In
addition to building up equity over time, owning a home offers significant tax
breaks. The interest expense that you pay on up to $1 million in home mortgage
debt ($500,000 if you are married and filing a separate return) is tax-deductible. Your
tax savings from the mortgage interest tax deduction are greatest in the early
years of a mortgage loan. For example, on a 7%, 30-year fixed rate mortgage loan
of $100,000, you pay $6,968 in interest the first year of the loan. If you are
in the 25% income tax bracket, your tax savings are $1,742. In Year 16 of the
loan, you pay $5,090 in interest, which saves you $1,273 in taxes. In Year 24
of the loan, you pay $2,926 in interest, which saves you $732 in taxes. When
you sell your home, you can exclude up to $500,000 in capital gains if you are
married and filing a joint return. (The exclusion limit is $250,000 for other
tax filers.) You will need to pass the IRS's ownership and use tests to show that
the home has been your primary residence for at least two of the past five years.
In addition to mortgage interest, you can also deduct your local property taxes
on your income tax return. As
a homeowner, you can tap the equity in your home in the future with a home equity
loan or line of credit. Interest expense that you pay on up to $100,000 in home
equity debt is tax-deductible ($50,000 if you are married and filing a separate
return). Yet,
renting does have some advantages. For one, renting doesn't require you to make
a down payment, which can easily reach $25,000 or $50,000. A total monthly payment
for rent is generally cheaper, too, when you include all the other costs of owing
a home. In addition to paying off a loan with interest, homeowners routinely pay
homeowner's insurance and property taxes. They may also be required to buy private
mortgage insurance (PMI). Finally, homeowners face maintenance and home-improvement
costs that renters avoid. In
general, renting has a lower financial burden, requiring smaller monthly outlays.
With the extra cash that you save each month, you may be able to invest and earn
a rate of return that compensates for missed opportunities of homeownership. Renting
may be a wiser course of action if you plan to relocate to another city soon or
are in uncertain financial circumstances. For persons fresh out of school or newly
divorced, renting may be the only realistic option.
The
above information is educational and should not be interpreted as financial advice.
For advice that is specific to your circumstances, you should consult a mortgage
lender or financial adviser.
Next,
we'll look at how to determine how much you can afford if you choose to buy a
home. (Back To Top)
Home
affordability To
determine how much of a home you can afford, you need to calculate your expected
monthly payment. Most
of your payment will go toward loan principal and interest, also called P+I. However,
your monthly payment is also likely to include amounts for property taxes and
homeowner's insurance. Because of these extra payments, your monthly P+I payment
is sometimes called your P+I+T+I payment. If
you plan to make a down payment of less than 20% of the home purchase price, you
will also have to add an additional amount for private mortgage insurance (PMI).
Lenders require PMI to insure against the higher risk of default that occurs with
loan-to-value (LTV) ratios greater than 80%. (An LTV of 80% is equal to a down
payment of 20%.) Your
housing ratio is your total monthly payment divided by your monthly gross income.
Generally, the ratio should not be more than 28%. For example, if your monthly
P+I+T+I payment is $1,400, your monthly gross income should be at least $5,000. Your
debt ratio is the sum of your P+I+T+I and any other credit card or loan payments,
divided by monthly gross income. Debt ratio will obviously be a higher percentage,
since most people have other loans or credit card debt. Generally, your debt ratio
should not be more than 36%. In this example, with monthly gross income of $5,000,
your total loan payments (including the proposed mortgage loan payment) should
not be more than $1,800. Mortgage
lenders regularly use these 28% and 36% ratios as guidelines. The ratios change
over the course of the economic cycle. When the economy is strong, lenders tend
to raise the ratios, making it easier to obtain a loan. When the economy is weak,
lenders tend to lower the ratios, making it harder to obtain a loan. A weaker
economy leads to lower interest rates, which makes it somewhat easier to qualify. You
may wish to limit a home search to home prices that allow you to obtain a mortgage
loan amount that is conforming. A conforming loan amount is within the annual
limits set by Fannie Mae and Freddie Mac, two government-sponsored enterprises
that focus on investing in residential mortgages. For
2007, the conforming loan amount for Fannie Mae- and Freddie Mac-sponsored loans
is $417,000. For Alaska and Hawaii, the limit is $625,500. A conforming loan allows
you to avoid private mortgage insurance if you make a down payment of at least
20% on the home purchase price. If
your mortgage loan is conforming, you will likely have an easier time finding
a lender than if the loan is non-conforming. (A non-conforming loan is called
a "jumbo" loan.) Generally, interest rates on conforming loans are lower
than on non-conforming loans. How
much of a home you can afford also depends on the amount of down payment you have
saved. If you don't have one saved, consider these alternatives:
* Federal government mortgage-financing programs. The U.S. Dept. of Housing and
Urban Development (HUD) and Dept. of Veterans Affairs (VA) run loan programs for
first-time homeowners and veterans of the armed forces. These programs require
little or no down payment.
