What you will need… and need to do…..

Purchasing a home is probably the most expensive thing you’ll buy in your lifetime.  So you want to get it right.  You may, and probably will, sell the home and buy another although some really do stay in their first home for their lifetime. So…..

You will need 20% of the price of the home for the down payment… anything less will mean that you will pay a monthly premium for mortgage insurance (so better to put it towards your principal).  If you put down less than the 20%, the mortgage insurance premiums are paid until you’ve reached that 20% figure.

You will need closing costs…. this is a few to several thousands of dollars depending on the cost of the home.  This covers a home inspection (to your advantage), because they can usually find a problem or potential problem that alerts you to costs of repairs down the road. The closing costs also cover Registry of Deeds cost, as well as lawyer fees (a reputable lawyer will see that things are done right).  At the time of closing tell the lawyer that you want a Homestead Act in place….. this is a document that for the cost of about $35. – $50., your home will be protected from anyone trying to sue you. It’s an imperative, yet inexpensive document to get and keep in a safe place.

You should also have about $1,000. and up for redecorating or repairs and yard equipment such as a lawnmower, snow shovels etc.  After all, you want to keep your curbside appeal.

The best thing is to stay in your home for at least 5 years before you should move again, as  relocating and starting over is costly.

You should also have a lawyer draw up a Revocable Real Estate Trust.  No one has a crystal ball to the future and anything can happen at any time, so be prepared….

A Revocable Real Estate Trust will, should anything happen to you, allow the home to transfer smoothly and privately, without going through Probate, to whoever you choose and name in the Trust. This will cost less than $1,000. and it will give you peace of mind.

The bigger the down payment the smaller the mortgage payment….

The idea is to put at least 20% of the cost of the home on the table as your down payment.  The reason for this is that anything below that 20% means you’ll need to pay “Mortgage Insurance” to the lender until you meet that 20% figure.  The reason for this is so that should you default on your payments, the lender can recoup at least a portion back.

So…… Put down at least 20%….. more is better because the more you can put as your down payment, the lower your monthly mortgage cost per month (for the length of the loan).  So this is clearly better.

Remember, once your mortgage figures are set…. principal and interest….. those figures will not rise (or lower) as time moves forward.  Your real estate taxes and insurance may fluctuate a bit each year (these figures aren’t set by the lender).  The whole payment is PITI …. principal, interest, taxes, insurance…… and mortgage insurance if your down payment was below 20%.

Once your loan is established, you can always put extra money towards your principal only. This will not only pay your loan off quicker, but it will save money in interest payments as well.  So this is a very good idea.

You can also pay bi-weekly (every 14 days), which is free to do (just a phone call to your lender to set it up, and it will save at least 2 1/2 years off the length of your loan, but also save you thousands of dollars in interest payments…… a no brainer!  The extra full payment each year goes in it’s entirety towards your principal payment…. this includes the TI (taxes and insurance) part of your payment.

Any time you’re paying extra towards your principal, always tell the lender to put the payment towards “Principal Only”.

Don’t strap yourself with too much house.

There are definitely some things you need to  consider when choosing a home you’d like to purchase. Location is right up there on top, and of course, price and size.

Since it’s best to put at least 20% down payment on it to avoid mortgage insurance. Keep your budget in mind as you shop for a lender who will go to the high side of what you ”can afford”. You set you highest price keeping in mind that there are always costly surprises over time, and you need to be sure to have money set aside for the ‘what ifs’. So stay under their figure.

Don’t go for all the bells and whistles. They are where the dollars rise sharply in the listing price. And remember, once in there, you may want something different such as paint, carpet, flooring, larger shower etc.

Don’t buy too many rooms. Remember, you have to fill them and heat/cool them….and pay taxes on them. It’s always nice to have an extra bedroom which can be utilized in many ways. This home may be your forever home, but you more than likely will use it at a first step towards home ownership, giving you ideas and lessons as you move forward.

Remember, your PITI, principal, interest, taxes, and insurance should be no more than 30% of your take home income, and ideally, 28%. This will keep you more in line with staying within your budget.

You’ll want to put aside approximately $500. for a home inspection.  This will tell you what is wrong with the property and approximately costs to repair it.  If it is too costly, now is the time to have the sellers pay for the repairs, or give you the money to do so. A home inspection is very important, don’t neglect it. Also, don’t forget that at closing, you’ll need approximately $5,000 for closing costs (Registry of Deeds, Lawyer, etc).

And it is a very good idea to do a Homestead Act at the time of closing. It costs only $35. and is money well spent.  Mention it to your Lawyer that you want it at that time, and it will protect your home from anyone who may sue you. It covers about $300,000. and protects your home for as long as you own it.

What you need to know…and do….beforehand.

You want to own your own home someday.  A dream of many.  You need to know what is expected of you first.

You will need a down-payment of 20% (or more) of the cost of the home you’re choosing. You will also need approximately $5,000-7,000. for other costs associated with the closing: home inspection, legal fees, title, Homestead Act, etc.  All necessary to complete the transaction.

The 20% (or more), is the down-payment figure used, because if you put less down, you will have to get Mortgage Insurance (which will have to be paid monthly until you reach your 20%. The home inspection cost (approximately $500.) is for your protection. A registered home inspector is hired by you (before you actually purchase the home), and he/she goes through the house thoroughly and lets you know what needs to be repaired/replaced now or in the near future and approximate cost for each.  This now gives you the opportunity to ‘back out’ of the deal If there are costly repairs coming up, that may be out of range of your budget.  Or, you could negotiate with the sellers to either make repairs or deduct money from the price of the home and you will handle the repairs on your own.

