records for information on the property and the owner. When it comes to things like property title transfers and deeds most of it is public record. A lot of cities and counties even provide free searches on their websites. With this information you can obtain details such as when the previous owner bought the property and if they took out a mortgage, how much they borrowed. This information can be quite valuable. You may find that someone purchased the home five years ago with little or no money down and then see that their asking price is almost exactly what they probably still owe on their mortgage. Now you’ve discovered why the home is priced where it is. It’s not because it’s worth that much, but instead it’s because the sellers simply don’t want to resort to a short sale. Knowing this information ahead of time will give you an idea of how much potential room you have to negotiate down.

3. Get Comparable Sales Data

When you are ready to make an offer that’s lower than the listed price it’s good to back it up with facts. If you make a lowball offer just for the sake of trying to get a good price you’re probably only going to insult the seller and you may never even hear back. If you want to make a low offer and can support it with detailed information about recent sales of other comparable homes you stand a better chance of getting a response and maybe even some ammunition for negotiating. Remember, just because they may have a real estate agent working with them doesn’t mean the listing price is in line with actual value. So, it’s up to you and your agent to do a little homework and get as much information as you can about similar properties so you can spot a true deal.

Another tool that can help you determine the value of a home (or at the very least compare relative values) is to dig into your local property tax data. This is public record and these days most counties have free online property tax searches available on the web. You have to take some of the data with a grain of salt since appraisals and property tax adjustments haven’t been completely in sync with market values, but it can help you compare similar properties in the area. For example, you may see that the house you are looking at has a value $50,000 more than almost identical homes on the same street. Why? Has the property been significantly improved? Is there something different about the lot? Was the house last purchased at the height of the real estate bubble therefore resetting the taxable value and making it look like it’s worth more? The tax data won’t give you explicit answers, but it should point you in the right direction so you know the questions to ask.

4. Price Isn’t the Only Thing Negotiable

We bought a house about a year ago and we were able to negotiate a few thousand dollars worth of electronics and appliances as part of our offer. In the offer we asked the sellers to leave the 50″ plasma TV that was mounted on the wall in the basement, the wired surround sound, a plasma TV in the bedroom, really nice garage shelving, and a $1,500 wine fridge. Did we get everything we asked for? No, but we got most of it. We were left with the 50″ plasma TV, the garage shelves, the surround sound speakers (not the receiver, though), and the wine fridge.

We only made this part of the offer because we did our homework first. We knew these were the original owners and they built the home just a few years ago. We knew how much they financed and built the house for, and learned that one of them received an irresistible job offer halfway across the country and they had to move almost immediately. We also knew they were going to be having a moving sale and wanted to get rid of as much stuff as possible so they wouldn’t have to haul it across the country. So, why not see if we could get them to just leave it in the house for us? Luckily for us, it worked out great.

It’s not just about getting free stuff. A lot of aspects of the offer are negotiable. Things like minor repairs, closing costs real estate agent commissions are all negotiable items as well. Also, don’t forget to mention things that the buyer may want that can help you get a better price. If you’re in a situation where you don’t have to wait to sell your own home before buying this new home, that’s a very attractive proposition for a seller because they know they won’t be waiting for months. Because of this they may gladly come down a few thousand off the price because you’re likely one of the only offers coming in that doesn’t have a home sale contingency.

Making an Informed Offer

As you can see, there are a lot of different opportunities to save money when making an offer on a home. The worst thing you can do is simply go in and make an offer a few thousand less than what they are asking and expect to get a fair price. You still might, but if you do your homework you could find that you’re really not getting that great of a deal or you may miss an opportunity to negotiate even more of a discount. It isn’t an exact science, but the seller wants to get you to pay as much as possible and you want them to sell it for as little as possible. With the right information you can likely find a reasonable middle ground.

Mortgage rates continue to fall to almost unheard of levels. We’re talking about 30-year fixed rate mortgages hovering under 5%, and 15-year rates at just 4%. These rates are sharply lower than just a few years ago. But just how much can you save with a lower mortgage rate? Surprisingly, the savings can be quite substantial.

Let’s look at a $200,000 30-year fixed-rate mortgage. At 7% your monthly payment would be about $1,330 a month, less any PMI, escrow, etc. Now, take the same loan at 4.5% and the monthly payment drops to around $1,013. That’s more than $300 less each month. I don’t know about you, but I wouldn’t mind having an extra $300 in my pocket each month. And when you look at the total savings over the life of the loan, the 4.5% rate will save you over $95,000 in interest. It’s no wonder people are looking to buy a house or trying to refinance right now, but is it worth it?

Tighter Lending Limiting Loans

Even though rates are low, it’s more difficult to get a loan or to refinance today. Banks have changed their lending standards and it takes very good credit to get the best rates. A few years ago almost anyone could get a decent rate. If you bought a home with good, but not great credit a few years ago, you may actually find that the rate you can get today is not much better than your current rate. In some cases, you may be unable to get a loan or refinance at all.

