|
|
Finding the right Tampa Bay
Home, and making a prudent financial investment is more involved than just "Buying
Right."
You also need to "Finance it right". Even Experienced Homeowners
Make Costly Mistakes When Buying And Financing Their Home.
It’s no surprise that
borrowing $100,000…$200,000 or more is a lot of money. And how to FIND the right
home…how much to PAY for the home…how much to BORROW…and on what FINANCIAL
TERMS can literally mean tens of thousands of dollars MORE or LESS in your pocket! If
you’re like most people, the decision to buy a home involves a number of stresses and
strains. For about 80% of buyers, it’s the single largest financial transaction of
their lives. Mistakes in any part of the buying process can cost you thousands.
TIP #1:
Understand What You NEED In Your Next Home.
Two things you need to consider here: Your NEEDS…and your WANTS. They’re two
very different things. You may need 4 bedrooms because of your children, or need a 3 car
garage because of your 3 cars…
What you’ll find is your needs are
fairly basic. It’s the "wants" that take a little more time to clarify.
Here is a list of needs you should consider BEFORE looking for your home:
General price range of home - we’ll
cover this ahead when discussing financing options and the amount of home you can afford.
Approximate size of home (in sq. footage) - make a reasonable range
General location, area, or subdivision
Number of bedrooms required (don’t forget to include any home offices or guest
rooms).
Number of bathrooms you need - frequently determined by the number of children you have.
Style and layout of home: Do you want a more formal plan, or a contemporary plan with
great room designs, etc.
School requirements or districts
TIP #2: Understand What
You WANT In Your Next Home.
A great way to get a handle on your wants is to take a good look at your present home.
What do you like about it? Do you like it’s open floor plan? Do you like the kitchen
and eating areas? Do you like the common area layout? List out everything you like about
your present home, or homes you’ve visited.
Now, let’s take a look at what you
don’t like about your home. Do you hate the flat roof? Do you hate the master bedroom
layout? Are the bedrooms too small? Is the kitchen too far from the garage? If you dislike
something with your present home, you’re going to dislike it with your new home. So
the better you can identify these items, the more likely you are to avoid them.
Here’s a good suggestion: Take out a
piece of paper and draw a vertical line down the middle. In the left column, write down
everything you like about your present home. In the right column, write down everything
you dislike about your present home. It’s also important you understand WHY you
dislike something.
Now, from your list of "likes,"
let’s compile a list of features you want for your new home. Now, here’s an
important tip that will help you really narrow your focus.
Take out another sheet of paper and put two
columns on it. On the left hand side, you will be listing out the features of your home.
And on the right hand side, you’ll be listing out the benefits. For each feature, you
want to list the benefit of that feature. Features tell you what something IS: 3 bedroom,
2 bath, 3 car garage, etc. Benefits tell you what something DOES. Benefits fulfill
desires. For example, a great room concept (feature) will be ideal for entertaining
friends and family at special times (benefit). So on the left hand side, you would put
"great room.." And on the right hand side, list out all the benefits (or
reasons) for the "great room" design: Family entertaining, business
entertaining, Thanksgiving holidays with the family, etc.
Understand What Each Other Is Looking For,
And Why. If you’re a husband and wife looking for a home, this exercise will
eliminate many disagreements down the road. You will both understand what the other wants,
and WHY they want it.
Rank each feature in terms of its
importance to you and your spouse. You’re both going to live in the home, so you
better understand what the other is looking for. For example, a well designed gourmet
kitchen (remember, list ALL the features of the kitchen you’re looking for) may rank
high with a woman, while having a workshop may rank high with a man. Try to understand
each other’s priorities. Most People Have More Dreams Than Money. Ranking will also
show you areas you may need to eliminate because of price constraints. And by having each
person rank the importance of the features they want, you won’t be eliminating a high
priority item and putting additional stress on an already stressful time.
TIP #3: Understand How
Much Home You Can Afford.
Like it or not, there are 2 guidelines bankers and mortgage lenders use to determine how
much loan you can afford.
The first guideline is the Payment To
Income Ratio. This guideline compares your income - or your total household income - to
the amount of mortgage payment you’re considering.
To calculate the "payment" part
of the formula, the lender will take the mortgage payment (principal + interest) and add
to it Property Taxes and Insurance. Hence the term "PITI" (principal, interest,
taxes, and insurance).
