Frequently asked questions and answers

Q. Why should I buy, instead of rent?

A. Renting often makes good sense, but in today's market, with rents going up and house prices coming down, it usually makes more sense to purchase. The three main factors you need to take into consideration when deciding whether to buy or rent, are monthly expenses, rate of properties appreciation, and the length of time you plan on living in the home. You must have all these actual cost factors charted out in order to be able to make an informed decision. We do this every day for clients and will furnish this information to you. Before going into the market to shop for your home, it is essential that you first get pre qualified for a mortgage, so you go into the market with the negotiating power you need. We can make this happen for you.

For most renters, the thought of purchasing their first home, can be overwhelming: Initial confusion, fear and apprehension are common. It usually dissipates once we get them into the market and show them all of the available houses. With professional guidance, after seeing enough houses, most people are able to begin to set realistic expectations (Trade offs while still keeping the core of what they really want).

A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. In short, when you rent you're essentially paying the mortgage for the property owner, when you could be building equity in your own real estate investment

Finally, when buying, you'll enjoy having something that's all yours - a home where your own personal style will tell the world who you are.

Q. What price home can I afford?

A. The answer to this has a lot to do with your income and the amount of your debt load. As a rough rule of thumb, most home buyers purchase houses that cost between 1 1/2 and 2 1/2times their annual income. There is , however, a degree of variation due to the individual market prices of the area in which you are interested.in some areas there may not be houses available within that range, so you may need to spend a bit more. In general, however, your monthly mortgage payment can not exceed approximately 28% - 29% of your gross monthly income.These ratios will depend on the type of mortgage for which you are applying.

Q. Should I use a real estate agent?

A. As real estate agents, of course the answer is yes. The truth of the matter is, once anyone begins to realize the complexities involved in purchasing a home, the answer speaks for itself: Using a real estate agent becomes essential. The details involved in home buying, particularly the financial ones, can be mind-boggling. A good real estate professional can guide you through the entire process and will make the experience much easier. (And what's best, it cost's you nothing). We are well acquainted with all the important things you'll want to know about a neighborhood …the quality of schools, the number of children in the area, the safety of the neighborhood, traffic volume, and more. We help you figure the price range you can afford and have the tools to search for homes you'll want to see. With immediate access to homes as soon as they're put on the market, we can also save you hours of wasted driving-around time. When it's time to make an offer on a home, we point out ways to structure your deal to save you money, guide you through the paper work, the home inspection process, and set you up with the most reliable title company to handle your closing. We are there to hold your hand and answer last-minute questions when you sign the final papers. And remember you don't have to pay us anything! The payment comes from the home seller - not from the buyer. It's most important that you select a real estate agent you will feel comfortable working with. The person must be a professional who listens carefully to your needs and puts your interests before his or her own. (Usually not a relative or friend)

Q. How much money will I have to come up with to purchase?

A. That depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money - the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment, a percentage of the cost of the home that you must pay when you go to settlement; and closing costs, the costs associated with processing the paperwork to buy a house.

When you make an offer on a home, we will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment or closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies. If you buy a HUD home, for example, your deposit generally will range from $500 - $2,000.

The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loans require 10-20% of the purchase price. That's why mortgage brokers working with first-time homebuyers turn to HUD's FHA. These loans require only 3% down - and sometimes less.

The Closing costs - which you will pay at settlement average about 3-4% of the price of your home. These costs cover various fees your lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise. If you buy a HUD home, HUD may pay many of your closing costs.

Q. If my parents are willing to give me the down payment, how does that affect me getting a mortgage?

A. Most first-time buyers can qualify for a mortgage loan, but they may need help from parents to make the down payment or closing costs on their home. There are loan programs that minimize the down payment and closing costs for first-time buyers. These programs usually require that 3 to 5 percent of the purchase price come from the buyers' funds, not from a loan or gift. Most lenders ask for the last three months' bank records. The borrower will be asked to reveal the origin of any large deposits. If the money comes from the homebuyer's parents, the lender may not consider those funds when qualifying the buyers.

