The first home purchase can be the culmination of years of planning and consideration. Buyers typically look for 12 weeks and use a variety information sources for research before purchasing. However, many renters are not near as thorough in their study. image.ashx

Like any other commitment a person makes, careful consideration and understanding is required. There are things that every renter should know before they rent a home or apartment.

  1. A lease is a binding, legal document.
  2. Understand the lease before signing and ask questions.
  3. Get the complete agreement in writing instead of verbal statements.
  4. Tenants have rights too and they vary depending on the state and city.
  5. Tenants need renter’s insurance for their personal belongings and liability.
  6. The landlord is responsible for a habitable and safe environment and should typically pay for repairs due to normal wear and tear.
  7. Do a walk-through of the property before signing a lease.
  8. Don’t withhold the rent to settle a disagreement with landlord.
  9. The landlord must return your deposit or tell you why it is being held in a reasonable time.
  10. It may cost you considerably less to own the home than to rent.

With the exceptionally low mortgage rates available, the house payment including taxes and insurance can easily be less than the market rent of a home. By the time you factor in appreciation, forced savings due to amortization, leverage and tax savings, the actual cost of housing could be close to half of the rent even if a reasonable repair allowance is factored. Check out your net cost of housing.

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Freddie Mac chief economist, Frank Nothaft, says that affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30 year term.  However, for those who can afford a higher payment, there are three additional reasons to choose a 15 year term: save interest, build equity and retire the debt sooner.  image.ashx

First-time buyers have a higher tendency to use a minimum down payment and are very concerned with affordable payments.  It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.

Consider a $200,000 mortgage at 30 year and 15 year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher.  The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30 year term.

Another interesting thing about the 15 years mortgage is that more of the payment is going to principal than interest from the very first payment.  It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.

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Some people might suggest getting a 30 year loan and making the payments as if they were on a 15 year loan.  That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to.  Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

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It’s disappointing, frustrating and sometimes, discouraging when you lose a home you want to buy.  image.ashx

One of the hardest lessons for today’s buyers is that writing an offer doesn’t mean that you’ll get the home or even a counter-offer.  The low inventory affecting many of the housing markets requires a different strategy to give you the best chance to get the home you want.

  1. Make your best offer initially; you may not get a chance to accept a counter.
  2. Submit a written pre-approval letter from the lender.
  3. Increase earnest money above what is considered normal.
  4. Make a larger down payment.
  5. Eliminate unnecessary contingencies.
  6. Don’t ask for personal property not included in the listing agreement.
  7. Pay your own customary closing costs.
  8. Shorten the inspection period.
  9. Buy the home “as is” subject to inspections which still allows you to get your earnest money back if the inspections are unacceptable but doesn’t require the seller to make repairs.
  10. Write the seller a hand-written, personal letter telling them why you want their home; include a picture of your family.
  11. Offer to use the seller’s or listing agent’s preferred title company.
  12. If you can pay cash, do so and arrange financing after closing.  Be prepared to show proof of available funds.
  13. Schedule the closing as soon as possible but let the seller know you can be flexible.
  14. Once you decide on a home, act with expedience.
  15. Ask your real estate professional if they have any other suggestions.

Think of making an offer like applying for a job. You want to make your best impression and show why you are the best choice.  You won’t always know that there are multiple offers.  Approach the process like the competition is doing their best to get the home.

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In a study released by TD Bank, 65% of buyers with mortgages that required mortgage insurance said the higher monthly payment was more than they originally expected.  image.ashx

Private mortgage insurance is required on loans that exceed 80% of the home’s value.  For conventional loans, the premiums range from 0.5% to 1% annually.  The PMI could add close to $100.00 a month to the payments on a $200,000 mortgage and over $200.00 a month on a FHA mortgage.

FHA has two components to its mortgage insurance which includes an up-front charge on closing of the loan and an annual charge.  The up-front premium is 1.75% of the mortgage which can be paid in cash at closing or added to the mortgage amount.  The annual premium ranges from 0.45% to 1.35% depending on the loan-to-value and term of the mortgage.

