Start your data search with basic resources such as this book and books available in libraries. Consult the real estate section of your newspaper for articles about renting, buying, financing, remodeling, and other housing topics. Other helpful information sources are friends, real estate agents, and government agencies.
At some point in your life, you are likely to rent your place of residence.
You may rent when you are first on your own or later in life when you
want to avoid the activities required to maintain your own home. About
35 percent of U.S. households live in rental units.
Legal Details, most tenants sign a lease, a legal document
that defines the conditions of a rental agreement. This document provides
the following information:
A description of the property, including the address.
The name and address of the owner/landlord (the lessor).
The name of the tenant (the lessee).
The effective date of the lease.
The length of the lease.
The amount of the security deposit.
The amount and due date of the monthly rent.
The location at which the rent must be paid.
The date and amount due of charges for late rent payments.
A list of the utilities, appliances, furniture, or other facilities
that are included in the rental amount.
The restrictions regarding certain activities (pets, remodeling).
The tenant's right to sublet the rental unit.
The charges for damages or for moving out of the rental unit later
(or earlier) than the lease expiration date.
Price and Down Payment The amount you can spend is
affected by funds available for a down payment, your income, and
your current living expenses. Other factors you should consider
are current mortgage rates, the potential future value of the property,
and your ability to make monthly mortgage, tax, and insurance payments.
To determine how much you can afford to spend on a home, have a
loan officer at a mortgage company or other financial institution
prequalify you. This service is provided without charge.
Ideally, the home you buy will be in good condition. In certain
circumstances, you may be willing to buy a handyman's special, a
home that needs work and that you are able to get at a lower price
because of its condition. You will then need to put more money into
the house for repairs and improvements or to invest sweat equity
by doing some of the work yourself. Home improvement information
and assistance are available from hardware stores and other home
product retailers.
Step 2: Find and Evaluate a Property to Purchase
Selecting a Location
An old adage among real estate people is that the three most important factors to consider when buying a home are location, location, and location! Perhaps you prefer an urban, a suburban, or a rural setting. Or perhaps you want to live in a small town or in a resort area. In selecting a neighborhood, compare your values and lifestyle with those of current residents.
Be aware of zoning laws, restrictions on how the property in an area can be used. The location of businesses and the anticipated construction of industrial buildings or a highway may influence your buying decision.
If you have or plan to have a family, you should assess the school system. Educators recommend that schools be evaluated on program variety, achievement level of students, percentage of students who go on to college, dedication of faculty members, facilities, school funding, and involvement of parents. Homeowners without children also benefit from strong schools, since the educational advantages of a community help maintain property values.
Using a Real Estate Agent A real estate agent can help you assess your housing needs and determine the amount you can afford to spend. Real estate agents have information about areas of interest to you and housing available to buy.
The main services a real estate agent provides include (1) presenting your offer to the seller, (2) negotiating a settlement price, (3) assisting you in obtaining financing, and (4) representing you at the closing. A real estate agent will also recommend lawyers, insurance agents, home inspectors, and mortgage companies to serve your needs.
Since the seller of the home usually pays the real estate agent's commission, the buyer may not incur a direct cost. However, this expense may be reflected in the price paid for the home. In some states, the agent could be working for the seller. In others, the agent may be working for the buyer and may be a dual agent, working for both the buyer and the seller. When dual agency exists, some states require that buyers sign a disclosure acknowledging that they are aware the agent is working for both buyer and seller.
Many states now have buyer agents who represent the buyer's interests. In these situations, the buyer agent may be paid by either the seller or the buyer.
Conducting a Home Inspection Before reaching your decision about a specific home, conduct a complete evaluation of the property. An evaluation by a trained home inspector can minimize future problems. Do not assume everything is in proper working condition because someone lives there now. Being cautious and determined will save you headaches and unplanned expenses.
Determining the Home Price What price should you offer
for the home? The main factors to consider are recent selling prices
in the area, current demand for housing, the length of time the home
has been on the market, the owner's need to sell, financing options,
and features and condition of the home. Each of these factors can affect
your offer price. For example, you will have to offer a higher price
in times of low interest rates and high demand for homes. On the other
hand, a home that has been on the market for over a year could mean
an opportunity to offer a lower price. The services of a real estate
agent or an appraiser can assist you in assessing the current value
of the home.