The closing costs are just that…. costs at the time of closing the deal.  You should have a lawyer, and he/she will draw up papers and go to the Registry of Deeds to register the purchase/sale.

So that is where the figures of at least 20% plus legal costs fits in.

Now, do you have a few thousand dollars (for a lawnmower, some plants etc or if you want to paint the living room or kitchen?  This would be a good idea too.

It sounds ominous, but truly it’s doable.  Be disciplined about saving and you’ll get there.

And when you have the money you need set aside, then shop for the best rate on a loan and a reputable mortgage lender.

Easy To Get It Going…..

Having a separate direct withdrawal mortgage is best.  It shows you exactly what is set aside for your payments, without getting any other money/payments mixed in.

Open the account and round up your mortgage payment, depositing that figure. This amount will be your ‘cushion’ in the account (never to be touched).  Just pretend it’s not there.

Now call your lender and tell them you want the bi-weekly option.  They’ll let you know when the 1/2 payments will begin.  Every 14 days 1/2 your mortgage will be automatically withdrawn.

Just make sure that when you deposit money to cover your mortgage, you deposit the full month payment (as though you were paying once a month). This assures that the second 1/2 payment for that month is there.  It is best to round up some when you deposit (adding to the cushion).

Twice a year, usually in Spring and Fall, a third 1/2 payment is withdrawn.  These 2 one half payments go directly, in full, towards reducing your principal.  It is imperative that you keep tabs on what the balance is in your mortgage bank account so that you don’t run short for those 2 extra payments….. it’s why rounding up is a good idea.  You can also add to your account over the year to make sure.  Always watch your bottom line.

If you use an amortization schedule (ask your lender for one), you can follow how those 2 extra 1/2 payments each year go to the principal (your equity), and how it also saves you paying interest on them.

All it takes is a phone call and some discipline, and you’ll shave length of time off your loan, and save thousands of dollars at the same time.  A smart move.

Think ahead….

There are many valid reasons why people choose to either rent or buy a home.  But the financial reason(s) may tip the scale in your decision. Neither is ‘right’ for everyone.

Renting is when you pay a landlord to stay in their property.  When you move out, you take your belongings.  The money you spent for rent is gone…. it went to pay the mortgage of the landlord.  During your stay, the upkeep of the outside of the property, as well as if there is a problem with plumbing, appliance replacement etc, is the landlord’s responsibility.

Buying is more long term… All upkeep of the property inside and out is your responsibility. By paying your mortgage, a part of it goes toward equity, and when you move out (sell), you get to keep the equity accrued, plus any money over the cost of your purchase, minus what you still owe the mortgage lender. You almost always will walk away with money in your pocket.

You have to factor in several things when making this decision….but financially, you’d need 20% plus for a down payment. Less than 20% means you’d have to pay a monthly mortgage insurance premium in addition to your mortgage.  This is in case you default on payments, the lender is covered.  So, until you have 20% to put down, it is best to rent and keep saving.

You may have to set your sights on a smaller home to start with, and in 7-10 years, sell it and if you still want that larger home, you’d have some equity in the smaller one, plus the difference between what you purchased the home for, and what you sold it for.  This may be enough to put a 20% down payment on the larger one now.  Then again, maybe you’ve learned to simplify, and are very happy in the smaller one.

When you rent, you pay the figure the landlord says.  Sometimes, if you shovel or mow or help with upkeep in some way, you can dicker the figure some.

When you buy, you pay PITI (principal, interest, taxes, insurance) to the lender, the figure is dependent on your down payment, interest rate, city taxes, and homeowners insurance.  However, you do have some options to help you out there……  Insurance and city taxes are set by those affiliates, and can change slightly over time. The interest rate is figured by your down payment, your credit score, and amount of the loan. The principal and interest figure stay the same unless your refinance. This can be done, but there are charges, and should be discussed with your lender.

The principal can most definitely be helped ….. by you.  The principal is the figure you borrowed to pay for the remaining cost of the home.  You want this figure to lessen, and it will …. a little each month is taken from your mortgage payment.  As time goes on, that figure will be more each month…. this goes towards your equity. The easiest and free way to do this is …….

When you get a 30 year mortgage, there are 12 (full) monthly payments each year for 30 years.  But if you call and have the lender change it to a bi-weekly payment schedule, the payments are spread over the same 52 weeks, but 1/2 the mortgage payment is made every 14 days (every 2 weeks)….  52 divided by 2 is 26.  There will be 26 (half) payments in each year…. 2 of those payments, usually one in the Spring and the other in the Fall, will go directly, and in full, towards lowering you principal (into your equity account).

If you start this at the beginning of your loan term, you will knock off 2 1/2 years off the length of your loan, and….. you will save thousands of dollars on the cost of interest at the same time.  It only takes a phone call to set it up.  Set it up any time during the loan, every bit helps.

And, of course, you can…. always…. pay extra towards your principal.  Just remember to tell the lender that it goes only to the principal. Doing this also lessens the balance of your loan, as well as saving the interest paid by you for that amount.  A good thing!

So make a list of pros and cons for each before deciding.