As the events of the last few years in the real estate industry show, people tend to forget about the tremendous financial responsibility of purchasing a home. Here are a few tips for dealing with the dollar signs so that you can take down that “for sale” sign on your new home.
Shop the rate and terms. Before you talk to any lenders, try to get a general idea of what type of loan you think you might use. There are lots of great websites that explain the pros and cons of different loan products. Doing a little reading in the beginning will help the process go more smoothly.
Request a Good Faith Estimate. Once you think you know which type of loan you want to use, call a few different lenders and request a Good Faith Estimate of closing costs for that type of loan. A Good Faith Estimate or "GFE" is a great way for you compare the advantages and disadvantages of different lenders. You'll need to pick a hypothetical loan amount and use the same information for each lender you call. When you receive the paperwork, you will be able to do a side-by-side comparison of what the different lenders charge to do the same loan.
Get pre-approved. Sub-primes may be history, but you’ll probably still be shown homes you can’t actually afford. By getting pre-approved as a buyer, you can save yourself the grief of looking at houses you can't afford. You can also put yourself in a better position to make a serious offer when you do find the right house. Unlike pre-qualification, which is based on a cursory review of your finances, pre-approval from a lender is based on your actual income, debt and credit history. By doing a thorough analysis of your actual spending power, you’ll be less likely to get in over your head.
Choose your mortgage carefully. With mortgages, the emphasis used to be on paying them off as soon as possible. Today, the average person will accumulate debt on credit cards, student loans, etc. As a result, it is usually better to opt for a 30-year mortgage instead of a 15-year mortgage. This way, your required monthly payment is lower, but you still have the option of paying additional principal when money is good. Additionally, when picking a mortgage, you often have the option of paying points (prepaying a portion of the interest at closing) in exchange for a lower interest rate. Your lender might refer to this as "buying down" or "discounting" the rate. If you plan to stay in the house for a long time, paying points upfront may save you money, in the long run. Every situation is different and people have varying opinions about which is better. Arm yourself with information and you'll be in a strong position to make the right decision for yourself. If you have any concerns about the tax consequences, gather the facts and talk to your tax advisor.
Do your homework before bidding. Before you make an offer on a home, do some research on the sales trends of similar homes in the area. Sales should be recent (within the last 3 months), nearby (less than 3 miles away), and of similar homes (size, room count, property description, etc.). Sales that happened more than three months ago aren't relevant. Sales on the other side of town don't matter. Waterfront sales aren't meaningful for non-waterfront property. You get the idea. Your real estate agent can help you determine a fair price. Of course, no matter how fair you or your agent think it is, the seller may choose not to accept your offer. Still, going through this exercise will help you decide how much you're willing to pay, and at what price you should just walk away and find something else.
NOTE: These are my personal thoughts and should not be considered legal or investment advice.
Don Carlson, GRI
Keller Williams North Country