BUYING 101
Making an Offer
Once you've found your dream house, it's time to get started with the financial and contractual side of the purchase. Let your CENTURY 21® professionals guide you through this process. Purchase contracts vary in length and terms from state to state, and within a state, from locality to locality. Because you and the seller have different goals, rely on your CENTURY 21 agent's experience and expertise. He or she can bring order and calm to the process and will know what questions you may not know to ask to help you reach a favorable outcome.
Multiple offers on the same home are not uncommon, so you may only get one chance to make an offer that the seller will consider. That's why it's important to think carefully about your strategy. In most cases it is better to have your real estate professional negotiate the offer. If you have any personal interaction with the homeowner, don't give out any information about your move, your current housing status, financial status or your feelings about their property - positive or negative. This could hurt you in future negotiations.
How Much?
Find out what other homes have sold for in the area, how much money you might have to put into repairs or renovations. These considerations factor in with how much you're comfortable spending.
Also, it helps to know the features that help or hurt resale. In some areas, a swimming pool actually detracts from a home's value and makes it harder to sell. In neighborhoods with two-car, attached garages, a single-car or detached garage may affect the home sale and future value.
In addition to sale prices for other homes, there are several ways you can determine a good amount to offer:
• The condition of the house. Is the home in move-in condition, in need of paint and other cosmetic improvements, or a fixer-upper that needs some real work?
• The market. If you are in a buyer's market - where there are more homes for sale than there are people to buy them - prices are probably stable or falling. If you are in a seller's market - where there are more buyers looking for homes than there are homes for sale - prices are probably moving upward.
• Your ceiling. If you've gotten a credit pre-approval, you know how much you can borrow for your home purchase. Of course, you may not be comfortable paying as much as you've been approved to borrow, so think carefully about your financial situation before making an offer.
Next, decide how much you are willing to pay for a home. Remember, the advertised price of a house is just a starting point - it may take quite a bit of negotiating to arrive at a final cost.
Lease Options
A lease option is an arrangement between you and a seller to exercise the option to buy a house after you have rented it for a specific period. A portion of your rent would be applied toward the purchase if the option is applied. This is referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application. Read any lease option arrangement carefully for details on transferring the option and other important concerns.
For information on lease options, contact your real estate agent (some even specialize in such transactions) or read up on lease options at the public library or on the internet. If you have a real estate attorney, ask if he or she has any prepared information you can review.
The All-Cash Offer
Though most buyers don't buy a home with all cash, anyone considering such a move may be wondering how. Because all cash buyers sidestep the time-consuming loan qualification process, the deal can close very quickly. The all-cash buyer's primary advantage is completely avoiding mortgage interest. Buyers also save money that would be spent on loan origination fees, required appraisal, some closing costs and various other charges imposed by the lender.
At the same time, all-cash buyers should consider potential pitfalls of the transaction. Buyers who want to use the home as their primary residence lose out on many of the tax advantages available to homeowners with conventional loans.
If you can afford to pay cash but are concerned about price appreciation, you may be better off obtaining some financing. Also, look at other investments that are paying off and determine if spending cash on a home is worthwhile.
Mortgage Options
Unless you have enough money to pay for a house yourself, you'll need a mortgage. A mortgage is a loan you take out to finance the purchase of your home. It is also a legal contract stating that you promise to make a monthly payment until your loan is paid off.
Today, there are hundreds of different programs to choose from, but don't let that overwhelm you. Most loans are variations of a fixed-rate mortgage and adjustable-rate mortgage. Knowledge of how these mortgage programs work will help you to understand the majority of available loan options. You may qualify for a new loan without even selling your current home. It's simple to run the numbers for yourself on our Affordability Calculator.
Fixed-Rate Mortgages
A fixed-rate mortgage keeps the same interest rate for the life of the loan. For most people, especially first time homebuyers, this is the best option because you pay the same monthly principal and interest rate.
A fixed-rate mortgage means the interest rate and the payments remain the same for the entire life of the loan (taxes, of course, may change.) Advantages include consistent principal and interest payments, making this loan stable. In other words, your rate won't change, so you don't need to worry about market fluctuations.
Disadvantages include a possibly higher cost. These loans are usually priced higher than an adjustable-rate mortgage. Keep in mind that, on average, most people move or refinance within seven years. If rates in the current market are high, you're likely to get a better price with an adjustable-rate loan.
