Homeownership
To Own or Not to Own
Home ownership isn't for everyone. It's definitely a long-term commitment. The prices of homes increase over the years, but usually at a slow rate. With all the financing, closing costs and other expenses associated with owning a home, you'll probably lose money if you sell in less than five years.
You also have to think about the upkeep of a home. Everything from cutting the grass to putting on a new roof is your responsibility. The costs can really add up. Then add taxes, water and sewer bills and other expenses and you can get into some sizable payments.
But when you take full financial and maintenance responsibility for a home, it's yours to do what you please. Paint the walls purple. Add a planetarium. Put in a fireman's pole. You're in charge.
There are also substantial financial advantages to owning a home. The part of your monthly payment that goes toward the principal is all equity and the part that goes toward interest is tax deductible. Compare that with paying rent, which is neither an investment nor a tax write-off.
As your equity increases with time (and payments) it will be a source of financial stability for you, giving you collateral for a loan or producing a large sum of money if you sell. And if you decide to sell your home, as long as you have lived in it for two of the past five years, you won't have to pay tax on gains of up to $250,000. The limit doubles to $500,000 if you're married and both have lived in the home for two years.
When you're deciding what type of home is right for you, you not only have to think about now, you must think about your future. Will your family be growing? Are you going to need an office at home? Are you going to be able to keep up with the maintenance? You don't want to buy a home and then find out three years later that you have outgrown it.
Types of properties:
Houses
If you like privacy and independence, buying a single-family residence might be the right choice for you. Decide whether you want a new home, a previously-owned home or a fixer-upper. If you buy a newly built home, be sure to figure in the cost of upgrades and landscaping, which aren't usually included in the base price. You might be better off with a previously owned home in good repair. A fixer-upper, on the other hand, may allow you to purchase more home for your money. Your house will quickly increase in value as you put work into it - as long as you're willing to invest the time and money it requires to do the job right.
Condominiums
A condominium is halfway between an apartment and a house. You still own the building and the property, but you pay maintenance fees every month that pay for cutting the grass, trimming the hedges, painting the shutters, etc. You're still responsible for interior repairs and maintenance. Be sure to read the homeowners agreement before you decide to buy a condominium. These documents dictate what is and isn't allowed on the property and can include anything from how many and what types of vehicles can be parked in your driveway to how many pets you can own.
Co-ops
Co-ops are more frequent in larger cities and they're becoming increasingly popular. In a co-op, you're a renter, but you're also part of a group that serves as a landlord. You buy into the association.
Home Size Does Matter
The drawbacks to a small house are obvious - not enough space. But there are drawbacks to a large home as well. Upkeep is considerably more work with a large home. The spaciousness that once brought you such happiness may lead to the frustration of never-ending cleaning and maintenance. Consider how much space you need, how many rooms you need and how much furniture you want to have. Limit your home size to meet these requirements unless you're willing to put in a lot of time or hire maintenance and cleaning professionals.
Neighborhood
Urban, suburban, rural, young, old, high-traffic, low-traffic. You have many different options when it comes to choosing a neighborhood - too many to cover here. But here are some neighborhood variables to think about.
How long are you willing to commute? This will give you a geographical boundary to look within.
Do you have children? If so, carefully investigate the school system that your children will be attending. See what learning opportunities are available to them. Even if you don't have kids or your children attend private school, the quality of the schools in your community will have an impact on the resale value of your home.
Do you like high-energy environments or peace and quiet? When some people go home, they want to leave the world behind and relax in the peace and quiet of their personal retreat. Others would be bored to death by that environment and need more interaction and energy.
What aspects of a community are important to you? Envision the perfect neighborhood. Ask yourself what makes it perfect? Then seek out that neighborhood.
When you're looking at homes, try to get a feel for the neighborhood to see if it's right for you. Talk to the neighbors and ask them what it's like. Be nosy. After all, you might live there for quite some time.
Are there association fees? Be sure to check if there are homeowner association fees and how they may impact your budget.