Your offer will be in the form of a purchase agreement,
or contract.
This document constitutes your legal offer to purchase the home. Your
first offer price usually will not be accepted.
Negotiating the Purchase Price If your initial offer is
accepted, you have a valid contract. If your offer is rejected, you
have several options, depending on the seller. A counteroffer from the
owner indicates a willingness to negotiate a price settlement. If the
counteroffer is only slightly lower than the asking price, you are expected
to move closer to that price with your next offer. If the counteroffer
is quite a bit off the asking price, you are closer to the point where
you might split the difference to arrive at the purchase price. If no
counteroffer is forthcoming, you may wish to make another offer to see
whether the seller is willing to do any negotiating. Be cautious in
your negotiations if the seller is using a buyer agent. Remember, in
that situation, the agent represents the interests of the seller.
In times of high demand for housing, negotiating may be minimized;
this situation is referred to as a seller's market, since the current
homeowner is likely to have several offers for the property. In contrast,
when home sales are slow, a buyer's market exists and a lower price
is likely.
When you buy a previously owned home, your negotiating power is based
on current market demand and the current owner's need to sell. When
you buy a new home, a slow market may mean lower prices or an opportunity
to obtain various amenities (fireplace, higher-quality carpeting) from
the builder at a lower cost.
Determine Amount of Down Payment The amount of cash available
for a down payment will affect the size of the mortgage loan you require.
A large down payment, such as 20 percent or more, will make it easier
for you to obtain a mortgage.
Personal savings, pension plan funds, sales of investments or other
assets, and assistance from relatives are the most common sources
of a down payment. Parents can help their children purchase a home
by giving them a cash gift or a loan, depositing money with the lender
to reduce the interest rate on the loan, cosigning the loan, or acting
as comortgagors.
Private mortgage insurance (PMI) is usually required if the down
payment is less than 20 percent. This coverage protects the lender
from financial loss due to default. PMI charges, which the borrower
pays, vary depending on the amount of the down payment. These costs
may be paid in full at closing or are sometimes financed over the
life of the mortgage, depending on the type of financing.
After building up 20 or 25 percent equity in a home, a home buyer
should contact the lender to cancel PMI. The Homeowners Protection
Act of 1998 requires that a PMI policy be terminated automatically
when a homeowner's equity reaches 22 percent of the property value
at the time the mortgage was executed. Homeowners can request termination
earlier if they can provide proof that the equity in the home has
grown to 20 percent of the current market value.
Additional information is available at www.privatemi.com.
Qualifying for a Mortgage Do you have funds for a down
payment? Do you earn enough to make mortgage payments while covering
other living expenses? Do you have a good credit rating? Unless you
pay cash for a home, a favorable response to these questions is necessary.
A mortgage is a long-term loan on a specific piece of property
such as a home or other real estate. Payments on a mortgage are usually
made over 15, 20, or 30 years. Banks, savings and loan associations,
credit unions, and mortgage companies are the most common home financing
sources.
Mortgage brokers can help home buyers obtain financing, since they
are in contact with several financial institutions. A mortgage broker
may charge higher fees than a lending institution with which you deal
directly.
The mortgage loan for which you can qualify is larger when interest
rates are low than when they are high. For example, a person who can
afford a monthly mortgage payment of $700 will qualify for a 30-year
loan of
$105,263 at 7 percent
$ 95,368 at 8 percent
$ 86,956 at 9 percent
$ 79,726 at 10 percent
$ 73,529 at 11 percent
$ 68,027 at 12 percent
As interest rates rise, fewer people are able to afford the cost
of an average-priced home.
Evaluating Points When you compare costs at several mortgage
companies, the interest rate you are quoted is not the only factor
to consider. The required down payment and the points charged will
affect the interest rate. Points are prepaid interest charged
by the lender. Each discount point is equal to 1 percent of the loan
amount and should be viewed as a premium you pay for obtaining a lower
mortgage rate. In deciding whether to take a lower rate with more
points or a higher rate with fewer points, do the following:
Determine the difference between the monthly payments you will
make for two different situations.
