No doubt many wannabe first-time homebuyers have been sitting on the sidelines of the volatile housing market, unsure when or how to enter the game. If that describes you, you're probably fortunate to have missed out on the housing bubble and lax lending standards of a few years ago, when millions of people took out mortgages they couldn't afford -- or understand.
Homeownership is a long-term commitment filled with expenses (both expected and unexpected) and responsibilities. The upsides -- not to mention the tax advantages -- are why approximately two-thirds of Americans own instead of renting. But homeownership is not always right for everyone or at every stage of life.
Here's hoping that now, as home prices have plummeted and loan interest rates are at historic lows, you can resist the temptation to get in over your head and first bone up on the many one-time and recurring costs involved in owning your own home.
A good place to start is Know Before You Owe, the financial education initiative launched last year by the Consumer Financial Protection Bureau (CFPB) to ensure that people receive concise, easy-to-understand information regarding mortgages, credit cards and student loans, among other major financial decisions. (Along with improving financial education, the CFPB is also charged with supervising and enforcing federal consumer financial-protection laws.)
After soliciting input from thousands of consumers, lenders, mortgage brokers and consumer advocates, the CFPB recently developed new prototypes for the federal disclosure forms borrowers receive after applying for a mortgage (Loan Estimate Form) and before closing on the loan (Closing Disclosure Form).
"When making what is likely the biggest purchase of their life, consumers should be looking at paperwork that clearly lays out the terms of the deal," said CFPB Director Richard Cordray. "Our proposed redesign of the federal mortgage forms provides much-needed transparency in the mortgage market and gives consumers greater power over the exciting and daunting process of buying a home."
The proposed forms combine several different but overlapping documents now required by various federal agencies. But they will simplify the language and format and make it easier to compare different mortgages and more easily understand loan terms, including interest rates, monthly payment amounts, closing costs and how the loan amount might change over time (e.g., with an adjustable-rate loan). They also highlight features borrowers may want to avoid such as prepayment penalties and negative amortization.
The public has until November 6, 2012, to weigh in at this site on most of the CFPB's proposed mortgage rule changes, which also include new protections for so-called high-cost mortgages (those with higher interest rates, points and fees). A final version of the plan is expected sometime next year, with finalized forms to follow.
In the meantime, if you're considering buying a home, review the proposed forms to get an idea of which costs you should be watching out for. And, even if you're already comparing loans or in escrow, ask your lender to show you where the various costs highlighted in the new forms are located in your current disclosure documents -- it might help avoid costly last-minute surprises.
Here are some factors future homebuyers should keep in mind:
Start planning now. It could take years to save enough for a down payment and closing costs. You'll also need to factor in ongoing expenses like a monthly mortgage payment, mortgage insurance (for down payments less than 20 percent), homeowner's insurance, property taxes, furnishings and maintenance or repairs.
Speaking of closing costs -- they often run 3 to 6 percent of the home's purchase price and may include such arcane charges as: fees for loan origination, appraisal, underwriting, government recording and pest inspection; several months' of prepaid homeowner's insurance, property taxes and interest; and title search and title insurance, among many others.
Qualifying for a loan. Even if you've saved enough, if your credit rating is poor you may either not qualify for a loan or have to pay a much higher interest rate. Work on repairing your credit at the same time you launch a savings plan.
Down payment. The days of 0 percent down payment loans are long gone, unless you qualify for a Veterans Administration loan. Loans backed by the Federal Housing Administration are available for 3.5 percent down, but not all properties qualify. Conventional mortgages (either fixed rate or adjustable rate), are available for as little as 5 percent down, depending on how good your credit score is.
PMI. If your down payment isn't at least 20 percent, you'll probably be required to buy Private Mortgage Insurance (PMI), which protects the lender if you default. It can be very costly (typically 0.5 to 1 percent of the entire loan amount on an annual basis), so get rid of PMI as soon as your loan principal drops to 80 percent of the home's total value.
Mortgages. Common mortgages available include fixed rate, adjustable rate, interest-only, and jumbo (loans over $417,000, except in certain high-cost areas where the thresholds are higher). For a comprehensive overview of how different mortgages work, check out Bankrate.com. Another good tool is an easy-to-follow video explaining mortgages, as explained by Sal Kahn, founder of the popular Khan Academy, which you can view at Practical Money Skills for Life, a free personal financial management program run by my employer, Visa Inc.
Homeownership is not without its share of headaches, but in the long run, it can be a strong investment in your future -- and besides, it's nice to be your own landlord.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
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