There are also new fees being introduced to help lenders deal with risk. New risk-based pricing from Freddie Mac and Fannie Mae adds fees to mortgages based on a borrower’s credit score. In order to avoid the extra fees, borrowers need to have a FICO score of 740 or higher. While a score in the 700s is historically pretty good, you can now find yourself on the hook for added fees even with a 700-something score.

You Need Equity

Bad news for those of you in the more depressed housing markets. In order to refinance you usually need to have some equity in your home. A traditional refinance will allow you to refinance up to 80% of the home’s value. Well, if your $300,000 home you bought a few years ago is only worth $250,000 now and you still owe the bank $225,000 you very well may be out of luck. One exception is the Making Home Affordable plan, which can allow some refinancing on certain loans for certain people to be done without equity, but not everyone will qualify.

Thinking About Points

A lot of people think about paying mortgage points as a bad thing, but that isn’t always the case. The trend has been for lenders to require higher points for rates these days than a few years ago as they are looking for more money up front. Since points are essentially prepaid interest, this puts more money in the bank’s pocket early on. In some cases, paying points can result in a better deal, while some situations may end up costing the borrower money. Generally, the longer you plan on staying in the home, the more attractive it would be to pay points.

Julian Hebron, vice president and mortgage consultant at RPM Mortgage in San Francisco says  that paying points gets borrowers a bigger discount these days:

Historically, one point in fee gets borrower a rate that’s about 0.25% to 0.375% lower. Now one point gets the rate about 0.625% to 0.875% lower.

Recently, you could get a $417,000, 30-year fixed-rate mortgage at a rate of 5.625%, paying zero points. By paying one point (or $4,170) on the same loan, the rate went down to 4.875%, saving the borrower $261 per month in interest cost.

At this monthly savings rate, it takes 16 months to pay back the $4,170 and everything from that point forward is a benefit to you. Traditional breakeven periods are usually double this length of time.

Other Fees and Costs

Aside from paying points and possibly paying a higher rate because of your credit score, you still have all the other costs to contend with. It costs money to prepare a loan, and the underwriting and origination costs can easily be a few hundred dollars. You’ll also need an appraisal, which can again cost a few hundred dollars.

When you factor in all the costs associated with closing on a new mortgage or even a refinance, you can often expect to pay at least 3% of the loan amount in fees. This is especially important when you’re thinking about a refinance as the costs may outweigh the benefit of a lower rate in some cases. When you consider a $200,000 laon may end up costing $5,000  in total to refinance, what’s the breakeven point? If you’re saving $200/month by refinancing, it may take you nearly three years to make it worthwhile financially.

This is an important consideration if you’re unsure just how long you’re going to stay in the home. If the future is uncertain and you may be looking to move in a few years you could end up spending more to refinance than what you actually save. Also, remember that if you’re refinancing for the same loan term you’re resetting the clock. If you had ten years into your existing mortgage and then refinance into another 30-year loan you now have another 30 years before the loan is paid off instead of just 20.

A Lot of Things to Consider

As you can see, just because we keep hearing about how low the mortgage rates are these days, it isn’t always as easy as going to your bank and getting a new loan. With banks limiting these rates to those with the highest credit, regular people with average credit may not be able to find a loan or refinance for anything near what’s being discussed in the news.

In addition, if your future is uncertain and you may need to move in the next few years, the added points  and/or fees required to get the low rate or the fees associated with a refinance may actually cost you more money if you ended up not staying in the house as long as you expected.

So, if you’re considering the purchase of a new home or refinancing your existing mortgage, it’s certainly worth checking around to see what kind of rates you qualify for. But you want to make sure you’re actually going to save money and you’re not just jumping into a decision because the rates are at historically low levels. There are deals to be had out there, but it may be harder to qualify for them, and there may be other strings attached that make the lower rate not as attractive as it seems. Check to see what the latest refinance and mortgage rates are in your area.

This current real estate crisis isn’t over yet, but over the next few years things will begin to improve, home values will again begin to appreciate, and many people will be anxious to get back into the market. There will be some things in place that will prevent some of the reckless lending that got a lot of people into trouble in the first place, it won’t stop people from buying a home for the wrong reasons and making the same mistakes that millions made in years prior. So, it’s up to us to know what to do and what not to do when the next real estate bubble takes hold so that we don’t get caught holding the bag.

Housing Costs and Your Budget

The most important consideration when buying a home is obviously the monthly payment. Whether you are renting or paying a mortgage, you need to pay for a place to live. So, all of our attention goes on the monthly payment. In the end, people feel if they can squeeze in the monthly payment into their budget then they can afford to buy the house. This is exactly what got us into the real estate mess to begin with. People and banks ignored many of the old rules of thumb that guided people into an affordable house.

