Financing
rent vs. buy
For most homeowners, house payments are their largest monthly expense. This dissuades many renters from buying a house because they assume they can’t afford the house payments. Once you take the time to actually crunch numbers, it may actually be cheaper to buy than to rent. If you are staying someplace more than two years, it’s almost always better to own than rent because you build equity and can write off your mortgage interest.
know your options
There are hundreds of brokers and lenders in the area, all offering dozens of loan programs with various options. Since the purchase of a new home is one of the largest investments you will ever make, it’s important you choose the best loan for you and your family.
There are two basic places to get a mortgage: direct lending institutions and mortgage brokers. Direct lenders, such as banks, savings & loans, or credit unions, lend out money and make the final decision on your mortgage application. According to one area broker, about 40 percent of mortgages in Wisconsin are obtained through a broker. A mortgage broker is an intermediary between the consumer and the lender. The broker uses the consumer’s information and credit report to shop for your perfect loan. If you have special financing needs, an experienced broker might be able to help find the loan that best fits your individual needs. A mortgage broker’s fee is usually a percentage of the amount you borrow, but you should always ask what that fee is from the beginning.
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how much can you afford
This is usually one of the first questions people think about when considering buying or remodeling a home. It is often surprising how much one can afford with some of the longer-term loans available. For example, borrowing $150,000 at 6.0% interest with a 30 year fixed mortgage results to roughly a $900.00 monthly payment, not very much by today’s average housing costs (See the Mortgage Rate chart) .
To figure out how much you can actually afford will entail taking your income and subtracting your expenses. Most lenders listed in this publication have Web sites with financial calculators to help you estimate what you can afford or contact them directly for personal assistance.
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applying for the loan
If you’ve gathered all the right documents, the actual application process should be easy. The bank or broker will want to know your employment history, balances of your bank accounts, car loans, credit card debt, investments, etc. Be prepared to show paycheck stubs, bank account statements, tax returns, investment earnings reports, rental agreements, divorce decrees, proof of insurance, and other documentation that explains your current financial situation. After all the information is compiled a credit check will be run. (Note: this is not a good time to make any big purchases or change jobs. It could have an impact on your ability to secure a loan.) If you are deemed “credit worthy,” an appraiser will be hired to appraise the value of the home you want to buy to ensure that it is worth the money you want to borrow.
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costs of the loan
Closing costs, points and pre-paid items are part of the price of buying your new home. Depending on the market, you may be responsible for part or all of these costs. Check with your lender prior to signing any agreements.
Closing costs are the expenses the lender incurs in preparing your home loan, such as obtaining credit reports, the appraisal of the property or processing your application. Closing costs typically run between 2 and 3 percent of the amount being borrowed.
Loan discount “points” are a form of prepaid interest, with one discount point equaling one percent of the amount being borrowed. At closing it is paid in cash to the lender as a form of interest and can help lower the interest rate on the loan you are obtaining. Sometimes new homebuilders offer to pay some of these points as an incentive to buy.
Prepaid items are costs that are always the homeowner’s responsibility. On closing day, you must have proof that you paid the first year’s insurance policy in full. If you are a first time home buyer, lenders often require you to set up an “escrow” account, which is a savings account to cover property taxes and future insurance on your home. Each month, a portion of your mortgage payment goes into the escrow account.
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plan to invest in your mortgage
The kind of mortgage you choose when you buy or refinance your home can make a big difference in how much interest you pay and how much you keep. By taking out a 15-year mortgage instead of a 30-year mortgage, you pay more per month, but you save thousands in interest and your interest rate is usually lower. The example below compares two typical $100,000 home mortgages. Although the 15-year loan requires payments of $884.91 per month (compared to $665.30 with the 30-year), it saves the homeowner $80,225-just $19,775 shy of the original mortgage!
Want to save more mortgage interest? You can if you pay off your mortgage early. Sound impossible? Not really - not if you pay a set monthly amount over and above your usual mortgage payment. For instance, if you have 25 years remaining on a 30-year, 8.5 percent mortgage, your monthly payment would total $769. Paying just $50 more every month takes four years and four months off the life of the loan and saves you $27,816 in interest. Paying an extra $100 each month takes seven years and two months off the loan and saves you a whopping $45,153.
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