If you're going to be responsible for paying a mortgage for the next 30 years, you should know exactly what a mortgage is. A mortgage has three basic parts: a down payment, monthly payments and fees. We've already discussed the down payment. The monthly payment is the amount needed to pay off the mortgage over the length of the loan and includes a payment on the principal of the loan as well as interest. The fees are all the costs you have to pay up front to get the loan.
Keeping in mind those basic concepts, we'll look at some of the mortgage variations that are available:
Fixed Rate
A fixed rate mortgage requires a monthly payment that is the same amount throughout the term of the loan. When you sign the loan papers you agree on an interest rate and that rate never changes. This is the best type of loan if interest rates are low when you get a mortgage.
Adjustable Rate
Be careful if you're considering taking an adjustable rate mortgage. An adjustable rate mortgage allows the interest rate on your loan to vary with prevailing interest rates. If rates go up, so will your mortgage rate and monthly payment. If rates increase a lot, you could be in big trouble. If rates go down, your mortgage rate will drop and so will your monthly payment. A good strategy may be to stick with a fixed rate loan to safeguard against rising interest rates. And if rates drop, refinance your mortgage to take advantage of lower rates.
Pledged Asset Mortgages
In a pledged asset mortgage, you can use assets such as stocks, bonds, other property, etc., as collateral on your loan. This eliminates the need for a down payment and also avoids PMI (Private Mortgage Insurance).
Veterans Administration (VA) Loans
The Veterans Administration offers loan benefits to veterans who served in the armed forces on active duty during times of conflict, such as Korea, Vietnam, Desert Storm and Afghanistan, as long as they were not discharged dishonorably. The first step to obtain a VA loan is to obtain a certificate of eligibility, then submit it with your most recent discharge or separation papers to a VA eligibility center.
Federal Housing Administration (FHA) Loans
The FHA was created to aid people in obtaining affordable housing. FHA loans are actually made by a lending institution, such as a bank, but the federal government insures the loan. This is often the least expensive loan that non-veterans can get.
The Consumer Financial Protection Bureau (CFPB) took action against three reverse mortgage companies for deceptive advertising practices, including claiming that consumers could not lose their homes. For more information on CFPB's action, view the press release.
Mortgage Help Programs
There are programs that will assist you in obtaining and financing a mortgage. The number and variety of these programs makes it impossible to list and discuss them all here. Check with your bank, city development office or a knowledgeable real estate agent.
If you think owning a home is for you, start planning for it right now. You need to get your finances in order, save for a down payment and mentally prepare for the responsibility of owning a home.
Down Payment
The down payment is usually expressed as a percentage of the price of the house. A $10,000 down payment on a $100,000 house would be a 10% down payment.
How much do you need to save for a down payment? It depends on a lot of variables.
Different banks require different amounts, between 3% and 10% depending on the program, and often give better interest rates for down payments larger than 10%. Some programs even will let you put 0% down.
No matter how much you need for a down payment, save more. There are a lot of fees included with buying a house and you'll be in much better financial shape when you move in if you've given yourself a little padding.
Unless you're some kind of a financial magician, don't try to pull this down payment out of your finances all at once. Decide how much you want to spend on a house and how much you will need to save for a down payment. Saving a reasonable amount every month, you can compute a target date when you will have your down payment and can start your house shopping.
Government Assistance
Check with your local city or county government for special programs that may offer down payment assistance or reduced down payment requirements. To qualify, your household income will need to be lower than the program's income requirements, or you'll need to buy a home in an area targeted for redevelopment.
If you're going to be saving money, you might as well have it work for you. Check into short term Certificates of Deposit (CDs) and Money Market Accounts to earn some interest while you're adding more to savings. It won't be a lot of interest but every little bit helps.
Get Pre-qualified
Negotiating for a house is a lot easier when you have a check for the full amount in your back pocket. That's about what you have when you pre-qualify for a mortgage. Based on your financial strength, a lender will give you a firm commitment on a loan for a certain amount even though you haven't yet identified a specific property.
You can shop around for houses with confidence, knowing that if you find one within the amount of your pre-approval, you will get financing if you decide to buy it. And when it comes time for negotiations, you're in a much better position because the seller knows you can get the financing.
