Buying a Home

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Buying a Home

Buying a Home

There’s no doubt about it–owning a home is an exciting prospect. After all, you’ve always dreamed of having a place that you could truly call your own. But buying a home can be stressful, especially when you’re buying one for the first time. Fortunately, knowing what to expect can make it a lot easier.

How much can you afford?According to a general rule of thumb, you can afford a house that costs two and a half times your annual salary. But determining how much you can afford to spend on a house is not quite so simple. Since most people finance their home purchases, buying a house usually means getting a mortgage. So, the amount you can afford to spend on a house is often tied to figuring out how large a mortgage you can afford. To figure this out, you’ll need to take into account your gross monthly income, housing expenses, and any long-term debt.

Generally, if you’re applying for a conventional mortgage, your monthly housing expenses (mortgage principal and interest, real estate taxes, and homeowners insurance) should not exceed 28 percent of your gross monthly income. In addition, most mortgages require borrowers to have a debt-to-income ratio that is less than or equal to 43 percent. In other words, you should be spending no more than 43 percent of your gross monthly income on longer-term debt payment. It may be helpful to use one of the many real estate and personal finance websites to help you with the calculations.

Should you use a real estate agent or broker?A knowledgeable real estate agent or buyer’s broker can guide you through the process of buying a home and make the process much easier. This assistance can be especially helpful to a first-time home buyer. In particular, an agent or broker can:

  • Help you determine your housing needs
  • Show you properties and neighborhoods in your price range
  • Suggest sources and techniques for financing
  • Prepare and present an offer to purchase
  • Act as an intermediary in negotiations
  • Recommend professionals whose services you may need (e.g., lawyers, mortgage brokers, title professionals, inspectors)
  • Provide insight into neighborhoods and market activity
  • Disclose positive and negative aspects of properties you’re considering

Keep in mind that if you enlist the services of an agent or broker, you’ll want to find out how he or she is being compensated (i.e., flat fee or commission based on a percentage of the sale price). Many states require the agent or broker to disclose this information to you up front and in writing.

Choosing the right homeBefore you begin looking at houses, decide in advance the features that you want your home to have. Knowing what you want ahead of time will make the search for your dream home much easier. Here are some things to consider:

  • Price of home and potential for appreciation
  • Location or neighborhood
  • Quality of construction, age, and condition of the property
  • Style of home and lot size
  • Number of bedrooms and bathrooms
  • Quality of local schools
  • Crime level of the area
  • Property taxes
  • Proximity to shopping, schools, and work

Making the offerOnce you find a house, you’ll want to make an offer. Most home sale offers and counteroffers are made through an intermediary, such as a real estate agent. All terms and conditions of the offer, no matter how minute, should be put in writing to avoid future problems. Typically, your attorney or real estate agent will prepare an offer to purchase for you to sign. You’ll also include a nominal down payment, such as $500. If the seller accepts the offer to purchase, he or she will sign the contract, which will then become a binding agreement between you and the seller. For this reason, it’s a good idea to have your attorney review any offer to purchase before you sign.

Other detailsOnce the seller has accepted your offer, you, your real estate agent, or the mortgage lender will get busy completing procedures and documents necessary to finalize the purchase. These include finalizing the mortgage loan, appraising the house, surveying the property, and getting homeowners insurance. Typically, you would have made your offer contingent upon the satisfactory completion of a home inspection, so now’s the time to get this done as well.

The closingThe closing meeting, also known as a title closing or settlement, can be a tedious process–but when it’s over, the house is finally yours! The closing may require some or all of the following entities to be present: the seller and/or the seller’s attorney, your attorney, the closing agent (a real estate attorney or the representative of a title company or mortgage lender), and both your real estate agent and the seller’s. Depending on what state you live in, all parties may be required to attend the closing at once or the closing can take place over the course of several weeks. Some closings can be conducted by mail or via the internet.

During the closing process, you’ll receive and/or sign a variety of paperwork, including:

  • Closing Disclosure: This lists all of the final terms of the loan you’ve selected. Your lender is required to send you the Closing Disclosure at least three business days before the actual closing meeting.
  • Promissory note: This spells out the amount and repayment terms of your mortgage loan.
  • Mortgage: This gives the lender a lien against the property.
  • Deed: This transfers legal ownership of the property to you.

In addition, you’ll need to provide proof that you have insured the property. You’ll also be required to pay certain costs and fees associated with obtaining the mortgage and closing the real estate transaction.

Applying for a Mortgage

Applying for a Mortgage

Since most people finance their home purchases, buying a home usually involves applying for a mortgage. Here is some basic information to help guide you through the process.

Mortgage prequalification vs. preapproval

Before applying for a mortgage, you’ll want to shop around and compare the mortgage rates and terms that various lenders offer. When you find the right lender, find out how you can prequalify or get preapproval for a loan. Prequalifying gives you the lender’s estimate of how much you can borrow and in many cases can be done over the phone, usually at no cost. Prequalification does not guarantee that the lender will grant you a loan, but it can give you a rough idea of where you stand. If you’re really serious about buying, however, you’ll probably want to get preapproved for a loan. Preapproval is when the lender, after verifying your income and performing a credit check, lets you know exactly how much you can borrow. This involves completing an application, revealing your financial information, and paying a fee.

