This is a very complicated topic, so let's approach it like this:

Pt. 1:

-Economic Benefits of Owning Vs. Renting
-Preparation (financial)
-Background Info on Mortgages

Pt. 2:

-Selecting A House
-Townhouses Vs. Detached Homes
-Resale Value/Property Values
-Working with Banks, Lenders & Mortgage Brokers


First let's start with the economic benefits: While the responsibility may seem tremendous and the initial costs in terms of downpayments can be a good sum of money, it is typically cheaper to Buy a house then to rent. This is true for several reasons:

As you pay off your mortgage you build up equity in your home, I.e. If you've paid off $40,000 of the principle of your mortgage, you have 40,000 in equity + the difference between the home's value and the amount of the loan. For instance, you borrowed 175,000 to buy a 200,000 home (25k was your down payment) after some improvements your home is now worth 220,000. Your total equity is the 40,000 you paid towards the principle, plus 45,000 (220,000 - 175,000) which equals $85,000.

That won't happen if you're renting.

You can borrow against your house (home equity loan) and use that money to start a Business, pay for schooling, emergencies, etc. It's real property that you own.

One of the reasons behind the wealth gap between Whites and Blacks is that a higher % of Whites own homes then Blacks.

Let's say you pay $40,000 over time period X on your house, and when you sell you get that $40,000 back, your down payment back ($25,000) and an additional $5, for a total of $65,005.00...plus you got to live in the house too.

If you rented, you would be out of 40k over that time period...nice for your landlord..not for you.

Still not convinced?
http://www.homefair.com/usr/rentbuyform.html

Put in your tax bracket, your rent, use a number like 2-4 for property taxes and 3-5 for appreciation (depending on where you would buy/how much work you would do) interest rates are low, so put in 6.5 for the interest rate. I'll leave the rest up to you, some of you may find that the amount you save is close to the amount you pay in rent now....if not greater.

Final word: Don't think of your primary residence as an investment so much as a money saver, due to building up equity, saving $ vs. renting, deducting the mortgage interest on your taxes, etc. The reason I say this, is because your home isn't going to provide the kind of returns the stock market will, BUT if you can save $12,000/yr by buying a house......you can pump that money into the market.

Just think of your home.........as your home and the foundation for your wealth. But as an investment on par with your stock portfolio.

Of course it's a whole nother ball game when you buy houses to rent to other people


Now let's discuss financial preparation, please note that I'm discussing this outside the realm of government programs, that can help low income people buy homes...simply because I don't know enough about them to provide any useful information them.


First of all, you need a household income of $25,000 to purchase a home and you also need 2 years worth of tax returns, at or above that income level as well.


Once that's squared away you need to check your credit, you can pull your credit report from the 3 credit reporting agencies from the following Web Sites:

Transunion: http://www.transunion.com
Equifax: http://www.equifax.com
Experian: http://www.experian.com

Each of the reports can easily have different information on them, so it's important to check all 3. If you have anything that looks suspicious and/or a negative account...investigate it! If it isn't suspicious you'll at least get info on who it is and how to take care of it, if it's just a Bill you didn't pay...the company may not respond in time and it will get deleted Can't hurt to try.

Now some of the credit reporting agencies are starting to offer "credit scores" the same scores that lenders will use to evaluate your credit. Use the information they provide you to determine by how much you need to increase your credit score (if neccessary)

Ok, so now you're all set to get a Mortgage...so now you need to do some research on Mortgages themselves.

http://www.homefair.com/homefair/first.html

In general homefair is a great resource, I'm using it as part of my own home purchasing activities (hopefully in the next 12-18 months). The link I provided will take you to a page that gives you a lot of information on how mortgages work.

BUT, here is a some background info anyway.

Interest Rates, study the federal prime rate in determining your interest rate....you want to be as close to that as possible. Right now it's about 4.5% so a Mortgage rate of about 6 - 7 is good. If it was @ 8% you're probably going to be looking at a rate of 10% or more. The idea is to have as low as an interest rate as possible, even if it means waiting 6-12 months to improve your credit...but just know it's affected by the federal rate.