Determine the difference between the points charged for the two
different rates or at two different lenders.
Divide the result in step 2 by the result in step 1. This will
tell you how many months it will take for the lower monthly payment
to offset the higher cost of the points.
If you plan to live in your home longer than the time calculated
in step 3, paying the points and taking the lower mortgage rate is
probably the best action. This decision will, however, be affected
by the amount of funds available to pay the points at the time of
closing. If you plan to sell your home sooner than the time calculated
in step 3, the higher mortgage rate with fewer discount points may
be better. Online research may be used to compare current mortgage
rates and to apply for a mortgage.
The Application Process Applying for a mortgage involves
three main phases:
After completing the mortgage application, a meeting between lender
and borrower is scheduled. The borrower presents evidence of employment,
income, ownership of assets, and amounts of existing debts. At this
point, most lenders charge an application fee of between $100 and
$300.
The lender obtains a credit report and verifies other aspects
of the borrower's application and financial status.
The loan commitment is the financial institution's decision to provide
the funds needed to purchase a specific property. At this point, the
purchase contract for the home becomes legally binding. The approved
mortgage application usually locks in an interest rate for 30 to 60
days.
The conventional mortgage usually has equal payments over
15, 20, or 30 years based on a fixed interest rate. This mortgage
offers home buyers certainty about future loan payments. The mortgage
payments are set at a level that allows amortization of the
loan; that is, the balance owed is reduced with each payment. Since
the amount borrowed is large, the payments made during the early
years of the mortgage are applied mainly to interest, with only
small reductions in the principal of the loan. As the amount owed
declines, the monthly payments have an increasing impact on the
loan balance. Near the end of the mortgage term, nearly all of each
payment is applied to the balance.
Government-Guaranteed Financing Programs
Government-guaranteed financing programs include loans insured
by the Federal Housing Authority (FHA) and loans guaranteed by
the Veterans Administration (VA). These government agencies do
not provide the mortgage money; rather, they help home buyers
obtain low-interest, low-down-payment loans.
To qualify for an FHA-insured loan, a person must meet certain
conditions related to the down payment and fees. Most low- and middle-income
people can qualify for the FHA loan program. The minimum down payment
ranges from 3 to 5 percent, depending on the loan size. This lower
down payment makes it easier for a person to purchase a home. FHA-insured
loans have interest rates slightly lower than market interest rates,
since the FHA's involvement reduces the risk for the lending institution.
The borrower is required to pay a fee for insurance that protects
the lender from financial loss due to default. Despite the protection
given the lender, the lower-than-market interest rate can result
in extra prepaid interest, points, as a condition of the loan.
The VA-guaranteed loan program assists eligible armed services
veterans with home purchases. As with the FHA program, the funds
for VA loans come from a financial institution or a mortgage company,
with the risk reduced by government participation. A VA loan can
be obtained without a down payment. The points charged by the lending
institution must be paid by the home seller; however, the veteran
is usually responsible for other charges, such as origination and
funding fees.
Both FHA-insured loans and VA-guaranteed loans can be attractive
financing alternatives and are assumable by future owners when the
house is sold to qualifying individuals. Both impose limits on the
amount one can borrow, and a backlog of processing applications
and approving loans may occur during periods of high demand.
Balloon Mortgages
The high mortgage rates of the early 1980s led to innovative lending
plans for home buyers. One such plan is the balloon mortgage,
which has fixed monthly payments and a very large final payment,
usually after three, five, or seven years. This financing plan is
designed for people who wish to buy a home during periods of high
interest rates but expect to be able to refinance the loan or sell
the home before or when the balloon payment is due. Most balloon
mortgages allow conversion to a conventional mortgage (for a fee)
after a year if certain conditions are met. Some financial counselors
advise against the use of a balloon mortgage, since you have to
pay mortgage processing and closing costs when you refinance. Beware
that an inability to refinance in time can result in a major financial
loss.
Adjustable-Rate, Variable-Payment Mortgages As noted in Exhibit 9-10, adjustable-rate, variable-payment mortgages are a major category of financing available to home buyers.
