Money Saving Secrets For First-Time Buyers
Cut Your Costs Down to Size
Buying a home in today’s market takes confidence and experience. You can count on my experience to help you find and buy an affordable home with confidence. Here are some tips to help you clip your home buying costs.
We start off with a basic figure: What is the monthly payment range you can afford? From that, we calculate an affordable loan amount and look only at homes within your price range. You may not find every last feature of your dream home, but that does not mean you must abandon your dreams to buy. One solution is to look at properties that promise appreciation, so when you want to exchange your home later for something closer to your dreams, it will pay off.
Another solution is to take advantage of current financing plans designed to reduce your monthly payments, your down payment, or both:
· Adjustable Rate Mortgage. The initial interest rate on an ARM is lower than a conventional loan, thereby requiring lower monthly payments. The rate rises or falls at intervals, but within limits. Ask about 3-year and 5-year options offering no rate adjustment until the third or fifth year, then annual adjustments after that. Desirable ARMs have low rate caps (ideal: 2-3% adjustable cap, 5-6% life-of-loan cap) and below-market rates for the first period. Expect to shop among several lenders for the best terms.
· Fixed Rates. If you’re more comfortable with the security of a higher-priced fixed-rate loan, opting for a longer term (30 years rather than 15 years) may put monthly payments within reach. Although you would pay more in interest over the life of a loan, most homeowners plan to move before 30 years are up.
· VA Guaranteed Loan. If you are an eligible veteran, the Department of Veterans Affairs requires no down payment (up to a specific sales price) for a VA mortgage. Ask me for current ceiling.
· FHA 203 (B) Insured Loan. Insured by the Federal Housing Administration, your loan (obtained through an established lender) requires lower down payment and interest rate than most other mortgages. Down payment is 3% of appraised value on properties priced at $50,000 or under; 3% of the first $25,000 of properties priced over $50,000 plus 5% of the remaining amount up to an appraised value of $125,000, and 10% of the amount over $125,000 up to a ceiling that varies by area. (Ask me for our local figures).
· Private Mortgage Insurance. You insure your mortgage privately, to allow you to take out a mortgage with less than a 20% down payment. Your PMI covers your lender’s risk (should you fail to make mortgage payments).
· Buydowns. At settlement, a third party (builder, seller or investor) agrees to put additional cash “up front” with a lender, in exchange for a lower interest rate to the buyer. Approaches vary among permanent buy downs, multi-year and graduated plans. These rate subsidies can help you afford the home you want.
· Graduated Payment Mortgage. The initial interest rate of a GPM is lower than a conventional loan and it has scheduled increases in following years- as your income presumably is on the rise.
· Seller Take-Backs. Some sellers are willing to consider seller financing (in several formats) designed to reduce buyers’ payments. One format is short-term second mortgage, secured by the house and accepted by the seller to help trim the buyer’s downpayment requirements. Another is a long-term first mortgage but without the usual qualification standards.
· Mortgage Assumption. When you assume an existing loan, your “downpayment” is the difference between the sales price and the loan balance. By finding an assumption with a high unpaid balance, you may reduce your downpayment. If the loan has a lower-than-market interest rate, you’ll also reduce your monthly payments.
· Co-Signed Loan. A loan co-signer can help you qualify for a larger loan on a longer term, making monthly payments smaller.
· Shared Equity. You buy your home with parent, relative, friend or other qualified investor who makes the downpayment. You share the purchase costs, the maintenance, the monthly payments-and equity profits on sale.
Still another solution to reduce your monthly payments is to find additional funds for a downpayment. For example:
· Tax-Free Gift. Receive a tax-free gift from your parents (or others) documented by a “gift letter” stating no repayment is required (thus your debt burden is not increased). Children can receive up to $10,000 from each parent in one year tax free; thus, a couple can get first up to $40,000 from four parents without any gift tax consequences. Some lenders may require you to use some of your own money in addition to the gift.
· Finance Closing Costs. Ask your lender if you can pay closing costs from your mortgage loan proceeds. This will free some additional cash for a downpayment.
· Sale of Assets. If you own other property (real estate, jewelry, collectibles, automobile, etc.), securities (stocks, bonds) or other assets, they can be sold to make your downpayment.
· Tax Refund. Buyers anticipating an income tax refund can use it to increase their downpayment funds, especially in the spring.
· Life Insurance. If your life insurance has cash value, you may be able to borrow against it at a low interest rate, possibly without having to repay the loan- and without jeopardizing your mortgage loan qualifications.
· Securities Loans. If you own bonds, an IRA, vested pension or profit sharing, some banks will lend you cash against these as collateral. The portfolio must be negotiable, although not immediately available.
These are only a few of the dozens of ways to get around the home-financing dilemma. I’ll be glad to help you explore them all. Don’t hesitate to give me a call.