The interest rate is VERY important (often called the A.P.R.), because the interest is compounded monthly. If you borrow 200k at 6.5%, you'll pay about 254k in interest over the life of the loan, for a total of 454k. If you borrow 200k at 13%, you'll end up paying about 594k in interest over the life of the loan, for a total of 794k. Nasty eh?

(same goes for Car loans)

The lesson is to avoid sub prime (loans to people with bad credit) loans and to improve your credit, instead of taking a bad deal. However, if you have no choice......DO NOT take a loan with an interest rate of over 13.3%.........because it's illegal! Lenders can't charge over 13.3% for home loans by federal law, (although sub prime lenders do it all the time) that is not a company you want to work for.

Also, find out if your state/municipality has High Cost loan laws and find out what the maximum interest rate is. Residents of NY, NC, MA, Philly this means you.

I'm sure the thought of paying extra towards your mortgage is coming to some of your minds. You would simply pay 25% more then your mortgage payment (it would get applied to the principle) so that you could save money on interest payments. It may or may not be a good idea, depending your situation. Basically, you need to determine if the money paid towards the mortgage can be better spend elsewhere. If that extra 25% can be invested and generate a 10% annualized return, vs. the 6% you're paying on your mortgage...invest it. BUT, it's still something you need to figure out depending on your situation.

Points: 1% equals 1 point. Lenders charge these as part of the up front costs of the loan, so if you borrow 200,000 and the loan has 5 points, you owe them 10k. Try to get as low points as possible, it's another way they try to squeeze money out of you.

Prepayment Penalty: If you sell a house you haven't paid the mortgage off on, it's a prepayment. If you have 120k left on the principle and you sell the house for 200k, you give the bank the 120k to satisfy the debt and bounce. You don't have to pay the interest you would've paid if you had kept the house for 30 years, because the interest accrues monthly. You dig?

Banks don't neccessarily like this, because it cuts into their profits. They would (obviously) like to receive 254k in interest instead of 100k, so they have prepayment penalties to cover them if you sell the house too soon....usually less then 5 years. Look out for these as well, particularly if you're planning on selling the house in a time period that could incur the fee. Negotiate the lowest fee possible, or see if you can get a loan without a fee.

LTV: This stands for Loan to Value, or the % of the home's value the lender will lend to you. This number will also tell you how much of a downpayment you need to come up with.

If you want to borrow 200k and the LTV is 95%, then you only need 10k. If it's 80% then you need 40k.

Pre-Qualification: This is where a lender will check your credit, your income and tell you the largest loan you can afford. DO NOT TAKE THIS DEAL! Get something cheaper, and put that extra money towards saving for your retirement, investing or just to have spare cash around. They want you to take that deal so they an make more money......but don't take it.

If they say you can afford a 250,000 house, get a 200,000 one..and pocket the extra money.

The typical rule of thumb is that you can afford 28 - 33% of your Gross monthly income as a Mortgage payment. I'd advise you to go for 22-28% unless your income or family situation dictates otherwise. I say this because your home shouldn't crush you to the point that renting becomes cheaper, OR that it prevents you from investing and saving.

Better to live in a Modest house and have a ton of money in investments and savings socked away that you can live off of in a economic downturn, pay for Jr's college and/or retire off of, then to have the big house with the pool and have a small portfolio. n/m?

Ok, that's it for now.

Tommorrow or Wednesday, we'll deal with the MOST important part of all this. Selecting the house, choosing the right house is the difference between the house growing into a real asset, coming out ahead when you sell it AND it actually being cheaper then renting. So in the meantime, you really need to play with the calculator at: http://www.homefair.com/usr/rentbuyform.html

In general, buying is always better.....but if you make the wrong choices it only becomes marginally better. You could end up in a situation where you lose 25,000 on the house, but would've paid 28,000 in rent....it's almost moot then.......

But we'll discuss that later........

I'd also advise you to pick up a copy of the "The New Rules of Money" by Ric Edelman. Great advice for first time home buyers and the pitfalls to avoid, in terms of making buying a house work for your financially.




Peace,






M2

The Blog: http://www.analyticalwealth.com/

An assassin’s life is never easy. Still, it beats being an assassin’s target.

Enjoy your money, but live below your means, lest you become a 70-yr old Wal-Mart Greeter.