One rule of thumb is that your total housing expenses, including principal, interest, property taxes, and homeowners insurance should not exceed 25-28% of your gross monthly income. The Center for Housing Policy reports that in the last few years the number of working families paying more than 50% of their gross income for housing has jumped by 76%. Spending half of your income just on a place to live is an obvious red flag, but people do it anyway. It isn’t hard to understand why this is such a bad idea. If you’re a two-income household and one of you loses your job your income probably just got cut in half. If you were already spending half of your income on that house payment guess what? Now you’re going to be spending 100% of your income on the payment and certainly you have many other bills yet to pay each month. By keeping your total housing expenses down to the traditional limit of 28% of your gross income or less you will have some cushion in the event of a financial emergency.

The Importance of a Down Payment

Zero-down loans were all the rage during the last real estate bubble. People were anxious to get into new homes and banks were anxious to get money, so the tried and true 80/20 loan got tossed aside. Of course in a market where homes are increasing by 10% or more each year this seems like a perfectly reasonable proposition. Why put your hard-earned cash into the home when you can leverage money from the bank to reap the rewards of appreciating home prices? Obviously, we now know that prices don’t always go up and those who have little or no equity from a down payment got hit the hardest when their home values turned around.

You have to put something down on a new home purchase. Thankfully, many of the zero-down loans are gone, but there are still a few being made. And if it isn’t with no money down, banks are still lending with a little as 3.5% down in many cases. A down payment does two important things. First, the bigger the down payment, the less you have to finance. Obviously, the smaller the loan, the lower the monthly payments and less interest you’ll pay over the life of the loan. Second, it gives you that ever important financial cushion. If you put 20% down and the housing market remains soft for a while and you see no appreciation or even some depreciation in the value of your property and have to sell you aren’t immediately upside down on your loan. The market can drop 5 or 10 percent and you’re still in relatively good shape. If you put little or no money down and the property value falls that much you’re on the hook for a lot of money if you need to sell.

Buy a Home for the Right Reasons

One more thing you can do to ensure you aren’t a victim of the next real estate bubble is to simply buy a home for the right reasons. Home ownership has been pushed as the American Dream for decades, and for many it still is. There’s nothing wrong with that, but people can get caught up in this dream and jump into buying a house long before they are really ready. Buying a home just because you don’t want to rent any more, feel like you’re throwing money away, or because you’re told that’s just what you do when you get married and want to start a family is not how you should approach the decision.

You first have to ask yourself why you want to own a home. Everyone has their own reasons, so you need to decide what makes a home worth it to you. When you know why owning a home is important you can then look for homes in n area and with certain amenities that will fulfill those needs. Second, understand that as much as you might want to buy a house, if you will likely need to move in five years or less then buying a home will usually be a big mistake. It’s often young couples just starting out in their careers that are anxious to get into a home only to find they need to move for their job or one of them finds a better opportunity elsewhere and then they are stuck trying to unload a house that has little equity.

Don’t think of your home as an investment. In the past when real estate continued to appreciate year after year it was easy to get into the mindset that you could buy a home today and sell it for double what you paid in just 10 or 15 years. That was an anomaly and not how things usually work. In fact, even if you look at real estate prices over the past few decades it usually lags the stock market. Your home is a place to live and if you happen to make a profit when you sell you should just consider that a bonus.

Finally, don’t underestimate all of the hidden costs that come with home ownership. It can be exhilarating to finally be free of a landlord, but with that freedom comes many hidden expenses and a lot of work. You’ll be responsible for shoveling your driveway in the winter, mowing the lawn in the summer, paying for all of the utilities, and repairing the household problems that are sure to arise. While these drawbacks usually outweigh the benefits of owning a home, if you don’t take the costs and time it will take out of your weekly schedule seriously it can be physically and financially draining.

Avoiding the Next Real Estate Bubble

As you can see, there are a lot of ways that people get in over their head with their home. You may also notice that some of what I covered are things that the government or new mortgage regulations can’t fix. There may be some changes to what lenders are willing to loan you, but just because you can afford it on paper doesn’t mean it’s something you can really afford, and it certainly doesn’t mean you’re ready to buy a home at this particular stage in your life.

Ultimately, it comes down to common sense:

• Keep housing costs around 25% or less of your gross monthly income. The bank may come in with a higher number, but don’t just take money because they are offering it. Only you know your budget, job stability, and lifestyle that will determine what you can truly afford. By keeping your costs down you have some flexibility so that if there is a sudden change in your income you will have a better chance of making adjustments so you aren’t immediately unable to pay your bills.
• Make a down payment. 20% is the old rule of thumb, but that obviously isn’t doable in all markets. Even if you can’t afford a full 20% you should put down as much as possible. Even though an FHA loan may only require 3.5% down you really need to save even more. The sooner you can put equity into your home the better the chances you can weather a rocky real estate market when it comes time to sell.
• Buy a home for the right reasons. Forget the fact that everyone tells you the American Dream is to own a home or that by renting you’re just throwing money away. If you aren’t ready to buy a home, don’t jump into it too soon. Doing so could put you in a bad financial situation.