Parents who are planning to help their children finance a home should transfer any funds several months before the house-hunting process begins. If it is a loan rather than a gift, a formal re-payment agreement should be drawn up between parents and children to eliminate potential misunderstandings or future complications with either estate.

Q. In addition to the mortgage payment, what other costs?

A. Well, of course you'll have your monthly utilities. If your utilities have been covered in your rent, this may be new for you. Your real estate broker will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association or condo association dues. You'll definitely have property taxes, and you also may have city or county taxes. Taxes normally are rolled into your mortgage payment. Again, we will be able to help you anticipate these costs.

Q. So what will my mortgage cover?

A. Most loans have 4 parts: principal: the repayment of the amount you actually borrowed; interest: payment to the lender for the money you've borrowed; homeowners insurance: a monthly amount to insure the property against loss from fire, smoke, theft, and other hazards required by most lenders; and property taxes: the annual city/county taxes assessed on your property, divided by the number of mortgage payments you make in a year. Most loans are for 30 years, although 15 year loans are available, too. During the life of the loan, you'll pay far more in interest than you will in principal - sometimes two or three times more! Because of the way loans are structured, in the first years you'll be paying mostly interest in your monthly payments. In the final years, you'll be paying mostly principal.

Q. What do I need to take with when applying for a mortgage?

A. Good question! If you have everything with you when you visit your lender, you'll save a good deal of time. You should have: 1) social security numbers for both your and your spouse, if both of you are applying for the loan; 2) copies of your checking and savings account statements for the past 6 months; 3) evidence of any other assets like bonds or stocks; 4) a recent paycheck stub detailing your earnings; 5) a list of all credit card accounts and the approximate monthly amounts owed on each; 6) a list of account numbers and balances due on outstanding loans, such as car loans; 7) copies of your last 2 years' income tax statements; and 8) the name and address of someone who can verify your employment. Depending on your lender, you may be asked for other information.

Q. How do I know which type of mortgage is best for me?

A. There are many types of mortgages, and the more you know about them before you start, the better. Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest rate stays the same for the term of the mortgage, which normally is 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it. Another kind of mortgage is an Adjustable Rate Mortgage (ARM). With this kind of mortgage, your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower. Caution: This type of loan has recently gotten many home owners in trouble, giving them the opportunity to by a home which was actually a "stretch" for them to afford. There are several government mortgage programs, including the Veteran's Administration and the Department of Agriculture's programs. Most people have heard of FHA mortgages. FHA doesn't actually make loans. Instead, it insures loans so that if buyers default for some reason, the lenders will get their money. This encourages lenders to give mortgages to people who might not otherwise qualify for a loan. We can advise you about the various kinds of loans, and introduce you to the best mortgage company working in the area you wish to live.

Q. What are all the tax breaks for buying a home?

A. The answer to this question is so important that we are furnishing you with a comprehensive overview. We know that buying your first home is a huge step.

When you leave the world of renting behind, you begin building equity in an investment. And Uncle Sam is there to help ease the pain of high mortgage payments. The deductions now available to you as a homeowner will reduce your tax bill substantially. And, if you have been claiming the standard deduction up until now, the extra write-offs from owning a home almost certainly will make you an itemizer. Suddenly, the state taxes you pay and your charitable gifts will earn you tax-saving deductions, too.

Mortgage interest. For most people, the biggest tax break from owning a home comes from deducting mortgage interest. You can deduct interest on up to $1 million of debt used to acquire your home. Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the Form 1098. If you are in the 25% tax bracket, deducting the interest basically means Uncle Sam is paying 25% of it for you. A $1,000 deduction will reduce your tax bill by $250.

Points. When you buy a house, you usually have to pay "points" to the lender to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the number of points you pay is typical for your area, the points are deductible as interest if you paid enough cash at closing -- via your down payment, for example -- to cover the points. For example, if you paid two points on a $300,000 mortgage -- $6,000 -- you can deduct the points as long as you put at least $6,000 into the deal. And, believe it or not, you get to deduct the points even if you persuaded the seller to pay them for you as part of the deal. The deductible amount should be shown on your 1098 form.

