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Home
Purchase FAQ
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Making the buying decision
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Begin your
decision-making process by analyzing the
financial aspects of home ownership.
You may find our Rent vs Buy Calculator to
be a valuable tool for your analysis.
Understand that there are many good reasons
to buy which can't be measured with a calculator--your
long-term security and leaving something
to your children, for example. May it suffice
that we briefly direct your attention to
such matters and move on.
Assuming you plan to own your home for several
years and can afford the payments, you'll
likely be better off owning versus renting.
Here are some points to consider:
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Rent |
Buy |
Tax
Savings
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You might receive a state
income tax renter's credit, but
nothing more.
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Payments
towards interest, taxes and points
are tax deductible.
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Equity
Build-up
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None,
unless your rent payment is lower
than the cost of owning a home,
and you invest the difference
in a CD, stock or mutual funds.
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Even if your home value remains
constant, your loan balance
should decrease. This
results in increasing equity your
property.
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Mobility
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Most
leases are less than 1 year in
duration. It's easy to move
at the end of a lease. Also, your
landlord usually won't have
to renew your lease, and you could be
forced to move out at the end
of your lease.
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Selling
a house can take time and may
cost 6% to 8% of the sales price.
If you have to sell quickly, it
could cost even more. If you don't
have to sell, yet must move, consider
renting your house. You'll probably
receive additional benefits
by depreciating your home for
income tax purposes. Remember,
buying a home makes sense if you
plan to hold it for several
years.
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Payments
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Your rent payments generally increase
every year. Rent increases are often
tied to inflation.
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Mortgage
payments on a fixed-rate loan
will not change. Adjustable-rate
loan payments vary according
to the terms of the note and economic
conditions.
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Timeframe
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Renting
makes sense if your time frame
is less than 2 to 3
years.
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The
longer you plan to own your home,
the more sense it makes to buy.
Some buyers with plans to move
relatively soon may buy if they
expect the market to appreciate
significantly.
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Additional points to consider in your decision
include:
- What
are my reasons of owning a home?
Do you need a bigger home? Do you need
a better neighborhood? Are you speculating
that prices will increase? Whatever
your reasons, it helps to write them down.
Seeing your reasons on paper helps create
objectivity, and will help you follow
through in the event you get the
"jitters" later on.
- Do
I have enough cash for the down payment?
While this is certainly an important consideration,
many lenders today offer zero-down and
low down payment loans. However, you may
still have to come up with cash for closing
costs and moving expenses.
- Can
I afford to make house payments in
addition to making payments on my
other debts?
This is probably the single, most important
question to answer accurately. Spend adequate
time creating a realistic budget. If you
fall too far behind in your mortgage payments
or property taxes, you'll probably lose
your home and any equity you might have
had in it. Generally, you should spend
less than a third of your gross income
on your total housing expense, including
principal, interest, taxes and insurance.
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| Final
Loan Approval |
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Perhaps
you were pre-approved prior to or during
your home-hunting activities. Pre-approval
can take place in the absence of having
identified a home to purchase.
When you enter into a contract to purchase
your home, you begin the process of obtaining
final loan approval. To convert your pre-approval
to final loan approval, the main items the
lender needs include the appraisal, purchase
contract and title information. Your real
estate agent, loan agent and attorney (where
applicable) will be instrumental in providing
these documents to the lender.
If you were pre-approved, you probably gave
many of these documents (below) to your
lender. Review the list to make sure the
lender has current documents. If you're
just beginning the approval process and
the lender will be verifying your income,
assets and liabilities, you'll need to gather
these documents:
A. All
Borrowers:
- Copy of
purchase contract
- Copy
of sales contract on real estate you are selling
- Divorce
or separation documents
- Bankruptcy
files
- Relocation
agreement
- Copy of
most recent Social Security check
- Award
letter and copy of most recent checks
for disability, retirement, or legal settlement
- Recent
statements for all credit card accounts
- Bank and
financial brokerage account statements
for the previous three months
- IRA, Keogh
and 401(k) statements for the previous
three months
- Title
documents for automobiles under five years
old
B. Employed
Borrowers:
- (Documents
in section A.)
- Pay stubs
for the previous 30 days
- W-2s for
the previous two years
- 1099s
for the previous two years
C. Self-Employed
Borrowers:
- (Documents
in section A.)
- Federal
tax returns for the previous two years
- Year-To-Date
Profit-and-Loss statement for your business
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| Lock
Your Rate |
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Locking
your loan must be done prior to closing.
If rates are rising, you may benefit
by locking your loan early in the loan application
process. If rates are stable or falling,
you may benefit by waiting until the last
possible moment to lock your loan. The
shorter the time period between the lock
and closing dates, the lower the loan fees
and interest rate.
A lock-in, or rate commitment, is a lender's
promise to close your loan at a certain
interest rate and number of points. Depending
upon the lender, you may be able to lock upon
submitting your application, during application
processing, upon loan approval, or later.
A lock protects you against rate increases
while your application is being processed.
However, a locked-in rate could cost you
money if rates drop and you want a lower
rate.
You will need to lock the rate prior
to closing. There are five components to
a rate lock:
- Loan program
- Loan amount
- Interest
rate
- Points
- Length
of the lock
The document
describing the lock will contain the date
the lock was made and usually the lock expiration
date. The lender must disburse funds prior
to expiration, otherwise, the rate lock
is invalid.
A loan with a below-market interest rate is
less attractive to a potential purchaser of
the loan. The longer the lock period, the
greater the risk that interest rates will
increase before the loan closes. To offset
this increased risk, the lender charges increasingly
higher points and interest for longer lock
periods.
If you're close to the contractual closing
date for your new home, you may not have the
option to choose when to lock your loan. You
may have to lock it as soon as the lender
will allow.
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