Generally, if you’re applying for a conventional mortgage, your monthly housing expenses (mortgage principal and interest, real estate taxes, and homeowners insurance) should not exceed 28 percent of your gross monthly income. In addition, most mortgages require borrowers to have a debt-to-income ratio that is less than or equal to 43 percent. That means that you should be spending no more than 43 percent of your gross monthly income on longer-term debt payments.

It’s important to note that the mortgage you qualify for or are approved for is not always what you can actually afford. Before signing any loan paperwork, take an honest look at your lifestyle, standard of living, and spending habits to make sure that your mortgage payment won’t be beyond your means.

Before you apply

Do some homework before you apply for a mortgage. Think about the type of home you want, what your budget will allow, and the type of mortgage you might want to apply for. Obtain a copy of your credit report, and make sure it’s accurate; you’ll want to dispute any erroneous information and quickly correct it. Be prepared to answer any questions that a lender might have of you, and be open and straightforward about your circumstances.

What you’ll need when you apply

When you apply for a mortgage, the lender will want a lot of information about you (and, at some point, about the house you’ll buy) to determine your loan eligibility. Some of the information you’ll need to provide:

  • The name and address of your bank, your account numbers, and statements for the past three months
  • Investment statements for the past three months
  • Pay stubs, W-2 withholding forms, or other proof of employment and income
  • Balance sheets and tax returns, if you’re self-employed
  • Information on consumer debt (account numbers and amounts due)
  • Divorce settlement papers, if applicable

You’ll sign authorizations that allow the lender to verify your income and bank accounts, and to obtain a copy of your credit report. If you’ve already made an offer on a home, you’ll need to give the lender a purchase contract and a receipt for any good-faith deposit that you might have given the seller.

Types of mortgages

Like homes themselves, mortgage come in many sizes and types. The type of mortgage that’s right for you depends on many factors, such as your tolerance for risk and how long you expect to stay in your home. The following are some of the more popular types of mortgages available:

  • Conventional fixed rate mortgages
  • Adjustable rate mortgages (ARM)
  • Government mortgages (e.g., FHA or VA mortgage loans)
  • Hybrid adjustable rate mortgages (ARM)
  • Jumbo loans

Finalizing the application

As your mortgage application is processed and finalized, your lender is required by law to give you a Loan Estimate within three business days of receiving your application. The Loan Estimate is a form that spells out important information about the loan you applied for, such as the estimated interest rate, monthly payments, and total closing costs for the loan.

Buying a Home Both You and Your Insurer Will Love

Buying a Home Both You and Your Insurer Will Love

You’re house hunting, and you’ve brought along a wish list of features that you consider important, such as a certain number of bedrooms, adequate storage, and an up-to-date kitchen. But does your list include features that will affect your homeowners insurance premium? Buying a well constructed home equipped with certain safety devices may allow you to qualify for a lower insurance premium and help you avoid future insurance claims.

Home traits that affect premium rates

Because a home’s location, construction, and safety features can affect the premium you’ll pay for homeowners insurance, you’ll usually be asked to provide specific details about the home you’re purchasing when you request an insurance quote. This information will be used, along with other factors, to generate an accurate quote and to determine the actual premium rate that will apply once you’re issued a policy.

Keep in mind that premium rates may vary, because each insurance company sets its own underwriting guidelines in accordance with state regulations. But all insurers within a state may be required to offer certain premium discounts for homes with features that help reduce insurance claims. Other discounts are optional and will vary from one insurer to the next.

  • Age. Newer homes often cost less to insure than older homes because they are built according to strict building codes, and the electrical, heating, and plumbing systems are likely to be in good shape, reducing the risk of fire and water damage.
  • Construction. The construction materials used to build the home may affect your insurance premium. For instance, brick homes are more fire-resistant than wood frame homes so in some areas of the country they cost less to insure. Discounts may also be available if weather-resistant features such as hurricane shutters or impact-resistant roofs have been installed.
  • Location. Insurance premiums are likely to be higher for homes located near the coast or in areas at high risk for a natural or weather-related disaster.
  • Security devices and fire protection systems. Many insurers offer discounts for monitored alarm systems, deadbolt locks, smoke detectors, fire alarms, or sprinklers. More sophisticated devices usually qualify for higher discounts.
  • Proximity to fire department. When setting premium rates, insurers generally consider the home’s distance from the local fire department and whether a fire hydrant is nearby. Homes located in rural areas far from fire equipment may cost more to insure.

When it’s time to buy homeowners insurance, ask about available discounts. And remember that flood and earthquake damage isn’t covered by a standard homeowners insurance policy. You’ll need to purchase separate insurance to cover these risks.

Spotting potential problems

As you walk through a home, keep your eye out for evidence of damage or defects. Although serious problems can be a lot harder to spot than a lack of cabinet space, spending time identifying potential defects up front may help you avoid future insurance claims.

