September 2012 Blogs

4 Unexpected Mortgage Decisions Every Buyer Will Face (and How to Make Them):

The financial end of home buying is, for many, the most intimidating piece of the entire experience. Why?  Well, most of us don’t sign 30-year financial obligations on a daily basis. Plus, the consequences of poor decision-making in this particular area stand out as particularly disastrous.

There are a few obvious decisions involved in the mortgage process - like 15-year or 30-year loan term, fixed vs. adjustable interest rate and FHA or Conventional - which buyers tend to make by default, based on what they can qualify for, what they can afford, their risk tolerance and market dynamics.

But the truth is, deep within the home buying process there is a laundry list of additional, critical mortgage decisions every buyer must make. Don’t let them surprise you: here are four of the most important mortgage decisions you might not be expecting or conscious of, and some factors to consider in making the right choice for you.

1.  Mortgage or not.  It might surprise you to know that about ⅓ of American home owners have no mortgage at all. And this is not all people who have diligently paid their mortgages off over a 30-year period of time; just last year the National Association of Realtors reported that about 30 percent of buyers are purchasing their homes with 100 percent cash. While many are investors, there are many, many others who have simply saved up, received windfalls, are using the proceeds from another home to buy this one, or are buying distressed properties at bargain basement prices they can afford to purchase without a home loan.

In fact, the question of whether to take a mortgage or pay all cash is actually one of the most frequently submitted questions I receive here on Trulia! While the decision is an individual one, it should account for at least the following considerations:

  All-cash purchases are seen as more competitive in multiple offer situations, and often receive a discount.
  All-cash home purchases can save thousands of dollars on loan-related closing costs, including origination fees and insurance coverage designed to protect the lender.
  The freedom from having that largest of monthly expenses - a mortgage payment - is, essentially, priceless.
  The largest tax advantage of home ownership is the deduction of your mortgage interest - if you forego a mortgage entirely, you also opt out of that tax benefit (though you are still able to deduct your property taxes).
  There might be opportunity costs to investing most or all of your cash into your home - before doing so, financial advisors suggest that you ask yourself how you could be growing those funds if you invested them elsewhere.

If you do decide to buy a home all-cash, make sure you still obtain inspections and title and hazard insurance to obtain the same protections that a mortgage lender would insist on. Your agent, attorney, financial advisor and CPA or tax professional should all be involved in your decision-making process.

2.  How much to put down.  Like the decision whether to use a mortgage or not to finance your home’s purchase, the decision of how much money to put down on a home can seem obvious if you’re scraping together every available penny to come up with the minimum down payment amount you need. But this is not the case for every home buyer - there is a pretty delicate decision-making process that those with even slightly-better-feathered nest eggs must go through in the process of deciding how much of their cash cushion to invest up front.

Most buyers think they’ve dealt with this decision at the very beginning of the home buying process, telling their mortgage provider that they’d like to put $X down and have a mortgage payment no greater than $Y-per-month. But many are surprised to learn that they can able to qualify for a home they’d like while putting less down and keep some cash in the bank, or that they may be able to afford a pricier home at the same payment level if they stretch the same cash to cover a lower percentage down payment. And the opposite is true: some who plan to put 10 percent down end up preferring to buy a less costly house and stretch the same down payment to 15 or 20 percent.

The primary deciding factor in this calculus tend to be affordability - all things being equal, the lower the down payment, the higher the monthly payment. But that is far from the only consideration that should be accounted for in deciding how much to put down on a home.

One of the more critical decision factors is the issue of private mortgage insurance or PMI (aka mortgage insurance premium or MIP, for FHA loans). If you drop below the 20 percent down payment level, your lender will add a mortgage insurance policy to your loan which protects them from the possibility that you may default on your loan - and they will add the cost of that policy to your monthly mortgage payment and/or closing costs. Mortgage insurance can add hundreds of dollars to your monthly mortgage payment, and can add thousands to your up-front closing costs, but it might also be tax deductible.

Talk with your mortgage broker and tax professional to get a personalized understanding of how these costs and offsets would look, at various down payment levels. Ask your mortgage broker to give you loan scenarios with 5%, 10%, 15% and 20% down, if you want a concrete understanding of how your monthly payment and cash required to close will vary based on your down payment.

The decision of how much cash to put down should also be made with thought to how much cash you’ll want to have in reserves, to:
  cover rainy day possibilities like disability and job loss
  pay for the expenses of bringing a fixer-upper home into shape
  and to account for the inevitable upgrading and maintaining the property.
(Some of these expenses can be hedged against, with things like disability insurance, long-term care insurance and home warranty plans.)

