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Should you buy or rent?
Emotions, family and personal reasons all come into play in any home-buying decision. No one knows what the future holds for you, your family, your job or your finances. But we can help you understand what you're going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.
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If I am thinking about buying a house, what is the first thing I should do?
When you get that urge to buy a house, the first thing to do is step back and ask whether it makes more sense to keep renting for a while. If you still want to buy, you need to figure out how much house you can afford.
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What are the economic differences between renting and owning?
If you're looking for the best return on your money, historically you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds. While the stock market's long-term average rate of return is in the range of 8 percent to 10 percent, housing historically has appreciated on average in the low- to mid-single digits. Don't buy solely for investment gain. On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.
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What is the sunny side of homeownership?
Owners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also don't have to worry about their housing costs shooting through the roof because lenders can't boost borrowers' rates and payments, unless those borrowers have adjustable-rate mortgages.
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What is the cloudy side of homeownership?
When something breaks at an apartment, it's the landlord's problem. When it's your name on the deed, the problem is yours. If you throw every penny into a down payment, you're taking a big risk because you may not have enough money left to fix leaky pipes or buy a new air conditioner.
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What are some of the options I may want to explore?
Some middle-ground approaches to homeownership blend elements of buying and renting. Some of the more popular loan types are seller financing, "lease with an option to buy" and "contract for a deed" plans.
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Why would a potential buyer decide NOT to buy?
Potential buyers might want to hold off for many reasons. If there's a good chance that you will be laid off soon, you might want to wait. The same goes for people who plan to leave a job soon. The monthly payment isn't the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.
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What is seller financing?
With seller financing, the seller actually assists the buyer in purchasing the home, by "lending" the buyer either a portion of the amount to be financed or the entire amount.
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What are some examples of seller financing?
Let's say the buyer and seller agree on a price of $150,000 for the house. In many cases a lending institution would require a 20-percent down payment -- $30,000 -- and give the buyer a mortgage for $120,000. But if the buyer has only $15,000 cash, the seller could "take back" a second mortgage for the $15,000 the buyer is short. The buyer makes payments on the first loan to the bank and the second loan to the seller. Another example of seller financing: If the sale price of the home is $150,000 and the buyer has only $15,000 for a down payment, the buyer gives the $15,000 down payment directly to the seller who agrees to carry the entire mortgage amount of $135,000. The buyer would make all payments directly to the seller.
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What are the Pros and Cons of seller financing?
Pros: Seller financing reduces the cash needed to get into a home and could dramatically reduce closing costs. Often the seller will be more flexible in accepting an underqualified buyer.
Cons: The seller determines the interest rate for that portion of the mortgage being carried, and it usually comes with a higher rate and a shorter term. Perhaps most importantly, it very often comes with a balloon payment. This means that monthly payments would be computed as though the mortgage was to continue for, say, 30 years, but at the end of five or 10 years the entire remaining balance has to be paid in one lump sum. That normally requires refinancing at that point, when rates could either be lower, higher or about the same, or selling the house to meet that balloon payment.
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What are the different types of mortgages I can choose from?
There are all kinds of ways to finance your home. The most common types of mortgages are fixed-rate, adjustable-rate, and subprime mortgages for those who have credit problems. There are also less-well-known types of financing including jumbo and balloon mortgages.
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What is a fixed-rate mortgage?
A fixed-rate mortgage is by far the most common type of financing available. These loans feature fixed rates and monthly payments, generally for 15 year and 30 year periods.
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Why are fixed-rate mortgages so popular?
First off, consumers balk at the thought of their house payment rising and falling with interest rates. Secondly, whenever rates are low, fixed-rate mortgages are very affordable. Finally, fixed-rate loan borrowers face one major choice: 15 year or 30? For some, a 30 year loan makes more sense. For others, a 15 year loan does. The long repayment schedule of a fixed-rate mortgage will make keep the monthly payments to a minimum, making these types of loans very appealing.
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What are the advantages and disadvantages of a 30 year fixed-rate loan?
Advantages:
- Offers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
- Monthly payments are lower than those on 15 year loans because the interest is amortized over a longer period.
- Lower monthly payments free up money that borrowers can pour into investments that yield more than their homes.
- Higher interest bill increases the amount consumers can deduct at tax time, potentially reducing or eliminating their federal income tax liabilities.
Disadvantages:
- Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
- The overall interest bill is much higher because of the long amortization term.
- The interest rates are higher than on 15 year loans. TOP
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What are the advantages and disadvantages of a 15 year fixed-rate loan?
Advantages:
- Borrowers build equity much more quickly due to shorter amortization schedules.
- Overall interest bills are dramatically lower than those on longer-term loans.
- The interest rates are lower than 30-year loans.
Disadvantages:
- Monthly payments can be significantly higher than those on 30 year loans.
- Restricts homebuyers to a smaller house than they might be able to afford with longer-term loans. TOP
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What is an adjustable-rate mortgage?
Adjustable-rate mortgages, or A.R.M.s, differ from fixed-rate mortgages in that the interest rate and monthly payment move up and down as market interest rates fluctuate.
Most have an initial fixed-rate period during which the borrower's rate doesn't change, followed by a much longer period during which the rate changes at preset intervals.
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Why would I want to choose an adjustable-rate loan over a fixed-rate loan?
Adjustable rates start low. Rates charged during the intial periods are generally lower than those on comparable fixed-rate mortgages. After all, lenders have to offer something to make it worth their while to assume the risk of higher rates in the future.
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What are the different types of A.R.M.s available?
The initial fixed-rate period can be as short as a month or as long as 10 years. One-year A.R.M.s, which have their first adjustment after one year, used to be the most popular adjustable, and were the benchmark. Recently the standard has become the 5/1 A.R.M., which has an initial fixed-rate period that lasts five years; the rate is adjusted annually thereafter. That type of mortgage, which mixes a lengthy fixed period with an even lengthier adjustable period, is known as a hybrid. Other popular hybrid A.R.M.s are the 3/1, the 7/1, and the 10/1.
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Does the borrower have any protection against drastic changes in interest rates?
Borrowers have some protection from extreme changes because A.R.M.s come with caps. These caps limit the amount by which A.R.M. rates and payments can adjust.
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What are the different caps available for A.R.M.s?
- Periodic rate: Limits how much the rate can change at any one time. These are usually annual caps, or caps that prevent the rate from rising more than a certain number of percentage points in any given year.
- Lifetime rate: Limits how much the interest rate can rise over the life of the loan.
- Payment rate: Limits the amount the monthly payment can rise over the life of the loan in dollars, rather than how much the rate can change in percentage points. TOP
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What is an interest-only A.R.M.?
Around the turn of the 21st century, lenders began to market interest-only mortgages to middle-class borrowers. Formerly the preserve of what lenders called "affluent clients," interest-only mortgages are usually adjustables. The borrower is required to pay only the interest for a specified period, often 10 years. After that, it adjusts to the going interest rate, as tracked by a specified index. After that, the loan amortizes at an accelerated rate. During the interest-only period, the borrower can choose to pay some principal, too. By providing flexibility in the size of monthly payments, interest-only mortgages often are a good match for people with fluctuating monthly incomes: salespeople who are paid by commission, for example.
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What is a convertible A.R.M.?
Some A.R.M.s come with a conversion feature that allows borrowers to convert their loans to fixed-rate mortgages for a fee. Make sure to ask your lender if the A.R.M. is convertible.
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What is an assumable A.R.M.?
When an A.R.M. is considered assumable, it means when you sell your home the buyer may qualify to assume your existing mortgage. This could be very desirable if mortgage interest rates are high.
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