Transcript Buying a house - Morris Hills Regional High School District

Chapter 22
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Market Value—the highest price that the
property will bring on the market; what a
ready buyer and seller would agree upon as
the price.
Appraised Value—examine the structure, size,
features, and quality as compared to similar
homes in the same area; the recent selling price
of a similar home in your area is a good
estimate of the current value of your home.
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Assessed Value—the county in which you live sets
an assessed value for purposes of computing
property taxes owed on your home; based on the
cost to build, the cost of improvements, and the
cost of similar properties. It is usually a percentage
of market value.
Estimated Value—Real estate agents also estimate
the value of homes to help sellers establish a list
price. They compare your house and its features to
similar ones that have sold in your area, called
comps, and it gives a general idea of a property’s
value.
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The value of most homes appreciates, or increases in
market value, over time.
Appreciation is one way that the equity –the
difference between the market value of property
and the amount owed on it—increases.
Equity also increases because each loan payment
you make decreases your debt.
Equity turns into cash when you sell your home.
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Home ownership generally offers more
privacy, more space, and more personal
freedom not available to renters.
In your own home, you can make the changes
you choose to accommodate your own needs
and personal style.
Owning a home also provides a feeling of
security and independence.
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You also get a sense of stability and belonging
to your community.
Neighborhood associations are groups of
homeowners in geographic areas that meet and
work to set quality-of-life standards for the
area, working with local government groups to
be sure the area is being provided with needed
services.
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The interest you pay on your home loan, along
with the property taxes, is tax-deductible.
These deductions lower the cost of home
ownership. Because of these tax savings,
owning real estate is a tax shelter.
Even though your equity in your home may be
increasing each year, you do not pay tax on the
equity until you sell your home.
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Mortgage lenders usually require that borrowers
pay a certain amount down toward the purchase
price. They will then provide a loan for the balance
of the price.
A conventional loan is a mortgage agreement that
does not have government backing and that is
offered through a commercial bank or mortgage
broker.
This type of loan requires a down payment of 1030%.
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An FHA loan is a government-sponsored loan
that carries mortgage insurance; borrowers pay
a monthly insurance premium and their loan
payments are guaranteed through the Federal
Housing Administration insurance program.
Down payments for FHA loans can be as little
as 3 percent and are often available for firsttime homebuyers, veterans, and low-income
buyers.
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Mortgage is a loan to purchase real estate.
A trust deed is similar to a mortgage, it is a
debt security instrument that shows as a lien
against property.
Payments on a mortgage or trust deed are
made over 15-30 years.
Monthly loan payments include principal and
interest. If the borrower is required to have an
escrow account, the payment includes property
tax and insurance.
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An escrow account is a fund where money is held to
pay amounts that will come due during the year.
Mortgage lenders often allow borrowers to buy
discount points, which are used to lower the mortgage
interest rate. Typically, one point equals one percent of
the loan amount. Points are essentially extra interest
that borrowers must pay at closing. They increase the
cost of the loan, but lenders usually offer lower interest
rates in exchange for higher points. It depends on how
long you keep your house for whether it is a good
tradeoff.
Points are often charged in addition to a loan
origination fee, the amount charged by a bank or
lender to process the loan papers.
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Closing costs are often also referred to as
settlement costs. They are the expenses incurred in
transferring ownership from buyer to seller in a
real estate transaction.
Closing costs can add $3000-$5000 to the purchase
price of your home. The buyer usually pays for the
title search to make sure the seller is the legal
owner and that no one else has a claim on the
property. The buyer may also pay for a credit
report, loan origination fee, loan assumption fee
(to take over someone else’s mortgage), closing
fees, recording fee, and their share of taxes and
interest owed on the property.
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The real estate property tax is a major source of
funding for local governments. Homeowners
pay property tax based on the assessed value of
the property. A local taxing authority
determines the assessed value, usually a
percentage of the market value. Property taxes
are tax-deductible.
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A homeowner must have property insurance
covering the structure. This is usually a
requirement of the loan agreement to protect
the interests of the mortgage lender as well as
the homeowner. Standard homeowners’
insurance includes both fire and liability
protection.
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Because most homes are larger than
apartments, the utility bills are usually higher.
The homeowner pays for all utilities and
garbage services, water and sewer charges,
storm drain assessments, lighting fees, gas,
electricity. They are responsible for costs to
repairs to things like water and sewer lines that
are on their property.
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Many housing subdivisions or planned unit
developments have covenants, conditions, and
requirements that were agreed upon when the
subdivision was built. They are rules to
maintain property values and protect the
interests of all property owners and include
things like maintaining your lawn, specifying
where cars can and can’t be parked, controlling
the kind of fences or storage buildings that can
be built, types of roof that can be installed, etc.