* Obtain private mortgage insurance. Private mortgage insurance, discussed above,
allows you to make a down payment of as little as 5% of the home purchase price.
* Borrow against the value of your investments. Some financial institutions offer
mortgages that are backed by the value of your investments. With these programs,
your investment portfolio serves as the collateral for your mortgage.
* Borrow from your employer-sponsored retirement plan. Most employers allow you
to borrow against the value of your 401(k) plan. (The IRS does not allow you to
borrow from an IRA, however.) Remember that if you leave your job, you'll likely
have to pay back the full amount of the loan immediately.
* Withdraw funds from an individual retirement account. While the IRS does not
allow you to borrow from an IRA, it does allow penalty-free withdrawals of up
to $10,000 for first-time homebuyers. However, you will owe income taxes on the
amount of the withdrawal.
* State government housing programs. Most states have programs to help residents
buy their first homes. In
addition to a down payment, you should expect to pay closing costs on your home
loan. How much
you pay in closing costs depends in part on how many points you pay on your loan.
One point is equal to 1% of the loan amount. Generally, closing costs range from
3 to 6 percent of the home purchase price. In addition to loan points, other major
categories of closing costs include:
* Fees to process your loan application, review your loan documents and fund the
loan. * Payments
to fund an impound account. These funds are used to pay your homeowner's insurance
and property taxes. Generally, you replenish an impound account as you make your
mortgage payments.
* Fees for legal and appraisal services, credit review, and title search and insurance. You
will also have moving expenses if you buy a home in a different city. If you move
to another region of the country, you may also face a change in the cost of living. If
you're moving to a new city to take a job, your new employer may reimburse you
for these expenses. If not, you can deduct them from your taxes. You'll need to
complete IRS Form 3903: "Moving Expenses." To
compare the cost of living between cities, you may wish to visit the ACCRA website,
a non-profit organization that provides cost-of-living indexes for more than 350
U.S. cities. The
above information is educational and should not be interpreted as financial advice.
For advice that is specific to your circumstances, you should consult a mortgage
lender or financial adviser. Next,
we'll look at obtaining a pre-approval on a home mortgage loan. (Back
To Top)
Obtaining
a pre-approvalA
lender's pre-approval is a limited-time commitment to fund your mortgage loan.
A pre-approval may include an interest rate lock. To obtain a pre-approval, a
lender evaluates your credit history, and calculates your housing and debt ratios.
You should expect to verify your income, length of employment and source of down
payment. A pre-approval
legitimizes you as a serious buyer. It also gives you additional negotiating leverage
to negotiate a sale price, especially if the seller cannot find other pre-approved
buyers. When seeking
a pre-approval, it's important not to misrepresent the facts on your application.
If a lender learns later that you've misrepresented or omitted information on
your application, your pre-approval may be rescinded. As
part of the pre-approval process, a lender obtains your credit report. You should
be familiar with the contents of your credit reports from all three major credit
bureaus: - Equifax
(800) 685-1111www.equifax.com
- Experian
(888) 397-3742 www.experian.com
- Trans
Union(877) 322-8228 www.transunion.com
If
a lender denies your pre-approval, you should investigate immediately. Without
a pre-approval, your chances of obtaining a mortgage loan are jeopardized. If
a lender bases the decision, in part, on information in your credit report, you
have the right to receive a free copy of the report. (Back
To Top)
Mortgage
lenders & brokers There
are hundreds of mortgage lenders on the Web that will pre-qualify and pre-approve
you for a mortgage loan. Major categories of mortgage lenders include:
* Savings & loans. Also called thrift institutions, savings and loan associations
(S&Ls) are the largest traditional lenders of residential home mortgages.
