Home Finance. Slide 1

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Home

Finance

The information provided in this e-course is intended for educational purposes only and does not constitute specific advice for you as an individual. When evaluating your

particular needs, please contact your own tax or financial advisors.

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Advantages

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Drawbacks

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Preparing for the Search

After you've weighed the pros and cons and made the decision to buy a home, your work begins. The search for a home is one that should start long before you begin to look at houses. More than likely, you won't have the money on-hand to purchase a house outright, so you'll need to get a mortgage. How much you pay in interest will be, in part, determined by your credit score and how you've handled credit in the past.

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Reviewing Your Finances

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28%

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Affording Your New Home

If you’re buying your first home, you should strongly consider taking a class for new home

buyers. Many banks and credit unions, as well as local housing authorities, provide opportunities for people to learn about the home buying process.

As you plan your home search, you must be realistic about what you will be able to afford. It’s

nice to dream about a home with a large yard in the nicest neighborhood in town, but it may

not be in your price range. Think about what’s important to you in a home. What’s a “nice to

have” and what’s a “must have”? Location is also a key consideration. If you have children,

maybe being in the best possible school district is most important. Or the location may be dictated by your commute to work. Spend time in some targeted neighborhoods, getting a

sense of what they’re like during the week and on the weekends, in the morning and in the

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Real Estate Agents

No, I can do it myself and save money

Yes, I need help Do you need a real estate agent?

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Real Estate Agents

Experience Objectivity

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Agent Contracts

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Finding the Right Agent

So how do you find the right agent? Often getting a recommendation from friends or family can be a good place to start. But the search shouldn't stop there. Do your research!

Consider working with an agent who is a realtor. Realtors belong to the National Association of Realtors, which has a strict code of ethics. This helps to ensure that your needs are foremost when the agent performs his or her duties.

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Loans

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Pre-qualification

We've already talked about being realistic about what you can afford. But how do you know how much that is? It's important to speak to a lender who will look at your income, debt and assets and pre-qualify you for a loan.

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Pre-approval

Pre-qualification will give you an idea of how much you can afford, but it's far better to be pre-approved for a loan. While it still doesn't obligate the lender to make a loan to you, it does provide you with the confidence that you can secure a loan for the approved amount.

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PROPERTIES

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Mortgages come in a variety of shapes and sizes. During the pre-approval process, you’ll be asked about the type of mortgage you want. Click on each of the buttons to learn about a few of the main types of mortgages.

FHA loans: The Federal Housing Administration helps low to moderate income earners get mortgages by providing federal insurance, which protects the lenders from losses. FHA loans typically require low down payments and are more accessible to borrowers with little or no credit history or minor credit issues. You can learn more about FHA loans on the U.S. Department of Housing and Urban Development’s website.

VA loans: The U.S. Department of Veterans Affairs guarantees the loans made to active duty service members and veterans by financial institutions that participate in the program. The program requires that applicants have a certificate of eligibility. You can learn more about the VA loan program on the Department of Veterans Affairs website.

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Length of Your Loan

30 year mortgage 15 year mortgage

Let’s take a closer look at conventional loans. Conventional loans have either a fixed or an adjustable rate. Fixed rate mortgages allow you to lock in an interest rate so your payment amount doesn’t change. As the name suggests, adjustable rate mortgages can fluctuate, so your payment amount can change over time. Because the rate is locked in, fixed rate mortgages make the most sense if you plan to be in your home for many years.

Conventional loans are typically 15 or 30 years in length, but may be as long as 40 years.

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$300,000 @ 4.75% X 30 years

Return Length of Your Loan

30 year mortgage

A $300,000 mortgage at a 4.75% interest rate for 30 years comes to a monthly payment of

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Return Length of Your Loan

15 year mortgage

$300,000 @ 4.00% X 15 years

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ARMs

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L i f e t i m e o f L o a n djustable ate ortgages

A R M

As you've already learned, adjustable rate mortgages, or ARMs, have interest rates and monthly payments that change during the lifetime of the loans.

They typically start with a low interest rate, but reset after a pre-determined period of time. For

example, you may see an ARM expressed as “5/1.” This means that the initial interest rate stays

constant for the first five years of the loan and then can change annually. If mortgage interest rates stay the same or decline, you pay the same or less each month. If interest rates increase, your mortgage payment will increase as well.

