There’s a popular saying in Texas, “big hat, no cattle”. In the home-buying world, you might translate that into, “big house, no furniture”. It’s very easy to buy more house than you can afford and end up with a home that’s more of a curse than a blessing. The summer months are a popular time for many people to buy and sell their homes. We wanted to compile a list of frequently asked questions that we get in order to help you navigate this complex process:
How do I know if I can buy/sell a new house right now? – We cannot emphasize enough that this question needs to be answered BEFORE you start looking to buy/sell a home. Here’s a mini-checklist to consider:
- Your current financial foundation must be strong. This means that you shouldhave a full emergency fund of 3 to 6 months of expenses in place. Anothercritical point – we encourage you to be debt-free and remain debt-free throughthis process. If you have car payments and credit card balances, then you maynot be ready to buy your first or next house yet. Owning a house comes withunexpected costs that can easily over-extend a person financially.
- Your future housing costs should be no more than 25% – 35% of your take-homepay. We advise you to stick to the 25% as a good rule of thumb. This isn’t justthe mortgage, but includes HOA fees, property taxes, home-owner’s insurance,etc.). Life tends to be unpredictable and going over this amount can leave yourbudget unable to meet a surprise cost.
- Can you put a 20% down payment on your new house? This allows you to avoida highly unnecessary cost for PMI, which is Private Mortgage Insurance.
There are so many different mortgage choices? Which one do I pick? – There are FHA, conventional, VA loans (if you’re a veteran), adjustable-rate mortgages, and different loan programs that can make it even more complex. Knowing which one to pick is only half of the issue. The other question is how long should my mortgage term be? Here’s what we recommend:
- Most people most of the time should choose a fixed-rate, conventional loan. Wenever recommend an adjustable-rate mortgage. Interest rates are low right nowand locking in that lower, fixed rate can save you a lot of money in interest overthe long run. The other mortgage types can come with additional complicationsthat can be hard to plan for and cause more frustration than they’re worth.
- Choose a 15-year term over the 30-year term. Quite simply, this has everythingto do with interest. Not only do the interest rates tend to be lower, but you’llend up saving a ton in interest expenses during the life of the mortgage. Currentinterest rates for a 15-year term are notably lower than the 30-year term.
What are all of the different costs associated with buying and selling a home? –While it’s impossible to totally estimate, on average, closing costs can range from 2% to 5% of the home’s selling price. Typically, both the buyer and seller will have closing costs that need to be paid. Another cost is the commission paid to the buying and selling agents which typically is 6% of the home’s sale price. It’s important to know that the seller is the one that usually pays the realtor’s commission; not the buyer. Truly, there are too many different fees to list, but here are some common ones: 1) loan origination fee 2) home and pest inspection fees 3) appraisal 4) prepaid property taxes and mortgage insurance 5) title insurance 6) recording fees and 7) underwriting fees. Your best bet is to get an estimate of all of the associated costs from your lender so that you’ll know the true cost of buying or selling.
I want to sell my home; what can I get for it? – Many believe that going to zillow.com can give an accurate estimate for their home’s value. While it does provide a good, ballpark estimate, what you really want to get is a free Comparative Market Analysis (CMA) from your realtor, which considers specific conditions in your local area. It’s critical to understand that you may not receive the value set forth in the CMA. You may have unknown issues with the house that can affect the value. Additionally, the local real estate market can either push prices down or up.
Do I just go to my local bank for a mortgage loan to buy a home? – While this is one way to apply for a loan, a better approach would be to go through a mortgage broker. These are agents that specifically work for the buyer to find the best loans and rates available. A direct lender can also work with you to structure the loan that you need. A bank will only give you their rates and their options. A broker will look at what’s available in the entire lending world to give you the best possible option.