Usually lenders will loan up to 28% of your
total household income. But before you think you’re home free, there’s something
else you need to know…It’s called the Debt To Income Ratio. Debt refers to ALL
the major monthly payments other than your mortgage payment (PITI). To arrive at this
amount, the lender will consider…
Your car payment…
Your credit card debt and payments…
Any IRS liens or payments due…
Any other payments and debts you have (boat, 2nd home, etc.)
Then, they’ll compare your total debt to your ability to make current payments with
your new home loan added into the equation.
Each mortgage company sets different limits
on your Debt To Income ratio. Which is why it’s critically important to find a
Motivated Lender. Don’t follow the "canned" financial advice like you hear
on Radio or see on TV. Most of that advice is "rule of thumb," and designed for
the lowest credit rating and highest interest rates. Think about this…If you spend 2
or 3 days to find a loan that saves you $40,000 to $150,000 over it’s term, your time
is WELL WORTH SPENT! Doing a little homework on your own will literally save you thousands
over the term of your loan.
TIP #4: Save A Bundle When
Financing.
Your ability to afford a home will be related to a number of items.
The PRICE of the home
Your DOWN PAYMENT on your home, and thus the amount financed
The INTEREST RATE and POINTS of your loan - the amount a bank charges you for the money
The TERM of your loan: 10 year, 15 year, 30 year
The overall TYPE of your loan: Most common is fixed vs. variable rates. But there are
hundreds of loan packages to choose from.
And just in case you were looking for a
specific "rule of thumb," for financing your home, you should know that there
are NO General Rules Of Thumb About Financing Your Home. Each case is different, and your
personal financial circumstances will have an impact on how much home you can afford.
However, you MUST understand the relationship and impact interest rates, term of loan,
points, and type of loan can have on your overall financial picture.
Let’s start with the "amount
financed" first. Many people often pay cash or put 20% or more down as equity.
The reasons they do this are…
"The bank required us to…"
"We’ve just always put down this amount…"
"We wanted a lower payment."
Problem is, these reasons could cost you thousands of dollars.
The answer for how much you can put down on
your home is different for most people.
Many People Put Down More Cash On Their Home Than They Need To, And Could Have Received A
Better Return On Investment Had They Invested The Money Instead Of Putting It Into Their
Home
Here’s a simple and fast way to
"ballpark" the actual annual return on investment you get from the money you put
down on your home: Take a look at the homes in your area. How much have they appreciated,
each year on average, over the past 5 years? For example, you might find that values have
increased an average of 1.5% a year.
Now, take the total cost of your home,
multiply that value times 1.5% (the average expected annual appreciation of your home).
For example, a $150,000 home increasing value at 1.5% for the first year. Thus, the home
will be worth $2,250 more a year from now. Now, divide the amount of increase in your home
($2,250 in the example) by the total amount of Down Payment you put into the home. For
example, if you put down 20% (or $30,000), then $2,250/$30,000 = 7.5%.
Now 7.5% sounds like a fair investment. But
the question you need to ask is this: Can you make more than 7.5% elsewhere? And did you
notice something else here? Had you put down just $15,000, your return on your Down
Payment would be 15%! Remember: Putting more money into your home may make your banker
happy, because it lowers the risk of getting his money out if you default. And it may make
your overall payment a little lower…But it may be a wiser decision to put less into
your home, IF you can locate an alternate investment that will pay greater interest on
your hard-earned equity.
Now, let’s shift gears a little and
talk about the impact Term and Interest rate will have on your overall financial
picture…
How INTEREST RATE and TERM can make or COST
you thousands.
Mortgage lenders toss around interest rate numbers as if they didn’t matter. They DO!
And to illustrate the impact interest rates can have on your overall financial picture,
I’ve presented a table below showing the interest you pay over the term of a 30 year,
$150,000 loan at 8%, 7% and 6%.
And here’s the clincher: Just ONE
percentage point on a $150,000 loan can cost you almost $37,000 over the term of the loan!
TWO percentage points will cost you over $72,000!!