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Caps

Caps are usually placed on any increase or reduction that may occur after one interest adjustment. There may be an annual cap which limits how much of a change can occur each year, or a cap on the total adjustment that may occur during the loan's lifetime.

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Interest Rates

Economic index Credit score Discount points

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What to Expect

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Making the Offer

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Negotiations

In most instances, the amount a buyer offers is not the same as what the owner is seeking. The owner may present a counter offer, which changes the price or other conditions that you may have set forth in your offer. This process can continue until both parties reach a point of

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Contingencies

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Home Inspection

A standard contingency is a home inspection. Home inspections are conducted by professionals to search for problems in home and property, typically at a cost of several hundred dollars. Home inspectors search for structural issues, problems with exterior and interior of the home, as well as electrical, plumbing, heating, and air conditioning concerns. In addition, many lenders require the home to be inspected for termites and other pests that could do significant damage to the property.

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Financing

Another standard contingency is that you'll be able to secure the required financing within a specified time period. Remember, that even if you've been pre-approved for a mortgage, that doesn't mean it'll close.

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Down Payments

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PROPERTIES

There will be a number of other payments that will have to be made as well. Closing costs typically range from 3% to 5% of your total mortgage amount, but you can negotiate sharing them with the seller when you present your offer. Click on each of the numbered tabs below to learn about the costs.

Loan origination fee: This fee covers expenses incurred by your lender. The amount can vary by lender, ranging from 0.5% to 2% of the purchase price. Take care to look for additional hidden charges called "junk fees," as they're considered to be unnecessary markups.

Title insurance: Title insurance protects you and your lender against the risk that the seller doesn’t own the property.

Property tax: The seller may have paid the property tax in advance. You may need to reimburse the seller for this on a pro-rated basis.

Attorney fees: Many states require that attorneys be involved in a real estate transaction, which could cost several hundred dollars.

Prepaid loan interest: Your lender may charge you for the interest that accumulates between the day the loan is funded and the day you're actually scheduled to make your first loan payment.

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vary based on the size and price of a property. A typical appraisal fee is around $300 to $500, which can either be paid at closing or prior to closing, depending on lender requirements. Survey fee: The lender may hire a surveyor to survey the property, which will cost around $350. The surveyor prepares an official diagram indicating such things as the property lines, sidewalks, and public utility easements on the property. You'll get a copy of the survey with the papers you receive at the closing.

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Home Insurance

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Premium Amounts

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Equity and Refinancing

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Equity

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PROPERTIES

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You can tap into this equity in one of two ways. A home loan is a one-time lump sum loan which has a fixed interest rate and is repaid in installments. Once you receive the funds, you can’t borrow further from the loan. A home loan is best used when you know the cost of your purchase, and you’ll need several years to repay the loan.

A home equity line of credit, or HELOC, allows you to borrow up to a certain amount for the lifetime of the loan. You would able to withdraw money as needed, often by check, credit card, or by phone transfer. When you repay the principal, the money becomes available again for your use. HELOCs have variable interest rates, so payments vary depending on the interest rate and the amount you owe. HELOCs are best used for short-term borrowing or as an emergency fund.

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PROPERTIES

At some point, you might become interested in refinancing your mortgage. Click on the buttons to learn about the reasons why someone may choose to refinance.

Lower your interest rate: Lowering your interest rate by 1% or 2% can prove to be worth the time and money. It will help you save money over the long run and will increase the equity in your home faster.

Shorten the length of the loan: If interest rates fall, you may be able to pay approximately the same monthly amount under a 15 year mortgage as a 30 year mortgage. This would allow you save money that would otherwise be paid in interest.

Convert between an adjustable rate mortgage and a fixed rate mortgage: Adjustable rate mortgages begin with a low interest rate but can escalate over time, often exceeding those of fixed rate mortgages. Converting to a fixed rate mortgage could result in a lower interest rate that would remain the same.

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Refinancing Cost vs. Benefit

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Home

Finance

On the Web Financial _Literacy

Congratulations! Even if you don’t own a home now, you’ve taken the first step by learning about the process of buying a home. You understand how to prepare for the purchase and what to expect from the process. You’ve also learned how to tap into your home’s equity or

refinance, once you become a home owner.

Keep learning! For more information on this topic, select “On The Web” to visit