Adjustable-Rate Mortgages The adjustable-rate mortgage
(ARM), also referred to as a flexible-rate mortgage or a variable-rate
mortgage, has an interest rate that increases or decreases during
the life of the loan. When mortgage rates were at record highs, many
people took out variable-rate home loans, expecting rates would eventually
go down. ARMs usually have a lower initial interest rate than fixed-rate
mortgages; however, the borrower, not the lender, bears the risk of
future interest rate increases.
A rate cap restricts the amount by which the interest rate
can increase or decrease during the ARM term. This limit prevents
the borrower from having to pay an interest rate significantly higher
than the one in the original agreement. Most rate caps limit increases
(or decreases) in the mortgage rate to one or two percentage points
in a year and to no more than five points over the life of the loan.
A payment cap keeps the payments on an adjustable-rate mortgage
at a given level or limits the amount to which those payments can
rise. When mortgage payments do not rise but interest rates do, the
amount owed can increase in months in which the mortgage payment does
not cover the interest owed. This increased loan balance, called negative
amortization, means the amount of the home equity is decreasing instead
of increasing. As a result of these increases in the amount owed,
the borrower usually has to make payments for a period longer than
planned. Beware: Some adjustable-rate mortgages may stretch out
as long as 40 years.
Consider several factors when you evaluate adjustable-rate mortgages:
(1) determine the frequency of and restrictions on allowed changes
in interest rates; (2) consider the frequency of and restrictions
on changes in the monthly payment; (3) investigate the possibility
that the loan will be extended due to negative amortization, and find
out whether the mortgage agreement limits the amount of negative amortization;
(4) find out what index the lending institution will use to set the
mortgage interest rate over the term of the loan.
A lending institution will revise the rate for an adjustable-rate
mortgage based on changes in the rates on U.S. Treasury securities,
the Federal Home Loan Bank Board's mortgage rate index, or its own
cost-of-funds index. Studies reveal that an ARM can be less costly
over the life of a mortgage as long as interest rates remain fairly
stable.
A graduated-payment mortgage is a financing agreement in
which payments rise to different levels every 5 or 10 years during
the term of the loan. In the early years, the loan payments could
lead to a negative amortization with an increase in the amount owed.
This type of mortgage is especially beneficial for people who anticipate
increases in income in the future.
Other Financing Methods To assist first-time home buyers, builders and financial institutions offer financing plans to make the purchase easier.
A buy-down is an interest rate subsidy from a home builder
or a real estate developer that reduces the mortgage payments during
the first few years of the loan. This assistance is intended to stimulate
sales among home buyers who cannot afford conventional financing.
After the buy-down period, the mortgage payments increase to the level
that would have existed without the financial assistance.
The shared appreciation mortgage (SAM) is an arrangement
in which the borrower agrees to share the increased value of the home
with the lender when the home is sold. This agreement provides the
home buyer with a below-market interest rate and lower payments than
a conventional loan. To obtain these conditions, the borrower typically
must agree to give the lending institution 30 to 50 percent of the
home's appreciation when the home is sold or after a set number of
years. Shared appreciation agreements are also common when parents
provide financial assistance to their children for the purchase of
a home.
A second mortgage, more commonly called a home equity
loan, allows a homeowner to borrow on the paid-up value of the
property. Traditional second mortgages allow a homeowner to borrow
a lump sum against the equity and repay it in monthly installments.
Recently lending institutions have offered a variety of home equity
loans, including a line of credit program that allows the borrower
to obtain additional funds. You need to be careful when using a home
equity line of credit. This revolving credit plan can keep you continually
in debt as you request new cash advances.
A home equity loan makes it possible to deduct the interest on consumer
purchases on your federal income tax return. However, it creates the
risk of losing the home if required payments on both the first and
second mortgages are not made. To help prevent this financial disaster,
some states restrict the use of home equity loans. Be cautious of
home equity loans for amounts that exceed 100 percent of your equity
in the home.
Before finalizing the transaction, do a walk-through to inspect
the conditions and facilities of the home you plan to buy. You can
use a Polaroid or video camera to collect evidence for any last-minute
items you may need to negotiate.
