It is important that a home buyer understand all of the costs involved in purchasing a home. These costs go way beyond the purchase price. Inspections, fees, appraisals, and on and on and on…. the terminology used in real estate can be extremely confusing for home buyers. What’s more, who pays for these things is even harder to figure out.
Real estate agents, title company officers, and mortgage providers deal with real estate transactions on a daily basis, so they understand this language. When it comes to what is known as the ‘closing costs’ it becomes even harder to understand for the average home buyer. Because closing costs can be, and often are, negotiated between buyer and seller, there are no clear-cut answers. Let’s start by taking a look at the closing costs that can appear on your closing statement:
- Upfront, prepaid, interest points
- Appraisal costs
- Title transfer costs
- Real estate agent fees
- Loan origination fees
- Property taxes
- Homeowner’s insurance
These closing costs are simply the extenuating costs of purchasing a home. But, they can’t just appear out of nowhere when it comes time to write the check. That’s where the ‘HUD’ comes in.
All closing costs must be disclosed on a form called the HUD-1 Settlement Statement. The HUD-1 must be signed by all parties in the transaction before it is legally considered complete. In most cases, the loan officer for the buyer and the buyer’s agent will review the HUD-1 with the buyer so there are no surprises when it comes to signing it at the closing table.
Included in the HUD-1 Settlement Statement are also any credits due to the buyer, such as the down payment amount, tax credit from the seller, buyer closing costs the seller has negotiated to pay, as well as any money held in escrow on behalf of the buyer, such as the earnest money deposit.
This is a long, long list of money in and money out. Many of the terms may be confusing to you, the buyer. Don’t be afraid to have your agent explain, in detail, each and every item and provide supporting documentation to help you understand. A good real estate agent and loan officer will provide a true copy of the estimated HUD-1 prior to your closing. You may even want to obtain a blank HUD-1 form to read through just so you are prepared to ask questions before the figures get filled in.
Closing costs are often said by home buyers to be the most confusing part of the entire home buying process; even more confusing than inspections, offers, and contracts. These costs deserve individual attention from both you and your buyer’s agent. Be sure to insist on being fully informed as to the detail of each cost. After all, you are footing the bill for this large investment of a home and you deserve to know everything that involves your money.
You will hear it said that today we are in a buyer’s market. The current real estate market is primed for buyers to purchase due to a huge inventory of homes to choose from and low interest rates. If considering buying a home, now may just be the time to take action.
Before answering “Is now the right time to buy?” some homework will be necessary. There may be a surplus of homes on the market, but buying a house will depend on the financial situation of the individual buyer. Take these steps to craft a plan of action to make buying a home now, or in the future, a positive and lucrative experience.
Step One – Contact a Trusted Loan Officer
A loan officer will be able to review income, financial history, credit reports, and other documentation and advise the buyer on how much of a loan they can qualify for. There are literally hundreds of loans available, which is why consulting a loan officer is a smart thing to do. A loan officer understands the various products available and will present one or more options that best suit each individual buyer. Should the buyer not qualify for a loan at this time, they will come away from the experience with an understanding of what actions they need to take in order to qualify in the future.
Step Two – Hire a Buyer’s Agent
A buyer’s agent is an agent who works on behalf of the buyer, representing the buyer. The services should include negotiating for the buyer, consulting the buyer, listening to the buyer’s wants and needs, assisting in identifying the potential of a property, showing the houses to the buyer, providing market analysis on houses the buyer is interested in, determining fair market value, and assisting in the completion of documents to purchase the house. The initial consultation should help you determine if the agent is someone you can work with. A buyer should interview two or three buyer’s agents in order to find the best fit for them personally and professionally.
Step Three – Consult Other Recent Buyers
This may include family members, friends, and co-workers. They will each have different experiences depending on a variety of factors, but it is good to start becoming familiar with what occurs during a real estate purchase. People do love to talk about their experiences buying a house, and it’s your job as a home buyer to listen closely. Take it all in, then make a determination based on facts.
Is now the right time to buy? The answer may be “Yes!” But first the buyer must understand how much of a home they can afford as well as the ins-and-outs of the real estate process. Consult a buyer’s agent who understands what you, the buyer, wants. Because, in a buyer’s market, there are hundreds of options available to the buyer who is prepared and has a plan of action in place.
Millions of Americans have received foreclosure notices over the past few years, forcing many former homeowners into the rental market. The increase of renters (many of whom used to be owners) has driven up rental rates in many areas, making the once easy to calculate formula of renting versus buying a little more difficult.
When deciding if renting is a better option than buying it’s best to compare the numbers on a long-term scale. First list the expenses you will have to pay when buying a home.
Costs buyers have to pay include:
- Down payment
- Closing costs
- Monthly mortgage payment (principal/interest)
- Property taxes
- Homeowner’s Insurance
- Association fees
- Utilities
- Renovations
- Maintenance
Fees associated with renting include:
- Initial rent deposit
- Rent
- Utilities (some utilities may be paid by property owner)
Renting v. Buying: Benefits
The list of yearly and monthly fees associated with renting may lead many to believe that renting is significantly cheaper than buying. However, while renting may serve as a good temporary option, buying a home is a better financial decision because the cumulative amount of money spent over the years could pay off your principal instead of adding equity for your landlord. You will also build equity in your home and earn the option to refinance to make home improvements or simply have extra cash in your pocket.
In today’s current economic climate, your long-term and short-term goals most likely include saving money. By renting, you have a roof over your head but you are prolonging the financial freedom and benefits of owning a home that many Americans enjoy everyday.
Some of the benefits of owning a home include:
- Tax Deductions – mortgage interest and property tax obligations are fully deductible for both federal and state income taxes. Additionally, many closing cost and fees for your loan application and appraisal may be deductible immediately or when you decide to sell your home. Also if you have a home office, your cable and phone bill can also be deducted.
- Equity – Equity is the portion of property you actually own. Needless to say, you can’t build equity as a renter. Moreover, there is a new trend in home owning called equity builders. This group of innovative homeowners picks a short-term home loan (usually a 5- or 7-year ARM) and adds money to their monthly payment to decrease the principal balance at a faster pace. Equity builders shorten the length of their home loan, lock in low-interest rates, and own their home faster.
- Option to Borrow – Equity can be used to secure a loan or obtain a line of credit. Your increased buying power can lead to home improvements or even the purchase of an investment property, expanding your portfolio of assets.
- Appreciation – While it’s hard to imagine right now, current record low home prices means you’re likely to sell your home in the future for more than what you paid for it today. For example, Harvard University’s Joint Center for Housing Studies suggests that a buyer who makes a 10 percent cash down payment with an annual home appreciation rate of 5 percent could expect a 225 percent return on the cash after five years and a 623 percent return on the cash after 10 years.
- Freedom – Renters typically renew their lease every year. This gives landlords the freedom to increase rent from year to year if they want to. Buyers have exponentially more freedom to do everything from permanent décor decisions to locking in on low mortgage and interest rate prices.
The decision to rent or buy a home should be made with long-term goals in mind. If you’re considering renting because of a foreclosure on your credit record, understand that renting is a temporary option that should be used as you repair your credit. Renting offers an alternative for people who are not yet in a position to buy. If you use this alternative as a time to save, repair your credit, and position yourself for the future, the American dream of homeownership will be an attainable goal for you.
Everyone’s financial situation is different, and whether to buy a home or rent a home is not a one size fits all equation. If you’re still not sure whether buying a home or renting a home is best for you, talk to us. We’ll help you draw out comparisons that will include your specific financial situation.