Mortgage without surprises

It’s no surprise: house sales are down nationwide, some of the sales are attributable to foreclosures and homes being auctioned. Generally speaking the news is not that great, but on an individual basis, the present economic environment is a great time for some people to finally afford the house of their dreams! Prices are a lot more reasonable than they have been in quite a while, the inventory of houses on the market is high, an the mortgage rates are near historic lows: it’s a buyers’ market.
And if you are in the market to buy a home, we have a simple checklist for you. First you must collect the following information:

Your yearly gross income;
Your yearly loan payments that you make (monthly payment x 12), include credit cards, student loans, auto loans, personal loans, and any other obligations you have;
Asking price of the home that you are looking to buy, I am sure you’ve set your eyes on a few, take the one that you like best;
Your mortgage payment for that home, using the asking price (if reasonable, or a reasonable market price);
Real estate tax for your new home;
Yearly homeowner insurance premium (call your insurance agent for a quick quote).

Now, the time tested calculation is as follows:

Take your yearly gross income;
Deduct your yearly commitments. This is your adjusted yearly gross income;
Multiply your adjusted yearly gross income by 0.28 (or 28%), this is your gross income available for housing;
Multiply your mortgage payment by 12. This is your yearly mortgage payment;
Add the real estate taxes;
Add the homeowner insurance premium; now you have your expected yearly housing expenses.
Is the amount of your expected housing expenses (point 6 above) lower than your gross income available for housing (point 3 above)? If yes, congratulations, you are on your way to home ownership.

We made a few assumptions on the above exercise:

You are able to make a 20% down payment on your new home from your existing savings. Buying a home with a lower down payment is a riskier proposition that we advocate only in few selected cases, for individuals who are in complete control of their personal finances. Buying houses with no money down is one of the leading causes of the present financial mess that a lot of inexperienced homeowners find themselves in.
You are able to pay the closing costs from your existing savings.
You are applying for a 30-year, fixed rate mortgage. 30-year, fixed rate mortgage are the surest and safest bet, many people have gotten into trouble by taking on variable rate mortgages, or - even worse - mortgages with introductory rates (teaser rates).
You are currently under no other mortgage obligations, therefore you are renting, living with relatives, or other arrangements. If you are leasing, read your lease agreement, you might be responsible for substantial payment penalties in case you break the lease.
Your commuting expenses will not increase significantly with your move to your new home. If this is the case, deduct your new commuting expenses from your gross income available for housing (point 3).
You are buying a home and not a condo. If you are buying a condo deduct your condo fees from your gross income available for housing (point 3).
Your new home is in good overall condition and doesn’t need any major work in the short term such as a new roof, heating system, hot water system, plumbing or electrical system, bathrooms or kitchen. If that’s the case, get an estimate of the work to be done, add that to the price of the home, and re-do your calculations. You can have your lawyer draft an offer and related purchase and sale agreement where the seller makes the work necessary, increasing the selling price accordingly, so that effectively you finance such necessary work with your mortgage, with the associated favorable interest rate and tax treatment.
After paying for the down payment, closing costs, and moving expenses you will still have at least 6 months worth of living expenses (with the new mortgages) in a savings or money market account. This is one of the basics of sound Personal Finances.

What to do if the above exercise shows that you can’t afford your dream home? There are a few things you can do:

Search for a lower priced home.
Search for a home in a different town with a lower tax rate.
If your target home requires flood insurance, search for a home that is not on a flood plane and does not require flood insurance.
Make a bigger down payment (if you can afford it).

If all of the above remedies still won’t work: WAIT! Someone recently on TV stated that while home ownership is still part of the American dream, “there’s no shame in renting“. Look at it as a process, curtail your spending to save more money for a larger down payment, get a second job and save the extra income toward a larger down payment. In the meanwhile continue to keep an eye on the real estate market, home prices might decrease, interest rates might decrease as well, and your dream home might come on the market at the right price.

For a mortgage without surprises, we recommend:

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Photo Credits: Sabrina Campagna (cc)

October 27, 2008 | Filed Under Mortgage, Real Estate | Leave a Comment

Is It Worth (& Smart) To Refinance Your Mortgage To Pay Off High Interest Credit Card Debt?

We all get that dreaded phone call during dinner at some time or another. It’s a mortgage company calling to see if we want to refinance our home and take out cash to pay off debt. If you are like the average American family, then no doubt you have a substantial amount of credit card debt. The average in this country is $8,500.00 however a large percentage of families carry substantially more. So the question comes to the fore, is it really worth it to allow someone to refinance your home in order to pay off all your credit card debt?

Well to begin you need to look at the interest you will pay on your mortgage versus your credit card. With many people paying upwards of 15% on their credit cards each month versus the 6-8% for a typical home loan, initially it seems that you would be better off going with the refinance option than sticking with the credit cards. But keep in mind that the money you take out of your home in the form of a cash equity to pay off your credit cards will be amortized or spread out over usually 30 years. That is a lot of compounded interest you will need to pay. Not to mention most people refinance their home several times, so that 30 year figure can be stretched out even farther making the overall interest you pay higher.

Therefore some basic questions should steer the average person in the right direction. Such as:

How long do I plan to live in this house?
Do I plan to pay it off and if so how long will it take me.
What interest rate am I paying on my credit cards and again do I plan on paying them off anytime soon?

Once you have a clear answer to these questions, you can use readily available credit card and mortgage calculators to calculate how much interest you will pay over a certain amount of time. Then you can compare those amounts and also take into consideration the upfront costs on refinancing which are typically at least 2% of the loan amount. It’s only when you are armed with this information you can make a rational and informed decision.

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