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Buying a Home: Take Two

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When I first began writing my Married and Starting Out blog here on CareOne, my husband and I were trying to save up for a home all of our own.

Since moving to New York, both my husband and I have rented, at first separately and then together.

After we got married, we decided the next big step would be to buy an apartment. With the great interest rates spurring us on, we wanted to invest in our future and begin to build equity rather than paying a landlord every month.

Buying a Home: Take TwoAs my blog posts detailed, we were completely unsure of the process.

After reading some elementary books and combing every website for tips, we are more well-versed in the buying process.

Besides finding a place that we could see ourselves living in, researching mortgages was the trickiest thing about the process.

Our first attempt to really begin looking for a home was thwarted quickly by doubts and confusion about almost everything.

We had to take a step back and begin to focus on learning about how everything worked before jumping headfirst into it.

Unless you have bought a home before it is not something you are likely to know about and I thought it might be helpful if I shared my top six tips that I have learned over the past few months that can save thousands over the course of a mortgage.

1. The best thing you can do for yourself is to put down as much as you can for your downpayment. It may be hard to find the money, so budget strictly and consider asking relatives for loans-- it will be worth it in the long run.

Not only will this reduce your monthly payment, but sometimes the lender will improve the rate, meaning that you will pay back less in interest over time.

2. Shop around for the best rate. Rates vary greatly from lender to lender and bank to bank so be sure to call a handful of well-known banks to get the best rates in your area. Ask friends or relatives for advice, as they may be able to recommend a service that they have benefitted from.

When checking out rates, do not give anyone your social security number or allow them to check your credit immediately. Estimate your own credit for them when they do their preliminary quote, as there has been some discussion about whether multiple people pulling your credit can affect your credit score negatively. (Some lenders will tell you this is not the case, but I have had more than one tell me it can be.)

3. Ask about prepayments, closing fees, and penalties upfront. Many lenders have hidden closing fees so be sure to ask lots of questions about the exact fees they charge for their attorney, appraisals, and such. Ideally, you do not want to pay for points (also called loan orgination fees) and do not want to have any prepayment penalties.

4. Before applying, be sure to think about who to put on the mortgage. Most lenders use the lower of the two scores, if there are multiple credit scores, and not an average as is commonly thought. In our case, we are putting just my husband on the mortgage as my almost nonexistent credit would have only hindered us on our application.

5. Another good thing to do as you begin your applications is to pay off as much debt as possible. Lenders look at your debt to earning ratio to establish how much you are able to borrow. If you have less debt and more earnings, you can safely borrow more.

Pay off any accounts you are able to, such as small store credit cards or accounts with high interest rates before beginning to apply.

6. One last but important tip: see what they are willing to offer you! Mortgage lenders want your business, so ask what incentives they offer. Some banks are willing to pay the 1% loan origination fee, some will help pay their attorney fees, and some might help with other costs. It is worth negotiating, as it could save you a pretty penny at the closing table.

Hopefully, these nuggets which we have gleaned through our process might be able to help you during yours. I cannot express how helpful all the research we did has been to us. In this case, like many others, knowledge is power!  Happy house hunting!

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Vienna NowellVienna Nowell

Vienna currently resides in New York City, but is originally from London. She is a contributing writer under the  A Straight Talk on Debt and Savvy Spender blogs. She and her husband are recently married and they are contemplating taking the big step of buying their first home.  Still working their way through the processes of buying an apartment, she and her husband are learning as they go.  Vienna also writes a food blog, www.TinyTestKitchen.com, and is a freelance writer, chef and food stylist.  Read more posts by Vienna here. Compensated CareOne Blogger

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  • Good advice, with a few things I'd like to expand on/change. Putting as much down as possible is good up to a point. The more you put down doesn't usaully affect your interest rate too greatly. If you are able to put 20% or more down, however, you don't have to pay Private Mortgage Insurance and your payment will be reduced significantly. Also if you're asking relatives for loans, make sure it's more than 3 months before you're going to talk to any lenders. They check bank history 3 months back and any random large sum deposits are questionable to them. If you do accept a gift from a relative, you also have to sign a form letter explaining that it is a gift not a loan, and you have no intentions of paying it back. If they find out you did (they may never check after closing, but just to be warned) you may be in trouble for fraud. Another thing to consider is what return you may get on the extra money you don't necessarily need to put down. Buying a home in cash does sound appealing, but you just dropped all that money to save ~5% interest, if you can get a better rate of return (money market, etc) then it may be better to use only part and invest the rest. Shopping for rates is definitely important, but you can save yourself a lot of trips by going to a mortgage broker. It's their job to take your info and shop the rates for you, to find which bank may be giving the best deal. It may not even be a bank that does any business locally (my mortgage bank does no banking business in my area at all. I had never even heard of them before I bought) As far as figuring out who to leave on the mortgage, that's definitely good advice to consider. Most lenders will not take a person's income without their credit though. So if someone plans on only using one name for the purchase, be ready to only be qualified on that person's income. Your last point is a good one as well. In fact, most larger real estate companies offer a lot of side companies that offer a discount if you use them. The one I work for owns the best local mortgage broker, a title company, an insurance company, and we keep a list of vendors (lawyers, inspectors, etc) who give our customers discounts off their normal price and must maintain a record of quality. Overall I'd say good advice! (I am a Licensed Real Estate Sales Person with Hunt Real Estate in Lancaster, NY)

  • Pay cash. Get Title. Buy title insurance. Relax.

