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How long do I plan to stay in the
house?
One of the first questions to ask
yourself is how long do I plan on staying in the house.
You need to have a “ game plan “ on
how buying this home is going to benefit you and your family.
I find many time when I ask a home
buyer their plans on staying in the property they are about to buy are
between 3 – 10 years. How long you intend to stay in a property will
help determine whether you are better off paying points to lower your
rate, whether a fixed or adjustable rate loan is better suited for you
and whether you should accept a prepayment penalty ( to get a better
rate ).
If you are refinancing, and you plan
to stay for another year or two, you need to structure the refinance so
that your break even point isn’t going to be 3 – 5 years, otherwise you
may be better off not refinancing at all.
What do you mean by break even ?
You need to compare the interest rate
verses the closing costs for the new mortgage. Many times borrowers are
sold on a tease rate, only later to find that closing costs are
astronomical and you would have been better off with a higher interest
rate and lower closing costs. Basically, you need to weigh the
benefits of lowering your mortgage payments ( through lower interest
rates ) against the closing costs and how long you intend to live in
that property.
For example, we often hear
advertisements about the 1 percent 30 year fixed mortgage rate. Lets
say you have a mortgage balance of $100,000. Are you better of getting
the 1 percent mortgage or getting a 6 percent mortgage?
At a 1 percent interest rate your
monthly mortgage payment would be approximately $321.64. However the
closing costs to get the 1 percent interest rate is $12,000.
At 6 percent, your monthly mortgage
payment would be approximately $599.55. Total closing cost is $4,000.
Your basic break even analysis :
The difference in monthly mortgage
payments between the 1% and 6% mortgage is $277.91. Take the $12,000
in closing cost divided by $277.91 ( 12,000/277.91) = 43.18
This means that if you plan on living
in the house longer than 43 months, you are better off getting the 1%
mortgage at a cost of $12,000 than the 6% mortgage.
Of coarse, make sure you have the
$12,000 on hand.
What exactly are the closing costs:
Always get a Good Faith Estimate from
you lender and make sure they don’t surprise you at the closing table.
While the Good Faith Estimate is an estimate, don’t be fooled. Lenders
pretty much know how much it is going to cost to complete the loan. If
the type of loan or other circumstances changes, the Lender is required
to give you a NEW Good Faith Estimate that incorporates these changes.
Otherwise they need to live up to the initial Good Faith Estimate
offered to you.
The Good Faith Estimate estimates how
much the lender will charge you for origination and discount fees, an
appraisal, a credit report, document preparation, title insurance, a
pest inspection and myriad other costs. Compare good faith estimates and
especially take note of the line that reads "Estimated cash at closing."
That's an educated guess of how much you'll have to pay out of your
checkbook to get the loan.
What is the best loan for me ?
In the final analysis there is no
right or wrong loan. The best loan for you is the loan you are most
comfortable with. A good mortgage broker should provide you with
several loan options for you to choose from, explain each one in detail,
and answer all your questions to ensure you are comfortable with the
loan you will be responsible for.
Never allow anyone to “push” one
particular loan on you.
How much can I really afford ?
The biggest mistake you can make is
trying to buy too much of a home on the hope that your income will
someday improve enough for you to actually make the payments
comfortably. Use our pre qualified calculator to determine your
payments.
There are more expenses than principal
and interest payments when you buy a home.
There are real estate taxes, home
insurance, possibly private mortgage insurance and home owners
association fees. When you start to add these up, your payment may look
quite different to you.
In addition, people don't find room in
their budget to save up for the inevitable roof repairs, furnace
replacement and painting. Then they step on the debt treadmill to pay
for those things. A good strategy is to buy a home based on one
partner’s income to allow for life’s inevitable bumps.
Through the smart loans program,
smart loans, we can show you haw to
start off smart to eventually get the home of your dreams without the
stress of being one paycheck away from financial disaster.
Should I Pay Points?
NO
Though many borrowers have wanted to
buy down their rate by paying discount points, though emotionally it may
sound great to have a lower rate, financially speaking, it is RARELY a
good idea.
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