  • Look for signs of water-related damage or excessive moisture, especially in basements and attics, and on roofs and ceilings. Signs that drainage problems may exist include mud or sunken spots in the yard, or areas that slope towards the foundation.
  • Visit the home more than once. Walk or drive through the neighborhood, too, preferably at different times of the day and in different weather conditions. And talk to the neighbors–they can be a good source of information about the neighborhood and the home you’re considering.
  • Ask the seller about past insurance claims. If your state requires sellers to provide written disclosure notices detailing known issues with the home, carefully review these before purchasing the property. But remember, sellers won’t necessarily disclose every problem that exists.
  • Ask questions. For instance, find out why many homes in the area are getting new siding or roofs. Or if the home is priced much less than similar homes in the area, are you getting a good deal–or inheriting someone else’s problems?

Once you’ve decided on a home, make your offer or purchase agreement contingent upon a satisfactory professional home inspection. That way, you can try negotiating a price adjustment or even walk away from the sale if you find out that the home has significant defects.

And to avoid surprises, shop for homeowners insurance as early as possible in the home buying process. You don’t want to find out too late that the home you’ve chosen will be expensive or difficult to insure.

Popular Types of Mortgages

Like homes themselves, mortgages come in many sizes and types. The type of mortgage that’s right for you depends on many factors, such as your tolerance for risk and how long you expect to stay in your home. Here are some characteristics of various popular types of mortgages.

Conventional Fixed Rate Mortgages Adjustable Rate Mortgages (ARMs)
  • Low risk
  • 10- to 40-year terms
  • Interest rate doesn’t change
  • Larger down payment (compared to government mortgages) may be required
  • Payment remains the same
  • Higher risk
  • Initial interest rate often lower than conventional fixed rate mortgage
  • Interest rate may go up or down
  • Interest rate usually adjusted annually
  • Rate adjustments may be
    limited by cap(s)
  • Payment caps can result in negative amortization in periods of rising interest rates
Government Mortgages Hybrid Adjustable Rate Mortgages (ARMs)
  • FHA, VA, or bond-backed
  • Interest rate sometimes lower than conventional fixed rate mortgage
  • Variety of programs available
  • Low down payment requirements
  • Less stringent qualifying ratios
  • Attractive to first-time homebuyers
  • Higher insurance costs may apply for FHA loans
  • Payment remains the same
  • Higher risk
  • Initial interest rate often lower than conventional fixed rate mortgage
  • Fixed term for 1-10 years, then becomes a 1-year ARM
  • May have option to convert to a fixed rate mortgage before becoming a 1-year ARM
  • Interest rate may go up or down
  • Rate adjustments may be
    limited by cap(s)
  • Payment caps can result in negative amortization in periods of rising interest rates
Jumbo Loans
  • For 2018, any loan over $453,100 or $679,650 in high-cost areas ($679,650 or $1,019,475 in Alaska, Guam, Hawaii, and the U.S. Virgin Islands) for a single-family home or condo
  • Size of loan increases lender’s risk, so interest rates are generally higher than for conventional fixed rate mortgages

Caution: The Consumer Financial Protection Bureau’s qualified mortgage rules discourage mortgage loans that result in negative amortization due to the high risk of default associated with these loans.

Less Common Mortgage Options

Sometimes the more common fixed or adjustable rate mortgages aren’t advantageous or aren’t available because of your circumstances. Here are some less common mortgage alternatives and their characteristics.

Graduated Payment Mortgages Growing Equity Mortgages
  • Fixed interest rate
  • Medium risk
  • Low monthly payments increase over 5-10 years, then level off for remainder of term (usually 30 years)
  • Initial low payments can result in negative amortization during early years of the loan
  • Formalized prepayment method
  • Medium risk
  • Payments rise over 5-10 years, then level off for remainder of term
  • Excess payment applied to principal
  • Fixed interest rate usually lower than conventional fixed rate mortgages
Balloon Mortgages Energy Efficient Mortgages
  • High risk
  • Low interest
  • Short term (3-10 years)
  • Large final payment
  • Provides borrower with special incentives when purchasing a home that’s energy efficient, or is remodeling with energy-saving improvements
  • Decrease in energy costs
  • Green technology adds to resale value
  • Must get home inspected by professional home energy raters
Seller-Financed Mortgages
Seller-Financed Mortgages Wraparound Mortgages
  • Medium risk
  • Seller acts as lender
  • Terms are negotiated between you and the seller
  • Medium risk
  • Seller acts as lender
  • Terms are negotiated between you and the seller
  • Your mortgage payment repays both seller’s original mortgage and any additional amount seller financed for you
  • Interest rate higher than on seller’s mortgage but often lower than conventional fixed rate mortgages

Caution: The Consumer Financial Protection Bureau’s qualified mortgage rules discourage lenders from issuing mortgage loans with negative amortization, interest-only payments, or balloon payments, except in limited circumstances.

Comparison of Interest-Only and Conventional Fixed-Rate Mortgage Interest Payments

An interest-only mortgage can offer lower initial monthly payments, but at a long-term cost. Because you’re not reducing your principal balance during the initial payment phase of an interest-only mortgage, you’ll pay more interest over the life of the loan than with a conventional mortgage over the same term.