Also, the down payment decision requires many buyers to make decisions about alternative sources of assets, and the implications tapping into them for down payment money might trigger:
(a)  Down payment assistance programs:  For instance, first-time buyer down payment assistance programs offered by many city and county governments seem attractive, but may require repayment in the event you sell or rent the home out in the 10, 20 or 30 years following the grant, and may also impose additional limitations on the type and location of the home you can purchase.
(b)  Retirement accounts:  Additionally, some buyer/borrowers look to borrow down payment funds from their own 401K accounts or to draw cash out of their IRA accounts, each of which strategies has its own potential tax and strategic implications to take into account, which should be discussed at length with a retirement planner and a tax advisor in advance.
(c)  Gift money:  On another note, taking gift or loan money from relatives can activate gift money requirements from lenders that require you to put a certain level of cash in from your own funds - or require your donor to provide their own asset statements documenting the source of the funds. Gift money may also trigger relationship issues which should be considered deeply before accepting such a gift.
(d)  Wait and save:  Of course, many buyers seeking to crank up their level of down payment cash will simply decide to save up more cash, in an effort to make their mortgage more affordable, be able to afford a pricier home or compete more effectively against other, cash-flush home buyers in a market where demand is high. Because it may take months, even years, to save enough to make a big boost to your down payment, even these folks need to factor in how home prices and interest rates are likely to change in the time it will take to save those funds.

3.  Impound account - or not.  In loans with impound accounts, the buyer’s monthly mortgage payment to their lender includes not only the mortgage principal and interest, but also a monthly proration toward their property taxes, homeowners’ insurance and/or homeowners’ association (HOA) dues. The lender then deposits these funds into an “impound account” and makes the respective payments directly to the third parties involved, when they are due. Impound accounts have grown in popularity over the last decade, largely due to the uptick in FHA loans, which require them. Other considerations in favor of having an impound account include the convenience of making only one payment, versus paying all these different bills, and the financial planning convenience of only having to budget for one line item toward housing, versus three or four.

On the other hand, impound accounts can also put your mind on financial autopilot with respect to these other bills, and can set homeowners up for big, bad surprises when their tax or insurance costs rise. For example, lenders may actually pay a property tax increase before adjusting your mortgage payment to account for it, so by the time you get wind that your taxes have gone up, you are forced to repay the overage plus pay the increased monthly allotment for future tax bills. This can result in a hefty, seemingly sudden change in your monthly mortgage payment obligations if you don’t pay close attention to your tax statements when they come from the County.

Additionally, some homeowners appreciate having the control over when they pay their insurance and property taxes. Those who are paid on commissions or otherwise have irregular income might like to be able to pay their property taxes once or twice a year and have the lower monthly payment possible with a no-impound mortgage. As well, mortgages with impound accounts often require a couple months’ worth of property tax, insurance and HOA payments to be collected at closing, jacking up the cash the buyer is required to bring to the closing table - sometimes by thousands of dollars.

4.  What’s really important to you?  This is a decision which many home buyers make unconsciously, but it’s a critical one which deserves very deliberate, conscious attention. Many buyers got one of the #1 takeaways of the recession, which is that it is their own, personal responsibility to determine what they can afford, by running their own monthly budget and telling their mortgage professional how much they can spend every month toward their housing costs - rather than passively accepting the mortgage lender’s guideline-driven math that says what you can afford.

Less obvious are all the decisions that are built into the exercise of making a monthly budget, complete with a number of trade-offs. If you become frustrated by losing out to other offers or are unable to find a home that meets your wish list within your price range, return to the fundamental decisions you made, consciously or less so, during the budgeting process:
  How much did you set aside for discretionary expenses like food (yes - you have to eat, but no - you don’t have to eat out 3 nights/week), travel, entertainment, clothing and other personal purchases?
  Do those allocations jive with how much you care about those items vs. your home?
  Can you cut $50 on one line item, or $100 on another and reallocate it toward housing, to get yourself closer to the home you really want?
  Better yet: can you get superfrugal for 3 or 6 months and eliminate entire line items of expenses, like a credit card or other bill?

I know a married couple who was recently in tears over their inability to stretch their budget to beat out other offers for the homes they liked. Between the two of them, they own 3 near-new vehicles and a rarely-ridden Harley Davidson that just sits in the garage. When I gently suggested that selling a car and the bike might free up cash that could make the difference in allowing them to buy the sort of home they want, it was like a light switch flicked on! They had lived with these luxuries for so long they had never seriously considered downgrading them to uplevel their house hunt.

At every point in the mortgage decision-making process, you are making subsconsious decisions about what is most important to you: your home or any of the other things you could be spendinthose dollars on. My recommendation is that you make those decisions consciously, based on values and priorities that are consistent with your vision for your life, and your dreams for your family.



 


CLICK HERE TO RETURN TO THE HOME PAGE

MLSLincolnWestonRealty

BUYING ADVANTAGES

  • Approximately 45,000 Mass. Listings!
  • Prompt Online Showing Requests
  • Most Professional Buyer Representation
  • Top-Notch Agents to Serve You
  • Over 30 Years Experience
  • Easy Click for Showing
  • Virtual Drive Around the Neighborhood
  • Spectacular Map Search
  • View All Property Listing Specs!