Title insurance is one closing cost. This coverage has two
phases. First, the title company defines the boundaries of the property
being purchased and conducts a search to determine whether the property
is free of claims such as unpaid real estate taxes. Second, during
the mortgage term, the title company protects the owner and the lender
against financial loss resulting from future defects in the title
and from other unforeseen property claims not excluded by the policy.
Also due at closing time is the deed recording fee. The deed
is the document that transfers ownership of property from one
party to another. With a warranty deed, the seller guarantees the
title is good. This document certifies that the seller is the true
owner of the property, there are no claims against the title, and
the seller has the right to sell the property.
Mortgage insurance is another possible closing cost. If required,
mortgage insurance protects the lender from loss resulting from a
mortgage default.
The Real Estate Settlement Procedures Act (RESPA) helps home buyers
understand the closing process and closing costs. This legislation
requires that loan applicants be given certain information, including
an estimate of the closing costs, before the actual closing. Obtaining
this information as early as possible will allow you to plan for the
closing costs. Information on RESPA is available
online at www.hud.gov
At the closing and when you make your monthly payments, you will
probably deposit money to be used for home expenses. For example,
the lender will require that you have property insurance. An escrow
account is money, usually deposited with the lending institution,
for the payment of property taxes and homeowner's insurance. This
account protects the lender from financial loss due to unpaid real
estate taxes or damage from fire or other hazards.
The effective presentation of your home can result in a fast
and financially favorable sale. Real estate salespeople recommend
that you make needed repairs and paint worn exterior and interior
areas. Clear the garage and exterior areas of toys, debris, and
old vehicles, and keep the lawn cut and the leaves raked. Keep
the kitchen and bathroom clean. Avoid offensive odors by removing
garbage and keeping pets and their areas clean. Remove excess
furniture and dispose of unneeded items to make the house, closets,
and storage areas look larger. When showing your home, open drapes
and turn on lights to give it a pleasant atmosphere. This effort
will give your property a positive image and make it attractive
to potential buyers.
Determining the Selling Price
Putting a price on your home can be difficult. You risk not
selling it immediately if the price is too high, and you may not
get a fair amount if the price is too low. An appraisal,
an estimate of the current value of the property, can provide
a good indication of the price you should set. An asking price
is influenced by recent selling prices of comparable homes in
your area, demand in the housing market, and available financing
based on current mortgage rates.
The home improvements you have made may or may not increase
the selling price. A hot tub or an exercise room may have no value
for potential buyers. Among the most desirable improvements are
energy-efficient features, a remodeled kitchen, an additional
or remodeled bathroom, added rooms and storage space, a converted
basement, a fireplace, and an outdoor deck or patio.
The time to think about selling your home is when you buy it
and every day you live there. Daily maintenance, timely repairs,
and home improvements will increase the future sales price.
Sale by Owner
Each year, about 10 percent of home sales are made by the home's
owners. If you decide to sell your home without using a real estate
professional, price the home and advertise it through local newspapers
and with an information sheet describing it in detail. Obtain
a listing sheet from a real estate office as an example of the
information to include on your flier. Distribute the sheet at
stores and in other public areas.
When selling your home on your own, obtain information about
the availability of financing and financing requirements. This
information will help you and potential buyers to determine whether
a sale is possible. Use the services of a lawyer or title company
to assist you with the contract, the closing, and other legal
matters.
Require potential buyers to provide their names, addresses,
telephone numbers, and background information, and show your home
only by appointment. As a security measure, show it only when
two or more adults are at home. Selling your own home can save
you several thousand dollars in commission, but it requires an
investment of time and effort.
Listing with a Real Estate Agent
You may decide to sell your home with the assistance of a real
estate agent. These businesses range from firms owned by one person
to nationally franchised companies. Primary selection factors
should be the real estate agent's knowledge of the community and
the agent's willingness to actively market your home.
Your real estate agent will provide you with various services.
These services include suggesting a selling price, making potential
buyers and other agents aware of your home, providing advice on
features to highlight, conducting showings of your home, and handling
the financial aspects of the sale. A real estate agent can also
help screen potential buyers to determine whether they will qualify
for a mortgage.
