|Special Home Buyers
Do you see the statement above? Someone once told me it was written backwards…that you only make money when you SELL real estate. "How on earth could you make money when you buy it?" he said.
But that statement IS accurate. You see, you might receive your sales proceeds when you sell your home, but it’s how well you BOUGHT your home that will determine HOW MUCH your proceeds will be.
But the story doesn’t end there. Finding the right home, and making a prudent financial investment is more involved than just "buying right." You also need to FINANCE it right.
Even Experienced Homeowners Make Costly Mistakes
When Buying And Financing Their Home
Hi, my name is ray king, and I specialize in helping people buy the right home at the right price…AND right financing.
It’s no surprise that borrowing $100,000…$200,000 or more is a lot of money. And how to FIND the right home…how much to PAY for the home…how much to BORROW…and on what FINANCIAL TERMS can literally mean tens of thousands of dollars MORE or LESS in your pocket!
If you’re like most people, the decision to buy a home involves a number of stresses and strains. For about 80% of buyers, it’s the single largest financial transaction of their lives. Mistakes in any part of the buying process can cost you thousands.
That’s why I wrote this special report…to give you a number of helpful, straightforward tips for finding a home that meets your needs, AND becomes a wise financial investment for you.
Here are 8 strategies (I call them "secrets" because so many home buyers disregard them when buying) you should consider when buying your next home…
Secret #1: Understand What You NEED In Your Next Home.
Two things you need to consider here: Your NEEDS…and your WANTS. They’re two very different things.
You may need 4 bedrooms because of your children, or need a 3 car garage because of your 3 cars…
What you’ll find is your needs are fairly basic. It’s the "wants" that take a little more time to clarify. Here is a list of needs you should consider BEFORE looking for your home:
Secret #2: Understand What You WANT In Your Next Home.
A great way to get a handle on your wants is to take a good look at your present home. What do you like about it? Do you like it’s open floor plan? Do you like the kitchen and eating areas? Do you like the common area layout?
List out everything you like about your present home, or homes you’ve visited.
Now, let’s take a look at what you don’t like about your home. Do you hate the flat roof? Do you hate the master bedroom layout? Are the bedrooms too small? Is the kitchen too far from the garage?
If you dislike something with your present home, you’re going to dislike it with your new home. So the better you can identify these items, the more likely you are to avoid them.
Here’s a good suggestion: Take out a piece of paper and draw a vertical line down the middle. In the left column, write down everything you like about your present home. In the right column, write down everything you dislike about your present home. It’s also important you understand WHY you dislike something.
Now, from your list of "likes," let’s compile a list of features you want for your new home. Now, here’s an important tip that will help you really narrow your focus.
Take out another sheet of paper and put two columns on it. On the left hand side, you will be listing out the features of your home. And on the right hand side, you’ll be listing out the benefits. For each feature, you want to list the benefit of that feature.
Features tell you what something IS: 3 bedroom, 2 bath, 3 car garage, etc. Benefits tell you what something DOES. Benefits fulfill desires.
For example, a great room concept (feature) will be ideal for entertaining friends and family at special times (benefit). So on the left hand side, you would put "great room.." And on the right hand side, list out all the benefits (or reasons) for the "great room" design: Family entertaining, business entertaining, Thanksgiving holidays with the family, etc.
Understand What Each Other Is Looking For, And WHY
If you’re a husband and wife looking for a home, this exercise will eliminate many disagreements down the road. You will both understand what the other wants, and WHY they want it.
I recommend you RANK each feature in terms of its importance to you and your spouse. You’re both going to live in the home, so you better understand what the other is looking for.
For example, a well designed gourmet kitchen (remember, list ALL the features of the kitchen you’re looking for) may rank high with a woman, while having a workshop may rank high with a man. Try to understand each other’s priorities.
Most People Have More Dreams Than Money
Ranking will also show you areas you may need to eliminate because of price constraints. And by having each person rank the importance of the features they want, you won’t be eliminating a high priority item and putting additional stress on an already stressful time.
Secret #3: Understand How Much Home You Can Afford.Like it or not, there are 2 guidelines bankers and mortgage lenders use to determine how much loan you can afford.
The first guideline is the Payment To Income Ratio. This guideline compares your income – or your total household income – to the amount of mortgage payment you’re considering.
To calculate the "payment" part of the formula, the lender will take the mortgage payment (principal + interest) and add to it Property Taxes and Insurance. Hence the term "PITI" (principal, interest, taxes, and insurance).
Usually lenders will loan up to 28% of your total household income.
But before you think you’re home free, there’s something else you need to know…
It’s called the Debt To Income Ratio. Debt refers to ALL the major monthly payments other than your mortgage payment (PITI). To arrive at this amount, the lender will consider…
Your car payment…
Your credit card debt and payments…
Any IRS liens or payments due…
Any other payments and debts you have (boat, 2nd home, etc.)
Then, they’ll compare your total debt to your ability to make current payments with your new home loan added into the equation.
Now, here’s the "stickler." Each mortgage company sets different limits on your Debt To Income ratio. Which is why it’s critically important to find a MOTIVATED LENDER.