Your banker might tell you his
"slightly higher rate" is only a matter of $103 a month in payment. But YOU
should know better! Take a look at the table below…
Loan Amount $150,000 $150,000 $150,000 Interest Rate 8% 7% 6% Monthly Pmt. $1,101 $998
$899 Interest Paid $246,233 $209,263 $173,757 Savings -- $36,970 $72,476
That’s money taken out of your pocket
if you don’t look for good rates! And if you think interest rate has an impact on
your overall financial picture, take a look at what modifying the TERM of your loan can
do…
Here’s another example of a $150,000
loan at 7% interest. But this time, we examine the total interest paid when you select a
30 year vs. a 15 year vs. a 10 year amortization…
Term 30 Year 15 Year 10 Year Interest Rate 7% 7% 7% Monthly Pmt. $998 $1,348 $1,742
Interest Paid $209,280 $92,640 $59,040 Savings -- $116,640 $150,240
The "bottom line?" Estimate the
maximum amount of payment you can afford, and adjust TERM and INTEREST RATE of your loan
to minimize the amount of total interest you’ll pay. But then your banker cuts in and
says, "but the interest you pay is Tax Deductible…" And you should know
this: If you’re in the 28% tax bracket, for every dollar in interest you pay, you
only save 28 cents. Don’t go spending a dollar to save 28 cents if you can help it!
Here’s How To Instantly Know How Many
Points You Should Pay…Another consideration in the formula is the amount of POINTS
your lender will charge you to initiate your loan. And what you’ll notice is
there’s a GAME being played with you. And if you don’t know the rules of the
game, YOU LOSE!
Sitting across from a banker while he
throws obscure numbers at you like you’re a human dartboard can be pretty
overwhelming. And frequently you’ll hear terms like "7.5% with 1.5 points,"
or "7.25 with 1 point." All-the-while you’re thinking to yourself, "I
have no idea what the financial impact of this guy’s blabbering means to me."
And quite frankly, your banker knows…The Less You Know About What You’re Paying
The Better For Him.
So hopefully this little
"ballpark" example will help you quickly determine the best points-to-interest
rate for you. How many points should you pay, and what formula is best for you?
Here’s a little help…If a banker is giving you several options of interest rates
and points, you need to sort out the financial consequences so you don’t lose money.
Say, for example, you were considering 2 loans. Both are for $150,000, and both are 30
year amortization.
DEAL #1: One loan he offers you is 7.5%
with 0 points for origination…
DEAL #2: Another loan he offers you is 7%, but he wants 2 points to originate the loan.
What’s the ONE factor that will determine which loan is better? How LONG You Keep The
Loan!
The first thing you need to think about is
how long you’re going to live in that home. The average homeowner spends about 5.5
years in their home before selling for whatever reason. So, for example sake, let’s
say you plan to live in the home 5 years. Here’s how you determine which deal is
better…
Take the difference in monthly payments (principal and interest only) of EACH loan…
Multiply that amount by 12 months to get the annual amount of difference…
DIVIDE that amount into the $$ amount of points you pay to determine the number of years
at which you recover the points paid up front. If the number of years is LESS than your
anticipated time in your home, you’ll be better off paying the points and getting the
lower rate. If it’s higher than you plan to spend in the home, opt for the lower
points.
Here’s an Example…
Loan #1, $150,000 Interest Rate 7.5% Points 0
Mo. Payment $1,049
Loan #2, $150,000 Interest Rate 7.0% Points 0 2.5
$3,750 Mo. Payment $998
The difference in monthly payments is $51 a month ($1049 - $998 = $51).
$51 X 12 months is a savings on (approximate) interest of $612 per year.
Total Cost Of Points divided by $612 is 6.13 years ($3,750/$612 = 6.13).
The result? If you stay in your home for 5
years, you will NOT recoup the points you paid up front with the savings in a lower
interest rate. Recoup time is about 6 years and 2 months to breakeven.
So your best bet would be to select loan
#1. If, however, you planned to keep your home beyond 6 years and 2 months, you’d be
better off with loan #2 (i.e. the overall savings in interest rate will exceed the amount
you paid in points - not considering the time value of money). Are you starting to see how
important it is to understand your home’s financing? How important it is to shop for
the best rates, terms, and points? Now, let’s move on to another important secret for
buying your home…
TIP #5: How You Evaluate
Homes Will Save You Thousands And Heartaches!
One of the biggest mistakes people make when buying homes is they rely solely on
"local neighborhood market analysis information" to determine the right price to
pay for a home.
Before you buy or refinance your home
explore the "total market overview" of exactly what is going on in the Entire
market. Then narrow your analysis to local market information.
You want to know 2 things:
1) What is the Entire market doing with values? Are they going up? And by how much?