Most lenders are required to automatically cancel coverage when a 78% loan-to-value is reached which on a 30 year loan with normal amortization could be eight to eleven years depending on original loan amount and interest rate.   If the value of the home has increased as documented by an appraisal so that the current mortgage is below 80% loan-to-value, the lender can be petitioned to eliminate the PMI.

Beginning in April, 2013, FHA requires the mortgage insurance to be paid for the entire term of the mortgage.   Prior to this rule change, it was required to remain in effect for a minimum of five years but could be cancelled when the mortgage is reduced to 78% of the original purchase price.

A homeowner can greatly reduce their cost of housing by avoiding mortgage with a minimum 20% down payment.  If a higher loan-to-value mortgage is required to purchase the home, the objective should be to pay down the mortgage amount to relieve the need for the mortgage insurance.   Generally, loans with lower loan-to-value mortgages also have lower interest rates.

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It is generally considered a seller’s market when the conditions favor the seller.  This condition exists when demand is high and supply is low without any significant adverse economic conditions taking place.

Demand is determined by ready, willing and able buyers.  Low interest rates with indications that they will begin to rise fuels part of this demand. Rising prices also creates a sense of urgency to avoid higher housing costs.

Inventory is currently below what is considered balanced in most areas. In some areas and price ranges, homes are selling very quickly, with multiple offers and sometimes at above the listing price.  When too many buyers are chasing too few properties, things get competitive and the seller is the beneficiary.  image.ashx

Even when buyers and sellers come to an agreement on price and terms, a challenge can occur if the appraisal doesn’t meet the sales price.  Either the purchaser has to come up with the additional cash or the purchase price has to be renegotiated.

A typical seller wants the most money possible for their home in the shortest time frame with the fewest inconveniences.  A Seller’s Market provides the most likely environment for this to happen.

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Planning a summer trip is usually focused on what you’ll do, see and experience.  Enjoy it even more by spending a little time before you leave to make sure your home is safe while you’re gone.  image.ashx

Consider these suggestions along with your other normal efforts:

  • Tell your neighbors you’ll be out of town and to be aware of any unusual activity.
  • Notify your alarm company .
  • Discontinue your postal delivery.
  • Use timers on interior lights to make it appear you’re home as usual.
  • Don’t make it easy for burglars by leaving messages on voice mail or posting on social networks.
  • Post on social networks about your vacation after you’ve returned.
  • Remove the hidden spare keys and give one to a trusted neighbor or friend.
  • Lock everything, double-check and set the alarm.
  • Take pictures of your belongings in case you need them.
  • Disconnect TVs and other equipment in case of unexpected power surges.
  • Adjust your thermostat.
  • Arrange for lawn care.
  • Consider disconnecting the garage door opener.
  • Put irreplaceable valuables in a safety deposit box.

It’s nice to go out of town on a well-deserved trip and it’s always nice to get back home…especially when it is just the way you left it.

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Most taxpayers know that they will pay a 10% penalty if they withdraw funds from their IRA before they turn 59.5 years old.  There is an exception for first-time home buyers that allows a penalty-free withdrawal of up to $10,000 per person if they haven’t owned a home in the previous two years.  image.ashx

This would allow a married couple who each have an IRA to withdraw a lifetime maximum of $10,000 each, penalty-free for a home purchase.

In many cases, the money would be used for a down payment or closing costs.   However, some buyers might consider this source to increase their down payment so they could qualify for a loan without mortgage insurance.

If the taxpayer qualifies for the penalty-free withdrawal, there may still be taxes due.  Contributions to traditional IRAs are made with before-tax dollars and the tax is paid when the funds are withdrawn.  Since Roth IRAs are made with after-tax dollars, there is no tax due when the funds are withdrawn.