In our example, both mortgages are for 30 years. The interest-only mortgage has an interest-only payment period of 10 years; the principal and remaining interest are then amortized over the last 20 years. This is compared with a conventional mortgage at the same fixed interest rate.

Annual Mortgage Payments

The total interest paid on the conventional mortgage is $186,513. The total interest paid on the interest-only mortgage is $216,779. The interest savings with the conventional mortgage is $30,266 over the life of the loan.

Comparison of Annual Mortgage Interest Payments
($200,000 principal, 5% fixed rate of interest)

Caution: The Consumer Financial Protection Bureau’s qualified mortgage rules discourage lenders from issuing mortgage loans with negative amortization, interest-only payments, or balloon payments, except in limited circumstances.

Which mortgage is better: fixed rate or adjustable?


A fixed rate mortgage loan is a mortgage loan in which the interest rate remains the same from the day you take out the loan until the day you pay it off. Regardless of fluctuations in market interest rates, your interest rate never changes. Your payments remain steady, as well. The entire debt, including interest, is repaid in equal monthly installments. With an adjustable rate mortgage (ARM), your interest rate is initially lower than a fixed rate but then will be adjusted periodically to keep up with changes in interest rates. As your interest rate changes, the amount necessary to pay off your loan by the end of the term changes. Thus, your monthly payment amount is recalculated with each rate adjustment. There is typically an initial rate guarantee period, plus caps on how much your rate can increase in any year.

If you are conservative by nature, have a fixed income, or believe interest rates are rising, a fixed rate mortgage may be an appropriate mortgage for you. With a fixed rate mortgage, changes in the economy will not affect your loan. Your interest rate and payment amount stay the same until the mortgage is paid off. ARMs are by nature less predictable than fixed rate mortgages because the interest rate and payment amount can rise or fall, sometimes substantially. With an ARM, you trade the predictability of fixed interest and payments for the possibility of lower interest and payments in the future. If you will be staying in the house only for a few years, the lower initial rate of an ARM makes sense.

What’s private mortgage insurance (PMI), and can my mortgage lender require me to have it?

If you are applying for a conventional mortgage and have a down payment of less than 20%, your lender may require you to have private mortgage insurance (PMI). Low down payment mortgages are somewhat risky for lenders, because they believe you are more likely to default on a loan in which you have very little invested. For this reason, lenders generally require PMI if you are borrowing more than 80% of the value of the home you are purchasing (i.e., your down payment is less than 20%).

If you are concerned about taking on PMI payments, keep in mind that you may not have to pay PMI forever. For loans originated after July 29, 1999, your lender is obligated to cancel your PMI when the principal balance on your loan is scheduled to reach 78% of the original value of your home or once you have reached the midpoint of your loan’s amortization schedule, provided you have a good payment history. Or, you can petition your lender to remove the PMI if you have a good payment history and reach 20% equity in your home.

You can generally treat amounts you paid during 2017 for qualified mortgage insurance as home mortgage interest, provided that the insurance was associated with home acquisition debt, and was being paid on an insurance contract issued after 2006. Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and qualified private mortgage insurance (PMI) providers. The deduction is phased out, though, if your adjusted gross income was more than $100,000 ($50,000 if married filing separately) and no deduction is allowed if your AGI exceeds $109,000 ($54,500 if married filing separately).


I’m a first-time homebuyer, and I don’t have a lot of cash to put down on a house. What type of mortgage would be best for me?


If you are a first-time homebuyer and don’t have a lot of money for a down payment on a home, you may want to consider obtaining a mortgage through a government mortgage lending program such as those offered through the Federal Housing Administration (FHA) and the Department of Veterans Affairs, formerly known as the Veterans Administration (VA). Generally, these types of mortgage programs are an excellent choice for first-time homebuyers with moderate incomes, because the interest rates are set below current rates and little or no down payment is required. Consult your mortgage lender to see if you are eligible for either an FHA or VA mortgage.

In addition to government mortgage lending programs, many mortgage lenders offer special programs for first-time homebuyers that require little or no down payment. Shop around and compare the mortgage rates and terms that various lenders offer to find a mortgage that is geared toward first-time homebuyers.

Another option for individuals who have little or no down payment for a home is a rent with option to buy arrangement. A rent with option to buy arrangement allows you to rent a home for a certain period of time (usually three years) while you accumulate a down payment. At the end of the lease term, you have the option to purchase the home for a specified price. While you rent the home, part of each rent payment is credited toward the purchase price of the house, in effect creating a down payment.

What’s the Homestead Act?


The federal Homestead Act, which was enacted in 1862, offered free 160-acre parcels of land to early settlers, or “homesteaders.” Although this act was repealed in 1977, many states have enacted their own homestead laws. Some states use their homestead laws to encourage property ownership in certain areas by selling the property at a nominal price or offering special tax relief to buyers. Other states have homestead laws that protect your home against judgments and creditors. Consult a real estate broker or attorney to find out whether your state has enacted homestead laws and, if so, how you can take advantage of them.