Real-estate taxes. You can deduct the local property taxes you pay each year, too. The amount may be shown on a form you receive from your lender, if you pay your taxes through an escrow account. If you pay them directly to the municipality, though, check your records or your checkbook registry. In the year you purchase your residence, you probably reimbursed the seller for real estate taxes he or she had prepaid for time you actually owned the home. If so, that amount will be shown on your settlement sheet. Include this amount in your real-estate tax deduction. Note that you can't deduct payments into your escrow account as real-estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real-estate tax payments made from the account by your lender.

PMI premiums. Buyers who make a down payment of less than 20% of a home's cost usually get stuck paying premiums for private mortgage insurance (PMI), an extra fee that protects the lender if the borrower fails to repay the loan. For mortgages issued in 2007 and 2008, PMI premiums can be deducted by homebuyers. This new write-off phases out as income increases above $50,000 on single returns and above $100,000 on joint returns. (If you're paying PMI on a mortgage issued before 2007, you're out of luck on this one.)

Penalty-free IRA payouts for first-time buyers. As a further incentive to homebuyers, Congress offers to waive the normal 10% penalty for or first-time homebuyers who withdraw from traditional IRAs before age 59½. At any age you can withdraw up to $10,000 penalty-free to buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents. That $10,000 is a lifetime limit, not an annual one.

To qualify, the money must be used to buy or build a first home within 120 days of the time it's withdrawn. And, get this, you don't really have to be a first-time homebuyer to qualify. You're considered a first timer as long as you haven't owned a home for two years. Sounds great, but there's a serious downside. Although the 10% penalty is waived, the money would still be taxed in your top bracket (except to the extent it was attributable to nondeductible contributions). That means as much as 40% or more of the $10,000 would go to federal and state tax collectors rather than toward a down payment.

There's a Roth IRA corollary to this rule, too. The way the rules work make the Roth IRA a great way to save for a first home. First, you can always withdraw your contributions to a Roth IRA tax and penalty free at any time for any purpose. And, once the account has been opened for at least five years, you can also withdraw up to $10,000 of earnings tax and penalty free to buy a first home.

Home improvements. Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace and any additions. You can't deduct these expenses now, but, when you sell your home, the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is now tax free, it's possible for the IRS to demand part of your profit when you sell. Keeping track of your basis will help limit the potential tax bill.

Tax-free profit on sale. Another major benefit of owning a home is that the tax law allows you to shelter a large amount of profit from tax if certain conditions are met. If you are single and owned and lived in the house for at least two of the five years before the sale, then up to $250,000 of profit is tax free. If you're married and file a joint return, up to $500,000 of the profit is tax free if one spouse owned the house as a primary home for two of the five years before the sale and both husband and wife lived there for two of the five years before the sale. Thus, in many cases, you won't owe any tax on the home-sale profit. (If you sell for a loss, you cannot take a deduction for the loss.)

You can use this exclusion every time you sell a primary home, as long as you owned and lived in it for two of the five years leading up to the sale and have not used the exclusion for another home in the last two years. If your profit exceeds the $250,000/$500,000 limit, the excess is reported as a capital gain on Schedule D.

In certain cases, you can treat part of your profit as tax free even if you don't pass the two-out-of-five-year tests. A partial exclusion is available if you sell your house before passing those tests because of a change of employment or a change of health or because of other unforeseen circumstances such as a divorce or multiple births from a single pregnancy. A partial exclusion does not mean you can exclude part of your profit; it means you get a part of the $250,000/$500,000 exclusion. If you qualify and have lived in the house for one of the five years before the sale, for example, you can exclude up to $125,000 of profit if you're single or $250,000 if you're married-50% of the exclusion of those who meet the two-out-of-five-year test.

Q. What are "HUD homes," and are they a good deal?

A. HUD homes can be a very good deal. When someone with a HUD insured mortgage can't meet the payments, the lender forecloses on the home; HUD pays the lender what is owed; and HUD takes ownership of the home. Then they try to sell it at as quickly as possible We are registered HUD brokers.

If you have any questions that have not been answered, please call or email and we'll be glad to help with an answer. When you are ready, we would like to become your Realtor by gaining your confidence in our knowledge, integrity, and performance capabilities: As partners in RE/MAX PowerCentral, we have all the assets needed to get the job done.

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