  • Put down as much as possible?  Have you ever taken a course in finance?  Run a valuation model and see how a bigger down payment affects your long term return (i.e. it crushes it).  As long as your nominal increase in house value is greater than your adjusted cost of debt (after tax deductions, inflation, and taking into account opportunity cost), then you should put down as LITTLE as possible.  In the current market (2011), that's not the case, so 1) don't buy and 2) if you already own, pay down your mortgage as fast as you can until the opportunity cost rises above your adjusted cost of debt.

  • Horrible advice.

  • get the house thoroughly inspected by a home inspection licensed company. make sure roof, AC, furnace, plumbing, electrical, solar, fencing and more are in good condition. don't fall for staging of houses with tiny furniture to make it look spacious, flowers here and there, try to see the house for what it is and not the seller's fluff to unload it. know all the flaws before you are stuck with it.

  • @ Don Peoples. Don - why is it a horrible advice? Otherwise your comment is pointless or worse than horrible.

  • My 2 cents. If you have the money, and not borrowing it from some other source, put down as much as you can. Some years back I made one of the biggest mistakes of my life, I had the cash to put down 70 percent of the value of a property, but decided to hold off and instead invest in a couple of promising investments. I ended up losing virtually all the money and to this day haven’t recovered enough to be able to afford a home. Had I also gotten a mortgage putting down the 20 percent, I would have been in worse shape than not being able to afford a home.

    There are way more important considerations than opportunity cost when it comes to buying a home and this is particularly true for people with limited (not rich) financial resources. Having the peace of mind you own your own home should be a powerful motivator for the wise. You never know what the future brings. You may have the means now to make monthly mortgage payments, but what happens if things take turn for the worse, as has happened to thousands of Americans struggling to pay their mortgage?  When it comes to a home and you have some cash, get it over with. I lost far more in the stock market than would have been the opportunity cost of putting most of my money in purchasing a home. I am still renting when I could have been living in my own home and the peace of mind it brings.

  • I wanted to thank all of you for leaving your comments! Some really great perspectives here and nice tips on what to look for when ready to purchase a home!

    @Brad Kilger Thank you for sharing your expert advice; definitely some food for thought!

    @Monet Talks Sometimes easier said than done, but true.

    @Anon Agreed, today’s housing market is tough.

    @Joe A thorough home inspection is a must even if you have to pay a little extra.

    @Larry Power I agree but feel you should look at your home as a place to live and not necessarily an investment.

    Thanks, Vienna

  • @ Larry Power: It is horrible advice from the standpoint that buying a house period is a bad idea and please understand that your house is not an asset. Assets pay you, not make you broke. You will have to pay for 3 houses just to buy one. And here this person is telling you to put down as much as possible, cash you will never see again. Don't talk to me about tax breaks or equity. You will spend over $100K just on property taxes and insurance alone on your house over a 30 yr period. And equity is an imaginary thought. If you tap into it you have to pay the money back plus interest and if you sell your house you still have to go buy another one. Thumbs down to all the suckers that are giving 80% of their money each month to the bank in interest. Follow the money: seeker401.wordpress.com/.../the-interest-rate-ripoff .

  • @ Larry Power: Sorry to hear about your bad investments. That sounds like the usual feeling people get once their roof needs replacing or their water heater blows or their property taxes go up. I'd like to know what those investments were that you invested in and lost all your money on. All you had to do was invest in real-estate or gold or silver. I knew how good of investments those avenues were at the age of 10. Remember, you do not own a home until you no longer have a mortgage on it. Tell you what, miss next months mortgage payment and let's see what happens. You will be kicked out, that's what will happen. You can't be kicked out of something you own so you are selling people on the false security that if they go and get a loan and a house that they are secure because they NEVER KNOW WHAT WILL HAPPEN. Yea, tell that to all the people that lost their jobs and houses. What is your advice for them? And if you pay the house off but don't pay the property taxes you could still lose your own. It is conventional wisdom like this that  has people losing money in their 401ks and buying houses and paying $450K for a $150K house over a 30 yr period. Best advice, buy a house cash. If you can't pay cash then you don't need it. That is the best advice you will ever get.

  • I like the title of the Article though: BUYING A HOUSE, TAKE TWO because you will pay for at least two houses just to buy one. But hey, if you really want a home then why not follow the advice. I'd advise people to not buy homes and we as Americans take this country back from the bankers.

  • Don, while I certainly respect your opinion, I'm confused by your conflicting statements of first coming down on the author for buying a house, but then also say that investing in real estate is wise - which of course if exactly what the writer is trying to do.  I've heard many people lately jump on the "pay cash for your house" bandwagon...but I'm wondering if these same people have thought about exactly how an average American would accomplish that.  In many instances, Rent is just as expensive as a mortgage payment.  So, in order to save up enough money to buy a house with cash, you first have to throw away money each month on Rent....in addition to that, you've got to save the money to pay for a house with Cash.  Example:  Let's say that a person wants to buy a $150,000 house.  They pay $1000 a month in Rent, and (by some miracle) they are able to also save $1000 a month.  To pay cash for that house, they will save for 150 months.  So, they pay rent for 12.5 years, and save up enough cash to buy their house outright.  Except they also threw away $150,000 in rent - guess what....they essentially just paid DOUBLE for their house with your advice too!

    I would also like to point out that while the last  few years have been brutal with respect to home prices, historically home prices to indeed rise over time.  On the other end of the spectrum, I purchased my first home in 1997.  I sold it in 2004 (a mere 7 years later), for double what I bought it for.  Yes, for those 7 years - since it was the front end of a 30 year mortgage - I paid much more interest than anything else, but I sold it for **DOUBLE!**.  

    Was that a good investment (that I accomplished with a loan)?  I certainly think so.

  • This is very informative and interesting for those who are interested in buying a home. Thanks

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