What’s involved in getting a VA mortgage?


If you are a veteran who served in active duty during or after World War II, you may be eligible for a VA mortgage. Before applying for a VA mortgage, your eligibility must be verified by the Department of Veterans Affairs, formerly known as the Veterans Administration. To obtain a VA certificate of eligibility, complete VA Form 26-1880, titled Request for Determination of Eligibility and Available Loan Entitlement, and submit it to the nearest VA regional office.

In addition to meeting the VA eligibility requirements, you must obtain a VA appraisal on the property you are purchasing. To obtain an appraisal, complete VA Form 26-1805, titled Request for Determination of Reasonable Value, and submit it to the local VA office. Once the appraisal has been completed and the appraiser’s fee has been paid, a certificate of reasonable value will be issued.

VA mortgage terms are generally favorable when compared to other types of mortgages. However, some variations in terms may exist from lender to lender. It may be worth your time to shop around and compare the interest rates, indexes, and closing costs of various lenders.

Finally, keep in mind that although lenders act independently on most VA mortgage applications, some applications must be submitted to a VA office for approval. Once you fill out the application, your lender should notify you within 30 days as to whether your application and the amount of your loan have been approved.

How much money do I have to put down to buy a house?


In the past, lenders traditionally required a down payment of at least 20% of the purchase price of a home. Today, many lenders offer loans with lower down payments. In addition, certain private and government entities have low down payment programs.

You may be able to get a Federal Housing Administration (FHA) mortgage with a down payment of as little as 3.5%. Qualification standards for FHA mortgages are sometimes less stringent than traditional mortgage loans and the terms of these mortgages are generally attractive, making them ideal for first-time homebuyers. Keep in mind, however, that FHA loans require borrowers with down payments of less than 20% to pay mortgage insurance premiums.

Department of Veterans Affairs (VA) mortgages are another low down payment option. VA mortgages are available to qualified veterans and their surviving spouses. VA mortgage terms are also generally very attractive, and in many cases, little or no down payment is required.

You may be able to obtain a conventional mortgage with a down payment of less than 20% with the help of private mortgage insurance (PMI). Low down payment mortgages are somewhat risky for lenders, because they believe you are more likely to default on a loan in which you have very little invested. For this reason, lenders generally require PMI if you are borrowing more than 80% of the value of the home you are purchasing (i.e., your down payment is less than 20%).

Can I buy a house with no money down?


Typically, lenders require a down payment of 20 percent of the home’s purchase price. However, some special mortgage programs allow you to purchase a home with no down payment, such as Veterans Administration (VA) mortgages (if you are a qualified veteran) and no-down-payment or 100 percent financing mortgage programs. VA mortgage terms are generally favorable when compared with other types of mortgages. However, some variations in terms may exist from lender to lender. As for no-down-payment or 100 percent financing mortgage programs, you will generally pay higher interest rates and closing costs on these loans, and there may be additional qualification requirements.

Besides special mortgage programs, you may be able to qualify for a conventional mortgage with no money down if you purchase private mortgage insurance (PMI). Typically, monthly PMI premiums are $45 to $65 per $100,000 borrowed. The cost of PMI depends on several factors, such as the amount of your down payment, your type of mortgage, and whether you pay premiums on a monthly basis or in a lump sum at closing. PMI premiums can significantly increase your monthly housing cost. Without PMI, however, you may be unable to qualify for a mortgage if you have no down payment.

What are the advantages of making biweekly mortgage payments?


A biweekly payment plan is a formal method of prepaying your mortgage. Under a biweekly payment schedule, you make a payment on your mortgage every two weeks instead of once a month. Each of these payments is roughly equal to one-half of a normal monthly payment. By making biweekly payments, you end up making an extra payment over the course of each year (26 half payments are equal to 13 full payments). You also pay less interest in the long term, because payments are applied to your principal balance more frequently. Ask your lender if it offers a biweekly payment schedule and if it charges a fee for this service.

Before you sign up for a biweekly payment schedule, ask your lender whether or not a penalty exists for dropping out of the program. Once you sign up for the program, you may discover that you cannot afford the extra payment or are unable to keep up with the biweekly payment schedule. If the structure of a biweekly payment plan does not work out for you, consider making monthly payments and adding a little extra whenever you can. You can also budget your money so that you are sending in one extra payment a year whenever possible.

What is involved in buying a house that’s for sale by owner?


When you buy a home directly from the owner, also known as for sale by owner (FSBO), no real estate agent or seller’s agent is involved. Rather, the buyer and the seller deal directly with each other. Generally, the process for buying a house that is FSBO is the same as buying a house with the assistance of a real estate agent. However, many home buyers are intimidated by the thought of going through the home-buying process without a real estate agent to provide forms, suggest financing, write the purchase and sale agreement, or negotiate the deal.

Keep in mind that this lack of broker representation can actually be an advantage for buyers. First, the price of the home is not artificially inflated to cover the cost of the agent’s commission. Second, you deal directly with the seller instead of having to make an offer through the seller’s agent.

Should I choose a mortgage with no points and pay a higher interest rate, or should I put money toward points to lower the interest rate on a mortgage?