Don’t follow the "canned" financial advice like you see on TV. Most of that advice is "rule of thumb," and designed for the lowest credit rating and highest interest rates.
If you spend 2 or 3 days to find a loan that saves you $40,000 to $150,000 over it’s term, your time is WELL WORTH SPENT! Doing a little homework on your own will literally save you thousands over the term of your loan.
Secret #4: Save A Bundle When Financing.
Your ability to afford a home will be related to a number of items. They are…
And just in case you were looking for a specific "rule of thumb," for financing your home, you should know that…
There Are NO General Rules Of Thumb About Financing Your Home.
Each case is different, and your personal financial circumstances will have an impact on how much home you can afford.
However, you MUST understand the relationship and impact interest rates, term of loan, points, and type of loan can have on your overall financial picture.
Let’s start with the "amount financed" first. Many people often pay cash or put 20% or more down as equity. The reasons they do this are…
"The bank required us to…"
"We’ve just always put down this amount…"
"We wanted a lower payment."
Problem is, these reasons could cost you thousands of dollars.
The answer for how much you can put down on your home is different for most people. However, I have learned over time that…
Many People Put Down More Cash On Their Home Than They Need To,
And Could Have Received A Better Return On Investment Had
They Invested The Money Instead Of Putting It Into Their Home
Here’s a simple and fast way to "ballpark" the actual annual return on investment you get from the money you put down on your home:
Now 7.5% sounds like a fair investment. But the question you need to ask is this: Can you make more than 7.5% elsewhere?
And did you notice something else here? Had you put down just $15,000, your return on your Down Payment would be 15%!
The moral of the story: Putting more money into your home may make your banker happy, because it lowers the risk of getting his money out if you default.
And it may make your overall payment a little lower…
But it may be a wiser decision to put less into your home, IF you can locate an alternate investment that will pay greater interest on your hard-earned equity.
Now, let’s shift gears a little and talk about the impact Term and Interest rate will have on your overall financial picture…
How INTEREST RATE and TERM can make or COST you thousands.
Mortgage lenders toss around interest rate numbers as if they didn’t matter.
And to illustrate the impact interest rates can have on your overall financial picture, I’ve presented a table below showing the interest you pay over the term of a 30 year, $150,000 loan at 8%, 7% and 6%.
And here’s the clincher: Just ONE percentage point on a $150,000 loan can cost you almost $37,000 over the term of the loan! TWO percentage points will cost you over $72,000!!
Your banker might tell you his "slightly higher rate" is only a matter of $103 a month in payment. But YOU should know better! Take a look at the table below…
That’s money taken out of your pocket if you don’t look for good rates!
And if you think interest rate has an impact on your overall financial picture, take a look at what modifying the TERM of your loan can do…
Here’s another example of a $150,000 loan at 7% interest. But this time, we examine the total interest paid when you select a 30 year vs. a 15 year vs. a 10 year amortization…
The "bottom line?" Estimate the maximum amount of payment you can afford, and adjust TERM and INTEREST RATE of your loan to minimize the amount of total interest you’ll pay.
But then your banker cuts in and says, "but the interest you pay is Tax Deductible…" And you should know this: If you’re in the 28% tax bracket, for every dollar in interest you pay, you only save 28 cents. Don’t go spending a dollar to save 28 cents if you can help it!
Here’s How To Instantly Know How Many Points You Should Pay…
Another consideration in the formula is the amount of POINTS your lender will charge you to initiate your loan. And what you’ll notice is there’s a GAME being played with you.
And if you don’t know the rules of the game, YOU LOSE!
Sitting across from a banker while he throws obscure numbers at you like you’re a human dartboard can be pretty overwhelming. And frequently you’ll hear terms like "7.5% with 1.5 points," or "7.25 with 1 point."
All-the-while you’re thinking to yourself, "I have no idea what the financial impact of this guy’s blabbering means to me." And quite frankly, your banker knows…
The Less You Know About What You’re Paying
The Better For HIM!
So hopefully this little "ballpark" example will help you quickly determine the best points-to-interest rate for you. How many points should you pay, and what formula is best for you? Here’s a little help…
If a banker is giving you several options of interest rates and points, you need to sort out the financial consequences so you don’t lose money. Say, for example, you were considering 2 loans. Both are for $150,000, and both are 30 year amortization.
DEAL #1: One loan he offers you is 7.5% with 0 points for origination…
What’s the ONE factor that will determine which loan is better?
How LONG You Keep The Loan!The first thing you need to think about is how long you’re going to live in that home. The average homeowner spends about 5.5 years in their home before selling for whatever reason.
So, for example sake, let’s say you plan to live in the home 5 years. Here’s how you determine which deal is better…
Here’s an Example…
The result? If you stay in your home for 5 years, you will NOT recoup the points you paid up front with the savings in a lower interest rate. Recoup time is about 6 years and 2 months to breakeven.
So your best bet would be to select loan #1.
If, however, you planned to keep your home beyond 6 years and 2 months, you’d be better off with loan #2 (i.e. the overall savings in interest rate will exceed the amount you paid in points – not considering the time value of money).
Are you starting to see how important it is to understand your home’s financing? How important it is to shop for the best rates, terms, and points?
Good! Now, let’s move on to another important secret for buying your home…
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