2) What is the specific area doing with market values? How does it compare to what the
total market is doing? Are the growth rates the same, lower, or higher than the overall
market?
Understanding these parameters will save
you thousands of dollars when you make an offer on a home. I frequently perform both of
these analysis for my buyers, in an easy to understand format, so you know Exactly what
you’re buying!
Let’s say you’re now
pre-qualified with financing, and you’ve also found a number of homes to preview. The
Way You Inspect A Home For Sale Can Save You Enormous Amounts Of Money And Time
It’s now time to find not only a home
that fits your needs, but a home that will be a good investment. What are some of the
things you should look for? The first thing you should consider is called
"siting." Siting involves evaluating 3 areas: Location, Lot siting, and Home
siting.
The general location of the home
you’re considering could determine how happy you’ll be living there, and what
kind of an investment you’re buying. Drive the area, browse the local stores, pick up
the local newspaper and get a general feel of the local environment.
The second area you need to consider is Lot
siting. Lot siting has to do with Where your particular lot is located in the subdivision
you’re considering. Review a plat map of the entire subdivision. Note where your
home’s lot is located in the subdivision. Is it near a common area? Does it capture
better views than other lots in the area? Is it more private, or shaped better than other
lots? Lot siting in a neighborhood will give you a basis for knowing how well the home
will appreciate vs. other homes in the neighborhood (assuming the home is reasonable).
You want to look at the Home siting. How
well did the builder take advantage of all the amenities the LOT offers a home? Are the
views great? How’s the curb appeal? Is there a balance between front and back yards?
Do you see any drainage problems because of where the home has been located on the lot?
Think through these things as you visit each home.
Now, as you approach your home, there are
other things you want to keep in mind…
What is your initial reaction of the home as you approach it from the street? This is
called "curb appeal," and it has a great impact on the value of the home. Is the
home sited right on the lot? Notice the areas around the home? Are they well maintained?
Is the landscaping groomed?
Take a look at the structure of the home?
As you go through the home, windows and doors should be square, and they should close
correctly. Look around windows and doors for cracks. Check corners of rooms for sloping or
tile/wood cracks. These may reveal foundation or water problems.
Now think about the floor plan of the home.
Is it functional? Do the common areas flow the way you want them to? Are the halls narrow
and long, or are they open? How far will you have to carry the groceries from the garage?
Are the rooms the right size and height for your desires? Now, check the roof and
ceilings. Is the roof the type you prefer? Is it in good condition? When was the last time
the home was roofed? Now make a basic check of the plumbing, mechanical, and electrical
systems. Do drains and toilets work correctly? Is the property connected to sewer, or will
you have to deal with a septic system? Is the electrical wiring up to code? And are the
mechanical systems working properly? Make sure you get these systems inspected by a
licensed contractor or inspector Before you close any deals.
TIP #6: Save Thousands
Writing Your Offer And Negotiating Your Deal.
The party who is less motivated almost always gets the better deal. A major element that
will determine how well you negotiate your offer is…How MOTIVATED Is The Seller, And
How MOTIVATED Are YOU?
If the home has been on the market for over
a year, perhaps it’s because the seller hasn’t been motivated enough to sell. Or
perhaps the home hasn’t sold and he/she is very motivated. I you’ve been looking
for 4 months, your kids are late for starting school this year because you haven’t
found a home yet, and you now have found the right home, YOU may be very motivated to buy!
Here’s a tip you should bring to any real estate transaction…
Move Heaven And Earth To Avoid Emotional
Attachment To The Home You’re Considering. Hold back your emotions when around
the home, or you might get clobbered when negotiating the purchase.
And that’s ONE reason why you need a
Realtor® representing you during any transaction. The middle person alone will help save
you money. So let’s say you have a Realtor® representing you (make sure it’s a
Buyers Agent, or you could lose a bundle!), and you’re ready to write an offer.
What’s the single best piece of
information you can have? It’s the comparable sales and market data for the entire
market, and the area. That all Realtors have available to show you. Now, here’s what
you want to do…
You want to take a look at 4 important "market tell-tale signs:"
Take a look at the currently active (for sale) listings in the area. Was the home
you’re considering priced within reason to other homes? If so, you know you’re
at a reasonable starting point.