A government cleanup of bad loans at S&Ls that ended in the 1990s left behind
the stronger S&Ls. These institutions remain a major source of funding for
home mortgage loans. S&Ls are often called savings banks in the eastern U.S.
* Commercial banks. Commercial banks offer attractive loan terms, particularly
if they evaluate their entire banking relationship with you. Some commercial banks
have their own real estate departments and will service your mortgage loan.
Other commercial banks sell their mortgages to Fannie Mae and Freddie Mac, two
major government-sponsored enterprises that specialize in buying residential mortgages
from lenders.
* Mortgage bankers. Mortgage bankers borrow money from banks or pools of investors,
underwrite the loans, and sell them to investors for a profit. They often receive
a fee from these investors for servicing your mortgage. Mortgage servicing includes
collecting monthly payments, sending out loan statements, and collecting on late
payments. For more information, see the Web site of the Mortgage Bankers Association
of America (MBAA).
* Mortgage brokers. Mortgage brokers circulate, or "shop," a loan application
among lenders to find the most attractive terms for the borrower. In exchange,
a lender pays the broker a fee.
* Homeowners. You may find that the current homeowner is willing to offer financing
in exchange for selling the home sooner. This means that the seller becomes your
lender. A common means of financing is for the seller to accept a mortgage note.
A mortgage note requires you to make monthly payments to the seller instead of
a bank or other lender.
* Credit unions. Since credit unions are owned by their members, they are called
cooperative financial institutions. Since they are nonprofit institutions, credit
unions may offer attractive mortgage loan rates to their members. Like commercial
mortgage lenders, credit unions sell their loans to Fannie Mae and Freddie Mac
to maintain access to new sources of funds. The National Credit Union Administration
(NCUA) regulates the credit union industry. (Back To Top)
Types
of mortgage loans Major
types of mortgage loans include:
* Fixed-rate loans. Because they offer a monthly payment that is known and does
not change, fixed-rate mortgage loans remain the most popular type.
Most fixed-rate mortgages are for loan terms of 15 or 30-years. A 30-year loan
has lower payments but a slightly higher interest rate. For all of 2006, the average
mortgage rate on a 30-year fixed-rate loan was 6.41%, according to data from Freddie
Mac. For 15-year mortgages, the average rate was 6.07%.
To pay off a fixed-rate loan sooner, check with your lender to make sure you can
make prepayments. You should be allowed to make these anytime and for any amount,
and at no penalty. #
Adjustable-rate loans. After an initial term, the interest rate on an adjustable-rate
mortgage (ARM) loan is re-set periodically. This is to keep the rate in line with
current market interest rates. For example, a 3/1 ARM loan offers a fixed rate
for the first three years, adjusting once a year thereafter. A 5/1 ARM loan offers
a fixed rate for the first five years, adjusting yearly thereafter. The lender
sets the interest rate by adding a margin to an index rate. Common indexes include:
* Cost of Funds Index. The Eleventh District of the Federal Home Loan Bank Board,
which covers California, Nevada and Arizona, publishes the Cost of Funds Index.
For more information on the index, visit the Web site of the Federal Home Loan
Bank of San Francisco.
* Treasury bill yields. The yield on the 1-year T-bill, adjusted for a constant-maturity
security, is widely used.
Most
ARM loans have a periodic rate cap and lifetime cap to limit the amount the interest
rate can increase each adjustment period and over the term of the loan, respectively.
If
you have a payment cap in your loan agreement, you may face negative amortization
of your loan. This has the effect of increasing the amount you owe. #
Convertible mortgage loans. These are ARM loans that allow you to convert to a
fixed-rate loan at or before a specified time. The conversion privilege lets you
start off with a low variable rate, then lock in when fixed rates drop low enough. #
Balloon mortgage loans. These loans often have interest-only payments. In this
case, you don't amortize any loan principal and the entire loan amount is due
at the end of the loan term. A balloon mortgage allows you to minimize your monthly
payments until you refinance the loan. Another advantage is that a larger share
of your payment may be eligible for the mortgage interest tax deduction. (Back
To Top)
Shopping
online for rates When
shopping for mortgage loan rates online, consider the following steps:
* Look for trends in the direction of interest rates. Mortgage rates change by
only a few basis points each day. However, over several days or longer, these
changes quickly add up to half a percentage point or more.
Interest rates move in sync with the economic cycle. When the economy is strong,
rates tend to rise as potential homebuyers flock to lenders. When the economy
is weak, rates tend to drop as lenders compete for fewer homebuyers.