Points are costs that a lender charges you when you take out a loan on your home. One point equals 1 percent of the loan amount borrowed (e.g., 1.5 points on a $100,000 loan would equal $1,500). Generally, the more points that you pay up front, the lower the interest rate you will pay on your mortgage loan. This can save you thousands of dollars in interest over the course of the mortgage loan.

If you pay points up front, you want to make sure that you recover the cost while you are still living in your home. If you move before you recover the costs of the points, you really won’t be saving any money. You can determine how many months it will take for you to recover the cost of the points by dividing the amount you pay for points by the amount you save on your mortgage loan. For example, if you pay $1,000 in points up front and you save $40 a month in interest, it will take you 25 months to recover the cost of the points (1,000 divided by 40 equals 25). If you plan on staying in your home for less than 25 months, you will lose money on the points that you paid up front.

Keep in mind that the cost of points is negotiable and is often split between the buyer and seller. Points may also be deductible on your income tax return.

My mortgage includes a statement that a penalty may be imposed for early payoff. What does that mean?


Lenders will sometimes impose a penalty for early payoff or prepayment of a mortgage loan. Others will penalize you only if your payment exceeds a certain amount or occurs within a certain time period. Certain loans (i.e., fixed rate mortgages) are more likely to carry a prepayment penalty than others (i.e., adjustable rate mortgages). Federal credit union, Federal Housing Administration (FHA), and Veterans Administration (VA) mortgage loans can all be prepaid without penalty. Typically, you prepay a mortgage loan (that is, you send in more money than required) to reduce the amount of interest that is paid over the life of the loan, resulting in thousands of dollars in savings. To prepay your mortgage loan, you should read your mortgage contract or talk to your lender to clarify the terms of your mortgage loan and determine whether or not you will suffer a prepayment penalty. If your mortgage lender will not remove the prepayment penalty, you may be better off investing the extra sum elsewhere. It is important to note that if you do prepay your mortgage loan, it does not change your monthly obligation to your lender. Regardless of how much you prepay, you will be in default if you fail to make your minimum monthly payments.

Should I buy a home or continue renting?


Most people face this question at some time in their lives. Buying a home is part of the American dream. It’s also one of the biggest financial investments you’ll ever make.

One of the main advantages of buying a home is that you build equity in your property. For example, if you paid rent at $1,000 per month for 10 years, you would have spent $120,000 on rent and have nothing to show for it. However, if you had purchased your home and made $1,000-per-month mortgage payments for 10 years, you would have paid off a sizable portion of your mortgage. And if you decided to sell your home, you might make a profit.

Before buying a house, remember that your lending institution will want proof that you have money saved for the down payment and closing costs. If your savings won’t cover these costs, you should probably continue to rent for the short term while establishing an ambitious savings plan.

Even though buying allows you to accumulate a valuable asset, renting also has advantages. You may spend less time doing maintenance than if you owned the home, and you could relocate to another home more easily. In addition, you would probably pay less per month for rent than you would for a typical mortgage payment. This would leave you with more money to spend on whatever you choose.

Remember, it’s not easy to buy and own a home. Many people continue to rent throughout their lives. But if you decide to buy a home, start saving now so that someday you will own the home of your dreams.

Can I use a piggyback mortgage as an alternative to private mortgage insurance (PMI)?

If your down payment is less than 20% of the purchase amount when you buy a house, the lender will likely require that you buy PMI to ensure repayment of the loan. While PMI premiums can significantly increase your monthly housing costs, they may be tax deductible for 2017. To avoid paying monthly PMI premiums, you may want to consider getting a piggyback mortgage, sometimes called an 80-10-10 mortgage. In a piggyback transaction, a bank or other finance company traditionally lends 80% of the purchase price, and the buyer makes a down payment of 10%. The remaining 10% is financed with a second mortgage (typically a home equity line of credit). The interest rate for the second mortgage is usually significantly higher than for the primary loan.

Can my mortgage lender require me to have an escrow account?


Generally, your mortgage lender can require you to have an escrow account if you borrowed more than 80 percent of the value of the property you bought. (The percentage you borrow against the valuation of the property is known as the loan-to-value ratio.) Each month, in addition to your mortgage payment, the lender collects a prorated amount to be held in escrow. Your lender applies this amount to your annual private mortgage insurance premiums, homeowners insurance premiums, and property taxes.

Private mortgage insurance protects the lender from loss in case it must foreclose on your property. You may petition to have this insurance coverage canceled once you can establish that your loan-to-value ratio is less than 80 percent. However, you’ll still have to carry enough homeowners insurance to cover the replacement costs of the dwelling. Also, your property taxes may fluctuate from year to year, depending on the increase or decrease in your local property tax bill. Thus, the amount you may be required to keep in escrow may vary with changes in the valuation of your property. In addition to collecting the amounts necessary to meet these expenses, lenders typically hold a two-month surplus in escrow.

Only a handful of states have passed laws requiring lenders to pay you interest on the funds held in escrow accounts. In some states, you, the buyer, are allowed to set up your own separate account (known as a pledge account) for escrowing these funds. You are also responsible for making the property tax and insurance premium payments yourself. Under these circumstances, you earn interest on the funds in the pledge account.