• 30 Year Fixed-Rate Mortgages offer consistent monthly payments for the entire 30 years you have the mortgage. So if the market is good, you can benefit from locking in a lower rate for the full term of the loan.
• 20 Year Fixed-Rate Mortgages allow you to make a consistent monthly payment throughout the 20 years you have the mortgage. The shorter term means you pay the loan off more quickly, and therefore pay less interest. And you'll build equity faster than you would with a 30-year loan. (But remember the shorter term means higher payments, when compared to the 30 year fixed-rate mortgage.)
• 15 Year Fixed-Rate Mortgages provide consistent monthly payments for the 15 years you have the mortgage. By building equity even more quickly than with a 30 year or 20 year loan, and paying less interest, you'll save money in the long run. It's an ideal option if you can handle the higher payments and if you'd like to have the loan paid off in a shorter period of time - for instance, if you plan to retire.
Adjustable-Rate Mortgages
An adjustable-rate mortgage (ARM) is one that the interest rate changes over the life of the loan - according to the terms specified in advance. The interest rate fluctuates based on several money market indexes, which cause the cost of funds for lenders to vary. All ARMs are amortized (paid down) over 30 years.
With ARMs:
• The initial interest rate is usually lower than with a fixed-rate mortgage.
• The monthly repayment would also be lower.
• The interest rate may be adjusted (up or down) at predetermined times.
• The monthly payment will then increase or decrease.
ARMs are usually priced lower than fixed-rate mortgages so you can increase your buying power and lower your initial monthly payments. If interest rates go down, you'll enjoy lower payments. Usually an ARM is the best choice for homeowners who plan to relocate (for example, with their company or the military), or for those who are purchasing their first home and plan to be in the property only for three to five years. Remember that, on average, most people move or refinance within seven years.
Conversely, monthly payments could increase if monthly payments if interest rates go up. Keep in mind that ARMs are best for homeowners who aren't planning on staying with a property for a long period. If you're on a fixed income, an ARM (especially a short-term ARM) may not be your best choice.
10/1 Adjustable-Rate Mortgages provide a fixed initial rate of the loan for the first ten years of repayment. After 10 years, the rate adjusts every year thereafter for the remaining life of the loan. The loan is amortized over 30 years.
7/1 Adjustable-Rate Mortgages offer an initial rate that is fixed for the first seven years of repayment, then the rate adjusts every year thereafter for the remaining life of the loan.
5/1 Adjustable-Rate Mortgages mean the initial rate remains fixed for the first five years of repayment, and then adjusts every year thereafter.
3/1 Adjustable-Rate Mortgages provide three years at the initial fixed-rate, then the rate adjusts every year for the remaining life of the loan. A good choice if you expect to move or refinance in a relatively short period of time. But a much shorter fixed-rate period means your interest rate (and therefore monthly payments) may begin to fluctuate after three years.
New Construction Loan
If you are working with a builder in a sub-division or development you may be able to obtain a standard mortgage loan. But if you're hiring contractors, electricians, plumbers, and painters, you will probably need a construction loan, which provides funds to pay subcontractors as work progresses.
Assumable Loans
Assumable loans permit one borrower to take over a loan from another borrower without any change in the loan terms. Such loans still exist but they aren't very common or popular (for buyers) in a low-interest-rate environment. Plus, today new assumable loans are almost always adjustable rate mortgages. To find out if a loan is assumable, look to the loan agreement to determine if it is assumable by someone else, then talk to the lender about specific requirements based on the value of the home.
First-Time Homebuyers Tax Credit
An opportunity like this does not come around too often. With the recent signing of a major housing stimulus bill, it's now a great time to close on your first home. On July 30, 2008, the Housing and Economic Recovery Act of 2008* was passed, which includes a new, temporary tax credit as an incentive for first-time homebuyers. With this bill, first-time homebuyers may qualify for a tax credit of up to $7,500* for the purchase of a principal residence.
To obtain a better understanding of this opportunity, the CENTURY 21 team has compiled the following information:
• The National Association of Realtors First-Time Homebuyer® Quick Reference Chart
• The National Association of Realtors® Frequently Asked Questions
Before you decide to use the first-time homebuyer tax credit, please remember to consult with a tax professional.
Contact a CENTURY 21 Sales Professional today and get on the path to your first home.
*Housing and Economic Recovery Act of 2008. Consult a tax professional for details. Credit expires June 30, 2009.