Now, take a look at what the average
selling price is compared to the listing price. You may notice that most homes are selling
for about 3 or 4 percent less than their offer price. If that’s the case, you know
the original offers were LESS than this amount. Take this into consideration when making
your offer. And leave plenty of room for negotiating.
Now, make sure you visit several of the
other listings in the area. How does your home compare to the other homes? Is the home
you’re considering in similar shape? Is it better sited? Is it bigger, smaller,
better style, better landscaping, etc.? These factors will help you determine how much you
should pay for your home vs. how much others paid for similar homes in the neighborhood.
Now, take a look at the average market
times for homes in the area. If they’re long (evaluated on a market by market basis),
the market may be soft, and you might have more negotiating room with your offer.
You’re now ready to make your offer.
At this point, I highly recommend you work closely with a BUYERS AGENT to structure your
offer. They will talk about strategies such as
1) should you offer a high price and ask the owner to throw in all kinds of extras, or
2) offer a low price and skim your way into the neighborhood?
The correct answer depends on your personal
situation. And you need to work closely with your Realtor to strategize your offer.
TIP #7: Be Financially
Prepared - Ahead Of Time!
Many people go about the home finding process backwards. They go through the entire
process of searching, evaluating, and writing an offer on their home, Without being
financially prepared. And it usually costs them money. Doing a few things up front, BEFORE
you go searching, will save you a lot of money, time, and hassles. What are those things?
Here are 3 of them.
First, find a Motivated lender. No, don’t just go down to your local bank where
you’ll likely to be slowly tortured by some bureaucratic "vice president"
who makes his bonuses and gets promoted according to how much paperwork he creates (at
YOUR expense) and how many DECLINES he produced. You see, the only quota a banker has to
live by is: "How many Bad loans did you originate?" They don’t get measured
by their production…They don’t get measured by their service…They only get
measured by the Mistakes they Avoid!
The truth is…There Is
Absolutely No Incentive For A Traditional Banker To Serve Your Interests. What you want to
do is find a mortgage lender who is MOTIVATED to take your loan. One who represents many
different products, and can offer you many options for making your loan most affordable.
Here’s an important tip: Ask your
Realtor to refer one or two lenders to you. Why? Because Realtors have some leverage power
over lenders, because they send clients. After all, your Realtor and lender both want to
see the transaction close. There’s power in numbers and influence. Use it to your
advantage.
Now, the second thing you want to do is GET
PRE-QUALIFIED with a lender. Better yet, try to get PRE-APPROVED.
Why? Because the first question any home
seller will ask when an offer is presented is "Is your buyer approved for a
mortgage?"
And rightfully so! The seller doesn’t
want the deal to fall through because you couldn’t get financing. When they accept
your offer, their home comes OFF the active market. If you fall through, it costs them
time and money. Plus, there’s one more reason to get pre-qualified or
approved…You Will Have Much More Power To Negotiate Price And Terms When You’re
Financially Qualified!
When you have money behind you, the seller
knows your serious. And a serious buyer ALWAYS has more influence to negotiate. So do
yourself a favor, GET PRE-QUALIFIED or PRE-APPROVED!
TIP #8: Use A Buyers
Representative!
There’s a huge difference between a Buyers Representative and other agents. First and
foremost, if you don’t have a specific agreement to be represented by your
agent…Chances Are, Your Agent Represents The SELLER!
Yes, it’s true. And the question you
have to ask yourself is… "Is this person going to represent MY interests?"
Think about this: If you had to go to court, would you use the same attorney the opposing
side was using? I think you know the answer! But did you know that by creating a
"buyers representation" with your agent, you not only get someone representing
you, but…A buyers representative doesn’t cost you a nickel more than any other
agent. Even though they represent you, they’re still paid out of the standard
commission…
Buyer representation is easy to enter into,
and will support Only your interests. This includes finding your home, helping with
financing, and negotiating the best possible deal for You...A buyers representative will
keep everything about you and your deal Confidential, Greatly simplify the buying
process and can refer you to inspectors, title and escrow officers, and other service
providers you’ll need.
You’re probably pretty clear that, in
order to find the right home and save money, you need someone competent and professional
to represent YOUR interests.
Our Team will evaluate the value of your
chosen home so you buy the most home for your dollar…the very same way I described
earlier…Negotiate the best possible deal for you so you avoid costly traps and
pitfalls…Help you locate the most affordable financing in the market and for your
situation…Assist in co-ordinating inspections, appraisals, escrow and title services. |