If your loan-to-value ratio is less than 80 percent, you may be able to waive the need for an escrow account. To do so, let your lender or mortgage broker know up front in the lending process, because canceling an escrow account can be difficult once it’s established. Your lender may require you to pay a one-time escrow waiver fee equivalent to one-quarter of one point. For example, if your mortgage is for $100,000, the fee would be $250.

How can I insure my possessions during a move?


There are several ways to insure your possessions while you’re moving. Perhaps your current homeowners policy includes coverage for your personal property during a move. The policy may cover your possessions at the new location for a limited time, also. The same coverages, exclusions, and deductibles apply while you’re moving as they would for a regular homeowners claim.

If your homeowners policy doesn’t include this coverage, you can purchase a policy that’s specifically designed to insure possessions during a move. It’s known as a floater and is effective only during your move. Or, you can add a floater to the coverage already provided by your homeowners policy.

A third alternative is to rely on the insurance offered by the moving company. You’ll want to see its policy before you hire a moving company so you’ll know what’s covered and what isn’t. Also, pay attention to insurance limits. If the company’s insurance is not up to your standards, purchase a floater.

If you have a loss during a move, the mover’s insurance is primary. That is, the mover’s insurance company will pay first. Your insurance pays only after the mover’s insurance limits have been depleted. For example, the mover’s policy has limits of $10,000 and your floater has limits of $25,000. If you have a $15,000 loss and the movers are at fault, the mover’s policy will pay $10,000 and your policy will pay $5,000.

As you review the combined mover’s insurance and your own, pay attention to what they cover and how much. Know what the exclusions are and what the deductible is. Your insurance agent can help you be sure your possessions are adequately covered.

Why do I have to purchase homeowners insurance in order to obtain a mortgage?


Your home is the collateral for the mortgage loan you’re obtaining, so until you pay your mortgage in full, your lender has a financial interest in your property. As a condition of making the loan, your lender will require you to purchase a certain amount of homeowners insurance that will protect both you and the lender in the event that your home is damaged or destroyed.

Generally, at the closing or a few days before closing, you’ll be asked to submit proof of coverage, with the lender named as loss payee. If you have any questions, ask your mortgage lender or your insurance company or agent for more information about what’s required.

Should my partner and I buy a house together even though we’re not married?

Should my partner and I buy a house together even though we're not married?

If you want to buy a home with your partner, you may be able to qualify for a larger mortgage than if one partner alone applied for the loan.

However, be aware that unmarried partners have some unique considerations that married couples don’t have. The laws dealing with the distribution of property when a couple splits up or a partner dies are few and vague when the couple is not married. So it’s crucial for unmarried partners to have a detailed written agreement regarding their respective ownership interests in the property and their intentions for distribution of the property if either partner should die or if the relationship ends. Both partners should also keep thorough and accurate records of their respective contributions.

You and your partner can own the property in one of many ways, including:

  • Joint tenants with rights of survivorship
  • Tenants in common
  • Individually in one of your names
  • In trust

Joint tenancy with rights of survivorship means that when one partner dies, the surviving partner automatically owns the entire property, bypassing the probate process. This way of owning property may make it more difficult to sell your share of the property without your partner’s consent. However, it may also offer creditor protection because neither partner owns a separate share; instead, both own equal rights in the entire property.

As tenants in common, you and your partner each can leave your portion of the property to whomever you choose in your wills. Creditors of tenants in common may have an easier time attaching the property than if it were owned jointly with rights of survivorship.

You and your partner may decide that only one of you will own the property. However, if you choose individual ownership, beware. The person named on the deed will be able to sell the property without the consent or even the knowledge of the other partner.

You can also choose to own the property in trust, with the trust agreement spelling out the rights and obligations of each partner.

You’ll want to get advice from an experienced attorney on all of the ownership options available to you and your partner.

We just bought our first home. What can we deduct from the settlement statement?


If you took out a mortgage to purchase your home, you probably paid settlement costs in addition to the contract price. These costs generally include points, attorney’s fees, recording fees, title search fees, appraisal fees, and other loan or document preparation and processing fees. The only settlement costs you can deduct are home mortgage interest and certain real estate taxes. You deduct them in the year you bought the home if you itemize your deductions. Certain settlement costs can be added to the basis of your home. Other settlement or closing costs, however, cannot be deducted or added to the basis.

If the loan was for the purchase of your primary residence, the points withheld from the loan proceeds will generally be deductible as up-front interest if you paid a down payment, escrow deposit, or earnest money equal to the charge for points. Generally, you can also deduct any points paid by the seller. Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. You can deduct the taxes you actually paid during the year. However, you cannot take a present deduction for taxes paid in escrow for a future tax bill.

Other closing costs that you paid are not deductible and must be added to the cost basis of your home. You can include in your basis the settlement fees and closing costs that you paid that are associated with buying your home. You cannot include in your basis the fees and costs associated with getting a mortgage loan.