* Understand that a trade-off exists between interest rates and points. Most borrowers
pay at least one point when they close on a mortgage loan. One point is equal
to 1% of the loan amount. Lenders are usually willing to let you "buy down"
the interest rate if you pay more points upfront. #
Calculate your true interest cost. Instead of concentrating on the interest rate,
focus on the annual percentage rate (APR) of a mortgage loan. The APR is the true
cost of credit and includes your closing costs in the calculation. Under the Truth-in-Lending
Act (TILA), lenders are required to disclose the loan's annual percentage rate. #
Consider paying for an interest rate lock. Mortgage lenders generally offer a
loan rate that is good for 30 days. This is called an interest rate lock. If you
don't close within the 30 days, your rate may change to reflect the lender's change
in its cost of funds. If you think rates may rise, you may want to hedge by negotiating
a longer rate-lock period, even if you have to pay a fee. On the other hand, if
you think rates are headed lower, a rate lock would work to your disadvantage.
(Back To Top)
Searching
for a home Searching
for a home has at least two general approaches. First, you can calculate how much
you can afford, then shop for homes in that price range. Your income, size of
down payment and any equity you have in your current home are the major determinants
of how much home you can afford. You
may wish to limit your search to home prices that, together with your down payment,
allow you to obtain a conforming loan. A conforming loan means that the loan amount
is within the annual limits set by Fannie Mae and Freddie Mac, two government-sponsored
enterprises that focus on investing in residential mortgages. For
2007, the conforming loan limit for Fannie Mae- and Freddie Mac-sponsored loans
is $417,000. For Alaska and Hawaii, the limit is $625,500. For example, if you
make a 20% down payment on a $450,000 home in California in 2007, you would borrow
$360,000, which is within the limit. If
your mortgage loan is conforming, you will likely have an easier time finding
a lender than if the loan is non-conforming. (A non-conforming loan is called
a "jumbo" loan.) Generally, the interest rate on a conforming-loan mortgage
is cheaper than on a non-conforming mortgage. Once
you've pre-qualified yourself for a home that costs between, say, $125,000 and
$150,000, you then limit your search to homes in that range. A
second approach is to search desirable neighborhoods or streets, find a home that
is advertised for sale, and then calculate its affordability. You may be able
to negotiate a lower sale price. A
checklist of a home's desirable or essential attributes helps you to shop. Some
of these attributes can be clearly measured, such as the size of the living area
and number of bedrooms. However, many attributes are qualitative, which require
you to interpret what is important for that attribute. Here's a sample home checklist: Quality
of structure and foundation
Size of living area
Size of lot and yard areas
Quality and type of flooring
Grading of lot and soil quality
Number
of bedrooms/bathrooms
Quality and age of fixtures
Garage and storage area
size
Ventilation and lighting
Quality and age of insulation
A
checklist of important neighborhood attributes is also helpful:
Property
values (average sale price)
Zoning ordinances
Crime rate and crime-reduction
efforts
Proximity and quality of schools
Proximity and quality of services
Commute distance and time
If
you can't find a home yourself, alternative resources include:
* Home-listing or relocation services. These can easily be found using a Web search
engine like Yahoo! or Microsoft Explorer. Home-listing services are also called
multiple-listing services (MLS).
* Real estate agents or brokers. The Web or your local phone directory can help
you find an agent or broker, who will help you access a multiple-listing service.
Real estate agents licensed with the National Association of Realtors are called
realtors. * Personal
references. Your co-workers, friends, or acquaintances are a potential source
of leads to home listings in neighborhoods that you aren't able to visit easily.
* Newspapers. Homeowners selling on their own use the local newspaper to advertise.
Buyers often place an ad for a desired home if their search is fruitless. (Back
To Top)
Negotiating
a lower price To
help you negotiate a fair sale price for a home, it's best to get an appraisal
and inspection report. Even if you agree directly with the home seller on a sale
price, you may want these items to safeguard the value of your new investment. To
hire a professional inspector, contact the American Society of Home Inspectors
(ASHI), National Association of Home Inspectors (NAHI), or National Association
of Property Inspectors (NAPI). A certified inspector checks a home for:
* Structural components. This includes the foundation, floors, walls, columns,
ceilings and roof.
* Home exterior. This includes doors, windows, chimneys, decks, balconies, steps,
drainage and driveway.