Another interesting fact about this provision is that the taxpayer making the withdrawal can help a qualified relative which includes children, grandchildren, parents and grandparents.

Homebuyers who are considering using IRA funds for a home purchase should get expert advice from their tax professional concerning their individual situation.

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Serious shoppers wait for a 50% off sale to make the decision because of the bargain factor.  Renters who are serious about lowering their monthly cost of housing should consider buying with today’s low mortgage rates.  For an example, let’s assume a person buys a $200,000 home with 3.5% down payment on with a 4.5% FHA mortgage for 30 years.  image.ashx

The total house payment would be approximately $1,508 per month.  However, once you consider the equity build-up due to normal amortization, a monthly appreciation estimated at 2% annually for this example, the tax savings and paying maintenance that a tenant wouldn’t be required to do, the net cost of housing is $772 a month.  This is almost half of the full mortgage payment.

If this person was paying $1,750 a month for rent, it would cost him almost $978 more to rent than to own. In the first year alone, it would accumulate to over $11,000 which is more than the down payment required of $7,000.

Owning a home is the largest investment that most people make and the down payment of $7,000 to purchase this home would grow to $58,837 in equity by estimating a 2% appreciation and normal amortization.

To check out what your real housing costs might look like, go to Rent vs. Own or contact your real estate professional.

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One of the most common reasons buyers want to deal directly with the seller is because they feel they can save the commission.  It’s a valid consideration but interestingly, it’s the same reason the seller isn’t employing an agent; they feel they can save the commission. image.ashx

Both parties cannot save the commission.  The buyer feels they have earned it because they’ve had to find the home, determine its value and negotiate with the seller.  They had to arrange their own financing, title and inspections.

The seller equally feels that they have earned the commission because they have incurred all of the marketing expenses and have invested hours upon hours to be available to show the property, hold open houses and answer inquiries.  They have had to research value, financing, title work and make decisions.

There is certainly value in all of the things that buyers and sellers are willing to do to save the commission but only one person can save the commission only if the buyer and seller can reach a written agreement.

There is value to having a third party advocate helping each party to the transaction.

The Profile of Home Buyers and Sellers (Exhibit 8-1) reports that 14% of sales were For-Sale-by-Owners in 2004 compared to just 9% in 2013.  The trend shows that agent-assisted sales rose to 88% in 2013 from 82% in 2004.

The three most difficult tasks identified by for-sale-by-owners is attracting potential buyers, getting the price right and understanding and performing the paperwork. When surveyed, sellers most value the home selling in an anticipated time frame and for an expected amount.

The reality is that both parties cannot save the commission.  It is earned by providing specific services that are essential to the transaction.  The capital asset of a home represents the largest investment that most people make.   An investment that important certainly deserves the consideration of a professional trained and experienced to handle the complexities involved.

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Paying cash for a home seems like a huge advantage to qualifying for a mortgage and an appraisal.  However, for the fortunate few who don’t need a mortgage, there is a question they should answer before they make that decision: Do you think at any point in the future, you might put a mortgage on this property? image.ashx

It’s important because paying cash for a home could affect the ability to deduct the interest if the homeowner should place a mortgage on the home at a later date.

Most homeowner’s know they can deduct the interest on up to $1,000,000 of acquisition debt on their principal residence but they may not understand the limitations of such debt.

Acquisition debt is the amount used to buy, build or improve a person’s principal residence.  The amount is not static but changes over time.  An amortized loan reduces the principal owed with each payment made and the acquisition debt is reduced accordingly.  If a person stays in a home long enough to retire the loan, the acquisition debt is reduced to zero.

Our current federal law allows a homeowner to deduct the interest on the acquisition debt plus the interest on up to an additional $100,000 home equity debt.  If a person pays cash for a home, the acquisition debt would be zero and the only interest deduction allowed would be for home equity debt.

If you answered yes or even maybe to the question, before you pay cash to buy your home, you should discuss your situation with your tax advisor.

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