What are points, and do they affect my insurance rates?


Your state’s Department of Motor Vehicles probably uses some kind of point system to rate its drivers. Each state has its own point system, but typically, numerical values are assigned to different types of driving violations. The more serious the violation, the higher the point value. For example, you might get only one point for a speeding ticket, but three or more points if you’re convicted of drunk driving. The bottom line is that, as you accumulate points, your driving record gets worse in the eyes of both your state and the insurance industry. And that can mean higher auto insurance rates for you.

The purpose of these higher rates is not to punish you for an accident or other violation. Believe it or not, insurers want to charge premiums that are fair and appropriate. Since statistics show that people who’ve committed driving infractions are likely to do so again, it’s only reasonable that your premium should go up after an infraction. How much it goes up usually depends on the insurer. An insurance company may use its own point system to calculate rate increases. Your insurer’s point system probably resembles your state’s point system–both assign you points based on the number and types of violations you commit. Your insurer then uses these points to apply surcharges to your policy, which drives up your rate.

Your insurer gets information on your driving record by checking with your state’s Department of Motor Vehicles. There are certain times when you can bet that your insurer will run a check. For example, expect your driving record to be reviewed anytime you want to increase your coverage or make other changes to your policy. Of course, your record will also be checked when you first apply for coverage and when it comes time to renew your policy. Depending on how bad your record is, an insurer could even deny you coverage.

Do I need title insurance if I’m buying a condominium?


Your title to any real estate, including a condominium, is proof of your interest in that property. But what if your title were faulty? It could be a forgery, or it might have been recorded improperly. The property could be subject to unpaid tax liens or other assessments. If any of these were the case, you could lose the condominium and still be required to repay any money you borrowed to purchase it!

If you take out a mortgage to buy the condominium, you’ll probably have to get a lenders title insurance policy. This covers only the mortgage lender’s interest in the condominium for the life of the loan. You’ll want to get an owners title insurance policy, which protects your interest in the condominium for as long as you own it. If any questions arise about the legitimacy of your title, your title insurance company will defend your rights in court. If you suffer a title-related loss, the insurance company will pay for this in accordance with the policy terms.

When you buy title insurance on a condominium, you’ll be issued an American Land Title Association condominium endorsement. Some title issues (e.g., document defects that invalidate the property’s classification as a condominium, or unpaid assessments associated with the unit you buy) are unique to condominiums. The condominium endorsement form certifies that your title is free of such defects or encumbrances.

How much house can I afford?

Answer:Years ago, the general rule of thumb was that you could afford a house that cost two and a half times your annual salary. Today, most people finance their home purchases. As a result, determining how much house you can afford generally equates to how large a mortgage you qualify for and how much of a down payment you will make.

To determine how large a mortgage you qualify for, lenders use formulas known as qualifying ratios. Generally, these qualifying ratios are based on your gross monthly income, your housing expenses, and your long-term debt. To qualify for a conventional mortgage, your housing expenses should generally not exceed 28 percent of your gross monthly income. Your monthly housing expenses include mortgage principal, interest, taxes, and insurance (often referred to as PITI). In addition, the Consumer Financial Protection Bureau’s mortgage rules suggest that borrowers have a debt-to-income ratio that is less than or equal to 43 percent. That means that you should be spending no more than 43 percent of your gross monthly income on longer-term debt payments.

When shopping around for a mortgage, compare the mortgage rates and terms that various lenders offer, and then get preapproved or prequalified with the lender of your choice. That way, you’ll know exactly how much you can afford before you begin searching for a house.

Can I buy a house even though I declared bankruptcy?


Believe it or not, there is financial life after bankruptcy. It will take some effort on your part, but you can rebuild your credit with careful budgeting and record keeping.

A bankruptcy is a red flag that makes lenders leery, and it will stay on your credit report for 10 years. If you have a history of bad credit (e.g., a bankruptcy and numerous late payments) and don’t take steps to repair it, most lenders won’t take on the risk of giving you credit. If you find a lender willing to give you credit, you can expect a high interest rate (e.g., twice the going market rate). However, if you work to improve your credit rating by obtaining a line of credit and making all of your payments on time, for example, you may be able to obtain the financing you need to buy a home.

Remember that lenders want to see good credit histories. Therefore, it’s important to begin establishing good credit as soon as possible. Many people believe that the way to fix a bad credit problem is to pay for everything in cash. Although this is a good way to get out of debt and control your spending, it won’t help you get a mortgage. When you pay cash, you’re not establishing credit. Thus, lenders have no way of gauging whether you’re a good or bad credit risk.

Consider beginning your journey back to creditworthiness by obtaining a low-interest credit card. Be sure to make your payments on time, every month. If you can’t get a traditional credit card, ask about a secured credit card that operates much like an ATM debit card. Here, your credit limit is based on the amount you deposit in your account. For example, if you deposit $500 in the account, you’ll have a credit limit of $500. If high credit limits are what landed you in your current financial troubles, a secured card can help you stay on track by keeping you on a short leash. In a short time, you may be able to prove to lenders that you’re creditworthy.

For more information, contact your local consumer credit counselor.