* Plumbing. This includes pipes, sinks, drains, and bathroom fixtures.
* Electrical system. This includes wiring and grounding equipment, amperage and
voltage ratings, circuit breaker and lighting fixtures.
* Heating and cooling systems. This includes boilers, thermostats, heat pumps,
insulation, air conditioning, central controls, fans, ducts and filters. An
inspection report may exclude condition of paint, wallpaper, carpeting, household
appliances and draperies. These are generally replaced by the buyer, whose tastes
are likely different. You may also want a special inspection for pests, or for
soil and drainage. Inspections generally cost between $250 and $500. An
appraisal is almost always required when you buy a home. However, if you disagree
with the appraisal value, you can always order your own appraisal. You can find
an appraiser through such organizations as the National Association of Master
Appraisers (NAMA). Appraisals generally cost between $250 and $500. Negotiating
a sale price usually starts with you making an initial offer on the home. The
initial offer is usually less than the seller's listing price. The seller can
accept, reject or ignore your initial offer. He can also make a counter-offer.
A counter-offer is a concession to lower the price to meet your offer at least
part-way. After
the first counter-offer, the buyer and seller may go through a series of counter-offers
to arrive at a sale price (if agreeing at all). This means the spread, or gap,
between listing price and initial offer gets narrower. Armed with your own appraisal
and inspection report, you can make an informed offer and more effectively negotiate
a final sale price. (Back To Top)
Closing
on your new home The
sales contract defines the basic terms and conditions of your agreement to buy
a home. It includes the sale price, property description, deposit amounts, mortgage
financing and any contingencies that might rescind the contract. Practices
vary from state to state, but counter-offers that are subsequent to the contract's
stated sale price are usually appended to the contract. The
sales contract also includes the terms for the loan closing, or settlement. Table
1 is a checklist of some of the major items that should be included in the contract.
Table 2 is a checklist of major closing costs. The
Real Estate Settlement Procedures Act (RESPA) governs the loan application and
closing process. RESPA ensures that homebuyers receive timely notification of
closing and other costs. These disclosures begin when the homebuyer applies for
a loan and continue after closing. Table
1: Major items in sales contract
Sale price
Property address and description
Amount of initial deposit
Terms of mortgage financing
Details for
loan closing
Transfer and recording of deed
List of fixtures remaining
in home
Repairs required of the seller
Disclosure of easements
Details
of sales commission
Details of escrow transaction
Pro rata share of real
estate taxes
Table
2: Major closing costs
Amount of first loan payment
Loan underwriting fees
Amounts for insurance premiums
Amount for escrow reserves
Fees for
legal services
Fees for escrow services
Fees for title-related services
Fees for recording services
(Back
To Top)
Improving
your home's value For
many of us, our home is our largest asset. It pays to maintain and improve its
value. If your home value increases, so does your home equity. In addition to
increasing your personal net worth and giving you the means to trade-up, you can
borrow from your greater equity using a home equity loan or line of credit. In
addition to improving the benefits that you receive, remodeling can improve your
home value. Those that tend to be most valuable include additions to living space
or improvements to bedrooms, bathrooms and kitchens. Maintaining
and improving your home value is sometimes easier if you use licensed contractors.
These include roofers, carpenters, electricians and plumbers. If you use a licensed
contractor, try to obtain more than one checklist, or bid, for the project. At
minimum, a checklist should be in writing and include: Contractor
general information, including
license number.
Details of renovation project,
including
description of parts.
Project dates and phases-of-completion
when
funding is required.
Proof of liability and related insurance coverage,
including
worker's compensation.
Proof of all necessary permits to complete
project.
A written warranty of project completion,
including a refund for unused
materials.
Promise to clean up work site at project's
completion.
Provision
that allows you to approve any
modifications to the original proposal
Payment
schedule for funding each phase
of the project. You
can also protect your home value with a home warranty, which covers major home
defects for up to 10 years. Many builders of new homes participate in the Home
Owners Warranty program. If your home is not new, hire an inspector to help you
get a policy that protects your home value. (Back To Top)
Using
a reverse mortgage A
reverse mortgage loan is similar to a home equity loan. These programs pay you
either a lump sum amount or annuity based on the amount of equity in your home.
You or your estate repay the debt when you sell or vacate the home, or at death.