MLSLincolnWestonRealty

SELLING ADVANTAGES

  • Professional, Experienced Sales Force!
  • World-Wide, On-Line Exposure
  • Expert Real Estate Resources
  • Unmatched Property Valuation Methods
  • Specialized High-End Property Services
  • NO FEES unless we are successful
  • State-of-the-Art Marketing Strategies
  • We have the Most Important Selling Tips
  • We Respect your needs: Timing and Price

FEATURED INFORMATION

MLSLincolnWestonRealty BLOGS Provide the Best Real Estate Information & Advice Anywhere!

Homes for Sale In Lincoln MA

With previous property ownership and devel- opment experience in Lincoln, Mass., MLSLincolnWestonRealty possesses the direct knowledge and skills to help you thoroughly understand the real estate climate in Lincoln, MA, make the right decisions, and buy or sell a home with confidence. Our buyer or seller representation is unsurpassed anywhere in the State. With a limited inven- tory of homes for sale in Lincoln, MA, you need the best advice possible. Please contact us during our extended hours of 8:00 a.m. to 8:00 p.m. seven days a week.

Boston and Vicinity

Whether it's homes for sale in Lincoln, Mass., homes for sale Weston, Mass. or anywhere else in the Boston, Massachusetts area, MLSLincolnWestonRealty is devoted to being the best real estate brokerage firm anywhere in Massachusetts. Our techno- logical sophistication and innovations, over thirty years experience in sales, property management, development, renting and leas- ing in both residential and commercial/ industrial real estate are just some of the reasons you simply must give us a try. You'll be very glad you did!  CALL US TODAY!

Homes for Sale In Weston MA

In this dynamic and exclusive market MLSLincolnWestonRealty offers the most powerful tools, professional service and invaluable expertise to find the right home for you if you are shopping for houses for sale in Weston, MA. Our extensive experience within the Weston, Mass. real estate market makes us the best choice for marketing your house for sale in Weston, Massachusetts Our extended hours and passion for our work are only some of the reasons we will do a better job for you than any other real estate broker out there.

Scope of Services

MLSLincolnWestonRealty provides expert real estate and relocation services for residential real estate, single-family homes, high-end luxury homes, condominiums, multi-family homes, rental properties, mobile homes, commercial/industrial real estate, land, business opportunities, and much more with special emphasis in Weston, Lincoln, Brookline, Newton, Wellesley, Lexington, Wayland, Sudbury, Concord, Cambridge, Boston, Belmont, Sherborn, Dover, Needham, Lynnfield, Marblehead, Hopkinton, Holliston, Hyannis, Falmouth, Cape Cod, Cape Ann, Metro West, North Shore, South Shore and all other surrounding greater Boston and Massachusetts communities. MLSLincolnWestonRealty can also assist buyers and sellers with their specific real estate needs throughout the entire State of Massachusetts. We are the premier luxury residential real estate brokerage firm.

With an Exclusive Buyer Agency relationship, MLSLincolnWestonRealty provides our loyal and dedicated home buyers with the absolute best tools, resources, services, skills and expertise to provide them with tremendous savings and great satisfaction with their real estate purchases. Finding the right home and making the right home purchase are not always easy, but with MLSLincolnWestonRealty at your side every step of the way your chances of success with buying the right home in Massachusetts will increase exponentially.

As a highly skilled listing real estate agency, MLSLincolnWestonRealty provides our home sellers and other clientele with unparalleled knowledge, marketing programs and hard work to succeed with the sale of real estate in Massachusetts. This turn-key real estate power-house will enable you, the seller, to obtain a premium market price for the sale of your real property in the least time possible.
OUR SERVICES INCLUDE THE FOLLOWING TOPICS and AREAS: Homes for sale in Lincoln MASS., Homes for sale in Weston MASS., Weston MASS. Homes for Sale, Lincoln MASS. Homes for Sale, Boston Mass. Homes for Sale, Weston MASS. Real Estate, Lincoln MASS. real estate, Boston Mass. Real Estate, Massachusetts real estate listings, Massachusetts Real Estate Agent, Boston, Mass. Real Estate, MLSLincolnWestonRealty, MLS, Lincoln MASS., Concord MASS., open houses, school and community info, agents, offices, realtors, MLS listings, properties, home search, residential, land, adult community, mortgage, pre-approval, interest rates, relocation, moving, MA, Online Home Search, Find Homes Online, Mass Real Estate, Boston Homes, Cambridge, Mass. Real Estate, Massachusetts Real Estate, Massachusetts Homes PETER GOTTLIEB, BROKER/AGENT
(781) 272-4777