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You must obey all zoning laws and local
ordinances, like obtaining a building permit
and when you add or modify your home,
following setback requirements, adhering to
restrictions regarding the kinds and types of
buildings that can be constructed in the area.
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You will be responsible for maintenance and
repairs inside and outside of your home.
Before you buy, make sure you are willing to
spend the time and money needed to keep
your home in good condition.
Ongoing maintenance includes painting,
mowing, weeding, and fixing things that break.
There will be occasional expensive repairs, like
a new roof, furnace, water heater, appliances.
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Before selecting a home to buy, look at many
houses. You can look by yourself or work with a
real estate agent. Agents know the market, can
help you find the right home, and will assist you
with the purchasing, financing, and closing
processes.
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One of the first things an agent will have you do is
go to a mortgage lender and prequalify for a real
estate loan. You fill out an application to see how
much money you would be qualified to borrow.
This will help you find houses in your price range.
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Real estate agents earn commission income.
The commission is a percentage of the home
sale price, usually 5 and 7 percent.
The seller pays the commission, and the agents
working for the buyer and seller split it.
As the purchaser, you do not pay the agents’
commission.
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If you are buying directly from an owner without the
assistance of an agent, you might be able to negotiate a
lower price because the seller would not have to pay
this fee.
However, you should still seek advice from a
professional, such as a lawyer, to be sure your interests
are protected.
You can find homes for sale online or in the
newspaper. The Multiple Listing Service is a real estate
marketing service in which agents from many agencies
pool their home listings and agree to share
commissions on their sales. Sellers gain wide exposure
for their properties this way.
After you have narrowed your choices to a small
number of homes in your price range, you should visit
them with your agent.
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To let the homeowner know of your interest in
buying the home and the price you are willing
to pay, you will sign an agreement called an
offer.
An offer is a serious intent to be bound to an
agreement. When you make an offer it is called
an earnest-money offer. It is accompanied by a
deposit called earnest money, which is held in
escrow until the transaction is completed. This
protects the seller in case you fail to meet the
terms of the agreement.
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If you and the seller agree to terms, the seller will
take the house off of the market until the deal is
completed. During that time, the house cannot be
sold to anyone else. If you later back out of the
deal, you will likely forfeit your earnest money to
the seller.
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One way to avoid losing that money is to make
your offer contingent (dependent) on obtaining
financing and the property passing an inspection.
So if you don’t qualify for a mortgage, you have
not violated the contract and can get your money
back.
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The seller may not accept your initial offer.
When they agree to it, you have an acceptance.
If the seller wants to change any part of the
offer, they will make a counteroffer—a
rejection of the original offer with a listing of
what would be acceptable, and they offer a
new offer. The buyer and seller will negotiate
until an agreement is made or decide not to
complete the transaction.
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The most common sources of down payment
money are personal savings and informal loans
from parents or relatives.
Most lending institutions will not allow
mortgage applicants to formally borrow their
down payment.
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In other words, you must invest a substantial
amount of your own cash in the property.
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To qualify for a mortgage, you must complete
an extensive loan application.
The financial institution will check your credit
history, employment, and references.
They will look for evidence that you can meet
your current bills and look at the type and
amount of your current debts, the amount and
source of your income, and your
creditworthiness.
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There are two types of mortgages:
Fixed-rate mortgage-- is a mortgage on which the
interest rate does not change during the term of the
loan.
An adjustable-rate mortgage is a mortgage for which
the interest rate changes in response to the movement
of interest rates in the economy as a whole.
The rate for an ARM usually starts lower than the
current rates for a fixed-rate mortgage. The lender than
adjusts the ARM rate based on the ups and downs of
the economy, but rates usually go up.
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After you and the seller reach an agreement
and you have arranged your financing, the next
step is to prepare for the closing.
An escrow closer is an independent person
who gathers and verifies information. The
closer also prepares the closing statement that
lists what you owe and what credits will be
applied to you.
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You will meet with the closer to sign
documents and pay the balance you owe. Once
the sellers receive their money, the escrow
closer makes sure that title passes to you. Title
is legally established ownership.
A deed is the legal document that transfers title
of real property from one party to another.
Before you take ownership, you will want to
make sure that the title is clear—free of any
liens, which is a financial claim against the
property.
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To ensure that the property has a clear title, the
escrow closer orders a title search, which is the
search of public records to check for ownership
and claims to a piece of property.
When the title insurance company confirms
that title is clear and all is represented, it will
issue title insurance—a policy that protects the
buyer from any claims arising from a defective
title.
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Before the closing, the lending institution
prepares the loan papers and sends them to the
escrow closer. If any problems arise, the closer
or the lender will notify the buyer and seller.
When all procedures are complete, they will be
notified of the closing date. In this meeting,
you and the seller sign the papers and pay all
related closing costs and the ownership is
transferred from the seller to the buyer.