Any remaining equity goes to your estate. Unlike
home equity debt, however, reverse mortgages do not offer the tax benefits. Some
reverse mortgage programs are insured, which prevents you from having title to
your home taken by a lender that is eager to be repaid at any cost, even if it
means you're out on the street. To avoid these kinds of programs, it's best to
consult a financial adviser before considering a reverse mortgage loan. Fannie
Mae runs three reverse mortgage programs:
* Home Keeper. This program is the simplest of the programs and aimed at homeowners
wanting to tap their equity, not draw down the entire amount. A lender that participates
in the program pays you an annuity or lump sum. You repay the loan when you sell
the home, no longer use it as a primary residence, or die. You or your estate
repays the loan, with interest and other financing costs, with a choice of payment
plans. * Home
Keeper for Home Purchase. This program allows you to buy a new home with a reverse
mortgage loan, using the new home as a source of repayment. You make a down payment
and use the reverse mortgage loan for the rest of the home's purchase price. You
repay the loan, with interest and other financing costs, when you sell the home,
no longer use it as a primary residence, or die. Most types of homes are eligible,
including units in a planned community.
* Home Equity Conversion Mortgage. This program is affiliated with the Federal
Housing Administration (FHA). It combines features of a home equity loan and line
of credit. You receive a fixed payment and, in addition, can draw on a credit
line for extra amounts. This program is aimed at converting, or using, the equity
in your home to live on during the rest of your lifetime. Any equity that is left
over goes to you or your estate. Eligible homes include a single-family home,
condominium, two- to four-unit dwelling, or manufactured home. To
participate in these programs, you and any co-borrowers must be at least age 62.
You also must have either little or no mortgage debt on your home (except for
the middle program, above, which requires that you have no debt). There are no
income requirements to participate in these programs. Since reverse mortgage loan
payments are not considered as taxable income, your Social Security and Medicare
benefits are generally not affected. Another
feature of these programs is that you are never obligated for more than the value
of your home when it is sold. (Back To Top)
Bi-weekly
mortgage loans A
bi-weekly mortgage saves you thousands of dollars in interest expense over the
loan term. You amortize your loan faster, shortening the time it takes before
you own your home outright. Instead
of monthly payments, bi-weekly mortgages require a loan payment every two weeks.
For example, you might pay $500 every two weeks instead of $1,000 a month. As
a result, you make 26 payments in a year. If your bi-weekly payment equals half
your monthly payment, this is equivalent to making 13 monthly payments. You
aren't limited to making bi-weekly payments that equal half the amount of a monthly
payment. Most lenders offering bi-weekly mortgages will negotiate the size of
the payment. A
bi-weekly mortgage does not have the same term as a 15-year mortgage loan. From
the table below, you can see that your loan term is still well above 15 years. The
chart shows the monthly P+I payments for a $100,000 fixed-rate loan for 30 years.
If you make bi-weekly payments of $316 on a 6.5% loan, you see that you pay off
the loan in about 24.2 years. This is almost six years sooner than if you were
to make monthly payments for 30 years. The bi-weekly payments would save about
$29,100 in interest over the loan term. $100,000
(30-year fixed rate) 6.5% 7.0% 7.5% 8.0%
Monthly payment $632, $665, $699,
$734
Repayment period (years) 30, 30, 30, 30
Bi-weekly payments $316, $333,
$350, $367
Modified repayment period (years) 24.2, 23.7, 23.2, 22.8
Interest
savings $29,100, $34,200, $40,240, $46,240
Note:
months are calculated as a decimal value. Interest savings are approximate and
equal the difference in total payments for principal and interest. The
table shows that your interest savings grow as the loan rate increases. The repayment
period also gets shorter as the loan rate increases. You
don't have to use a bi-weekly mortgage to make extra loan payments. You can make
them whenever, and for however much, you wish, provided your lender does not charge
a prepayment penalty. Using
a bi-weekly mortgage or making extra payments has an opportunity cost. Because
you pay less interest, the amount of your mortgage interest tax deduction is smaller.