Check Your Credit Report
Becoming familiar with your credit report is an important part of financial fitness at all stages in life. But it's especially important when you're ready to buy a house. The better your credit rating, the better interest rate you're likely to get. So while you're taking the time to save money for a down payment, take some time to get your credit report in order.
If you have poor debt ratios, meaning too much debt compared to your income, start paying down your debt. That's not an easy thing to do. But it's crucial in repairing your credit and getting favorable interest rates.
The possibility of losing a home is a difficult ordeal that no one ever wants to face. If your credit card debt is unmanageable or you’re beginning to use credit for basics like groceries, this may be a sign that your finances are in trouble. Is it becoming more difficult to pay all of your monthly bills on time? It is time to seek assistance.
Consider these important points when looking at your financial future, particularly when it involves your mortgage. These efforts will demonstrate to your lender that you are willing to work and make sacrifices in order to keep your home.
- Where can you cut spending on optional expenses?
- Delay payments on credit cards or other unsecured debt until you make your mortgage payment?
- Do you own assets that can be sold to mitigate your financial difficulty?
- Can someone in your household get a second job to help with paying expenses?
Tips for avoiding foreclosure:
Contact your lender or loan servicer. It may be surprising to know that close to 50% of consumers who miss a mortgage payment or default on their mortgage never contact their lender. Lenders are there to assist you – and want you to keep your home. They can discuss options to help you work through payments during difficult times. Be honest with your lender about your financial circumstances and let them help you.
Gather information. Learn all you can about your mortgage rights and foreclosure laws in Florida. Review your loan documents to determine what your lender can do in the event that you cannot make your payments. Foreclosure prevention information sessions are offered throughout the state. Check for local presentations at www.freddiemac.com
Contact a nonprofit housing counselor. Help and information is available to you free of charge. The HOPE NOW alliance provides a 24-hour hotline to provide mortgage counseling assistance in multiple languages - 1-888-995-HOPE. You may also obtain a list of HUD-approved counseling services in Florida at www.hud.gov.
Alternatives to Foreclosure. When you are working with a lender or approved housing counselor to keep your home, there are options especially if your financial hardship appears to be short-term. See www.freddiemac.com for more detailed definitions of these options:
Refinance: You may be able to secure a lower interest rate than your current mortgage and lower monthly payments.
Forbearance: If your financial hardship is short-term, your lender may offer temporarily reduced or suspended mortgage payments for up to six months.
Reinstatement: It may be possible to make your loan current and avoid foreclosure if you can repay the missed payments along with associated fees and late charges. Reinstatement is often combined with forbearance when you can show that funds will be available in the near future.
Repayment Plan: This option allows the consumer to make up missed payments and late fees over a fixed amount of time and combines the past-due portion with the regular mortgage payment so that at the end of the repayment period, your mortgage is again current.
Modification: You may be able to reach an agreement with your mortgage company to change one or more of the original terms of your note in order to make your monthly payments more manageable.
Stay away from companies that promise to help you avoid foreclosure. These for-profit companies are in business to make money and will most likely charge hefty fees for their services. Some may even appear to be affiliated with your lender. Remember that you can receive the same assistance for free directly from your lender or HUD-approved housing counselor.
Do not be scammed! A business or individual may offer to “stop foreclosure immediately” if you sign a document authorizing them to act on your behalf. Don’t do it! This indeed may be a trick to get you to sign over the title to your home.
Source: Florida Office of Attorney General website at www.myfloridalegal.com & Freddie Mac at www.freddiemac.com.
Closing on Your Home
It's time for the end game. All the financing, house hunting and negotiating come together into one final step - the closing. This can be a confusing and anxious time, especially if you're not familiar with the process. In this section, we detail the process so you can know what to expect.
We have broken down the closing process into the following phases to help make it more understandable:
The Contract:
Once you've found a home, made an offer and the seller has accepted your offer, the seller's agent draws up a contract specifying the terms and a closing date. When you sign this contract, you have officially agreed to purchase the home and the terms outlined in the contract. Prior to signing, have a real estate attorney, or the licensed real estate agent representing you, thoroughly review your contract. There are many small details that could make the difference between a good deal and a bad deal. An experienced professional can help ensure you're getting a good deal.