Moreover, you'll have to give up any interest that you might earn on the extra
amount of payments you need. (Back To Top)
Find
a real estate agent An
important distinction: not all real estate agents are realtors. "Realtor"
is a registered trademark for real estate agents who belong to the National Association
of Realtors, a nationwide association of real estate agents. If not a realtor,
you should check the credentials and reputation of a real estate agent you are
considering using. A
real estate agent represents the buyer or seller of a home, and must disclose
his agency responsibilities to both sides if asked to represent both. Real estate
brokers earn a commission by introducing buyers and sellers, including those individuals
who choose to go direct, without using an agent. Going
direct: buying on your own
You don't have to use a broker when you buy. You
can purchase directly from a seller, or "fisbo" (an acronym for "for
sale by owner," or FSBO). Going direct requires doing your homework, however,
learning as much as possible about the local real estate market. Once
you find a home, keep in mind that the seller's broker receives a commission and
has a personal interest in getting the highest possible price. Don't expect the
seller's broker to tell you how low the seller is willing to go. Using
a buyer's broker to find a home
You can also hire an agent, or buyer's broker,
to represent you. A buyer's broker brings her knowledge of the local market and
ensures that you receive full disclosure from the seller about any problems in
a home. Your agent
will sift through listings and show you what she thinks makes a good match if
you tell her what exactly your needs are. If you are unfamiliar with the neighborhood,
she can tell you about property taxes, quality of schools, cultural activities,
transportation, shopping and hospitals, or other neighborhood attributes. You
can find a buyer's broker by registering online at the Buyer's Homefinding Network.
(Back To Top)
Selling
your home When
you sell your home, you can use a real estate agent or you can seek to sell it
yourself. If you sell it on your own, it is called a FSBO -- For Sale By Owner
-- transaction. A
FSBO transaction involves more of your personal time. You will have to show the
home to prospective buyers and handle the entire marketing effort. A FSBO usually
requires more than merely sprucing up your home and putting a "For Sale"
sign in the front yard. If you decide to sell on your own, consider doing the
following: *
Order an appraisal of your home's market value. You can find an appraiser through
such organizations as the National Association of Master Appraisers (NAMA). An
appraisal generally costs between $250 and $500.
* Circulate an ad flyer with a photo and description of your home's attributes,
address and phone number.
* Advertise in your local paper. A home that is being sold as a FSBO attracts
buyers hoping for a lower price that comes with cutting out the real estate commission.
Potential buyers will reason that, since you're saving as much as 6% of the home
sale price by selling your home yourself, you're likely to be willing to negotiate
a lower sale price. Hard
work, patience and previous experience selling your own home may pay off. Other
attributes certainly help, such as whether your home is located in a desirable
neighborhood. If
you use a real estate agent or broker, your home usually gets listed in a multiple
listing service. An MLS listing helps to advertise your home to a wide audience.
Agents also use an informal network of agents to pass along listings by word of
mouth. (Note: You may have heard real estate agents referred to as "realtors."
"Realtor" is a trademark-protected name and may only be used by agents
that are licensed members of the National Association of Realtors). A
real estate agent provides many valuable services, including:
* Recommends a sale price that is based on comparable sales. Comparable-sales
data are published in the newspaper and elsewhere, but a real estate agent is
generally able to compile it quicker.
* Locates and pre-qualifies potential borrowers and introduces them to mortgage
brokers and lenders.
* Handles all stages of negotiations between buyer and seller.
* Introduces you to appraisers or inspectors.
* Steers you through the loan-closing process To
find an agent, consider asking friends, family members or acquaintances for referrals.
An agent should demonstrate knowledge of the local real estate market and have
an established record of selling homes. The agent should be able to tell you how
long they have sold real estate, what credentials they have and whether they work
full- or part-time. Once
you select an agent, have them prepare a listing agreement. A listing agreement
is usually good for three to six months. You may want to include a provision in
the agreement that lets you cancel the agreement if you feel little effort has
been made in selling your home. Some
agents may ask for an exclusive listing to sell your home, which means that only
they can show your home. You should evaluate such a request carefully. Naturally,
an exclusive listing gives an agent an added financial incentive to sell. However,
an exclusive listing denies other agents the chance to sell your home at the same
time. An open
listing is the opposite of an exclusive listing. An open listing adds your home
to the multiple listing service and provides the most exposure to potential buyers.
Ask your agent to explain other alternatives for listing your home. In general,
the wider the exposure to all homebuyers, the better off you are. Once
you have found a buyer, you will prepare a sales contract. Depending on the state
that you live in, drafting a sales contract may require a lawyer. Agents often
help with this stage of the selling process by ensuring that all important terms
and conditions are included in the contract. (Back To Top) | 