Negotiating Closing Costs:
Before you sign the contract, see if you can negotiate to have the seller pay for some or all of the closing costs. Some sellers are willing to pay some or all of the closing costs in order to sell the house; as they are receiving a payment for the home, these costs can be less burdensome on the seller than on the buyer, depending on the seller’s circumstances. You may not be able to negotiate more than is customary in your area, and there may be limitations as to how much they are legally able to pay. Your real estate agent will be able to assist in determining what’s appropriate.
Contingencies:
The contract almost always specifies contingencies. That means the contract is valid only if certain requirements are met. For example, if you are not able to secure financing, you aren't required to purchase the home. Contingencies also cover home inspection (defined under Phase 4: Inspection), termite inspection, title search (defined under Phase 5: Closing Costs) and several other possibilities that would nullify the deal.
When you make an offer on a house, you'll have to put down a good-faith deposit, also known as an earnest money deposit. This is to prove you intend to purchase the home and to prevent buyers from placing a bid on multiple houses with the intention of buying only one. The amount of a good-faith deposit can range from several hundred to several thousand dollars or a percentage of the purchase price. As no laws mandate a good-faith deposit, the amount will largely be based on the traditions and customs of your local market. Your real estate agent will be able to help you determine what is customary in your area.
If the deal falls through, the money will be returned to you unless you have broken your end of the contract; for example, if you decide not to proceed with the purchase of the home even though the home has met all of the contingencies, you could forfeit this money. If the deal goes through, the deposit goes toward your down payment and your share of closing costs.
The cost of closing on a home can be thousands of dollars. You should have some money set aside for these costs, which are in addition to your down payment.
Closing costs in Florida include fees charged by the lender, fees charged by the attorney or settlement agent—that is, a real estate professional or title company professional who helps ensure that the title is transferred legally and smoothly during the closing process--and third-party fees that cover items like the appraisal, survey fee, title search fees, title insurance and postage required for processing your paperwork over the course of your home purchase.
- Appraisal: Your lender will order a home appraisal to be sure they are not lending you more money than the property is worth.
- Survey: A survey defines the boundaries of your property.
- Title Search: A title search ensures that the seller is the owner of the house and that there are no liens against it. A lien is a claim to the property rights of the home that is tied to a debt; if the debt is not repaid, the home could be repossessed. Your lender will order the title search through the title insurance company, which will be secured by your lender to help protect your ownership rights.
This search is an important part of the process. Any lien on a home will need to be paid by the seller before closing. Otherwise, you will be at risk of losing the home if the previous owner does not settle his/her debt, or you do not settle it for them. If you are paying cash for a property and therefore bypassing a lender, you’ll want to seek out a title insurance company, which will perform the title search and protect you should there be any problems with the title.
There are various ways you can perform a title search on your own. For example, you can visit your county Property Appraiser’s website or physical location and perform a public records search. There are also websites that now offer to perform a title search on your behalf for a fee. However, to ensure the accuracy of the information and protect yourself from risk, it is best to use a title insurance company for this search.
- Title Insurance: Your lender will purchase title insurance on your behalf. The title insurance company will perform a title search for you to uncover any liens or problems with the title. However, sometimes a title problem can still arise after you’ve purchased the home. For example, someone could claim that they have legal rights to the home or property due to an unclaimed inheritance or a spousal dispute with a previous owner. Additionally, fraud that may have occurred in the past may not come to light until after you’ve purchased the home. If the home was once sold by an impersonator, or a falsified deed was filed with the county, your ownership rights could be at risk.
If there is a problem with ownership, including fraud and forgery, the legal fees associated with those costs of dealing with those problems will be covered. Without title insurance, if there is a problem with the title after you’ve purchased the home, it could prevent you from occupying or selling the home, or from using it as collateral for a loan. The title insurance will cover the legal costs associated with sorting out any problems with the title, should they arise.
Your real estate agent and lender will handle most of these processes, and your settlement agent or attorney will handle the legal paperwork. Your lender should be able to offer an estimate of total closing costs and what you’ll owe (if the seller is paying any of the closing costs) before you get to closing. Ask for this estimate if they don’t provide it.