If you're like
most people, purchasing a home is the biggest investment you'll ever make. If
you're considering buying a home, you're likely aware of the complexity of
the endeavor. Because of the numerous factors to consider when purchasing a
home, it's important to prepare as best you can. Some common home-buying
principles and caveats are presented here for your consideration. By keeping
them in mind, you'll help create a successful and more enjoyable
experience. These Top Ten lists are by no means exhaustive. Since your home
could cost you 25 to 40 percent of your gross income, it's important to
conduct research, ask questions and study the process carefully. Call Dale
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for a home without being pre-approved. As a potential buyer competing for a
property, you'll have a better chance of getting your offer accepted by being
as prepared as possible. Consider this hierarchy of preparedness:
pre-qualified nor pre-approved
available at each level can be easily understood when viewed from the
seller's perspective. Imagine you're a seller in receipt of multiple offers
to purchase your property. A complete stranger (buyer) is asking you to take
your property off the market for at least the next two to three weeks while
they apply for a loan. As the seller, lets consider the type of buyer you'd
prefer to deal with.
pre-qualified nor pre-approved. This buyer provides no evidence that they can afford to
purchase your property. You may wonder how serious they are since they're not
at least pre-qualified. Pre-qualified This buyer has met with a mortgage
broker (or lender) and discussed their situation. The buyer has informed the
broker regarding their income, expenses, assets and liabilities. The broker
may also have seen their credit report. The buyer provided you with a letter
from the broker stating an opinion of what the buyer can afford. Pre-approved
This buyer has provided a broker written evidence of income, expenses,
assets, liabilities and credit. All information has been verified by a
lender. As a result, much of the paperwork for this buyer's loan has been
completed. This buyer will probably be able to close quickly. They provide
you with a letter (pre-approval certificate) from the lender. You're as
certain as possible that this buyer can close. As a potential buyer, you can
see that being pre-approved will give you the best chance of getting your
offer accepted. This is critical in a competitive situation.
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verbal agreements. If you're asked to sign a document containing
instructions contrary to your verbal agreements--don't! For
example, the seller verbally agrees to include the washing machine in
the sale, but the written purchase contract excludes it. The written contract
will override the verbal contract. More importantly, your state may require
that contracts for the sale of real property be in writing. Do not expect
oral agreements to be enforceable.
a lender just because they have the lowest rate. While the rate is important, consider
the total cost of your loan including the APR , loan fees, discount and
origination points. When receiving a quote from a lender or broker, insist
that the discount points (charged by the lender to reduce the interest rate)
be distinguished from origination points (charged for services rendered in
originating the loan). The cost of the mortgage, however, shouldn't be your
only criterion. Have confidence that the company you select is reputable and
will deliver the loan with the terms and costs they promised. If in the final
hours of the transaction you determine that the lender has suddenly increased
their profit margin at your expense, you won't have time to start again with a
different lender. Ask family and friends for referrals. Interview prospective
receiving a Good Faith Estimate. Within three business days after the broker or lender
receives your loan application, you must receive a written statement of fees
associated with the transaction. This is both the law and the best way to
determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE)
with you when you sign loan documents. You should not be expected to pay
fees which are substantially different from those contained in your GFE.
getting a rate lock in writing. When a mortgage company tells you they have
locked your rate, get a written statement detailing the interest rate,
the length of the rate lock, and program details.
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dual agent --i.e. an agent who represents the buyer and the seller in the
same transaction. Buyers and sellers have opposing interests. Sellers want
to receive the highest price, buyers want to pay the lowest price. In the
standard real estate transaction, the seller pays the real estate commission.
When an agent represents both buyer and seller, the agent can tend to
negotiate more vigorously on behalf of the seller. As a buyer, you're better
off having an agent representing you exclusively. The only time you should
consider a dual agent is when you get a price break. In that case, proceed
cautiously and do your homework!
home without professional inspections. Unless you're buying a new home with
warranties on most equipment, it's highly recommended that you get property,
roof and termite inspections. This way you'll know what you are buying.
Inspection reports are great negotiating tools when asking the seller to make
needed repairs. When a professional inspector recommends that certain repairs
be done, the seller is more likely to agree to do them. If the seller
agrees to make repairs, have your inspector verify that they are done prior
to close of escrow. Do not assume that everything was done as promised.
shopping for home insurance until you are ready to close. Start shopping for insurance as soon
as you have an accepted offer. Many buyers wait until the last minute to get
insurance and do not have time to shop around.
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documents without reading them. Whenever possible, review in advance the documents
you'll be signing. (Even though some specifics of your transaction may
not be known early in the transaction, the documents you'll sign are standard
forms and are available for review.) It's unlikely that you'll have
sufficient time to read all the documents during the closing
allowing for delays in the transaction. In a perfect world, all real estate
transactions close on time. In the world we live in, transactions are often
delayed a week or more. Suppose you asked your landlord to terminate your
lease the day your purchase transaction was scheduled to close. A day or two
before your scheduled closing date, you discover your transaction is delayed
a week. In a perfect world, no one is inconvenienced and your landlord is
willing to work with you. More likely, however, your landlord is
inconvenienced and angry. Will you be thrown out? Will you have to find
interim housing for a week or more? The eviction process takes a little time,
so the Sheriff won't immediately remove you, but this type of
stress-producing episode can be avoided. How? Terminate your lease one week
after your real estate transaction is scheduled to close. That way, if there
is a delay in closing your transaction, you have some leeway. This approach
might cost a little more, then again, it might not.
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Refinancing with your existing lender without shopping around.
existing lender may not have the best rates and programs. There is a general
misconception that it is easier to work with your current lender. In most
cases, your current lender will require the same documentation as other
companies. This is because most loans are sold on the secondary market and
have to be approved independently. Even if you have made all your mortgage
payments on time, your existing lender will still have to verify assets,
liabilities, employment, etc. all over again.
Not doing a break-even analysis. Determine the total cost of the
transaction, then calculate how much you will save every month. Divide the
total cost by the monthly savings to find the number of months you will
have to stay in the property to break even. Example: if your transaction
costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In
this case you'd refinance if you planned to stay in your home for at least 40
Note: This is a simplified break-even analysis. If you are refinancing
considering switching from an adjustable to a fixed loan, or from a 30-year
loan to a 15-year loan, the analysis becomes much more complex.
Not getting a written good-faith estimate of closing costs. See item number four above.
Paying for an appraisal when you think your home value may be
too low. Have
the appraisal company prepare a desk review appraisal (typically at no charge)
to provide you with a range of possible values. Your mortgage company's
appraiser may do this for you. Do not waste your money on a full appraisal if
you are doubtful about the value of your home.
Using the county tax-assessor's value as the market value of
Mortgage companies do not use the county tax-assessor's value to determine
whether they will make the loan. They use a market-value appraisal which may
be very different from the assessed value.
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Signing your loan documents without reviewing them. See item number nine above.
Not providing documents to your mortgage company in a timely manner.
When your mortgage company asks you for additional documents, provide
them immediately. They are doing what's necessary to get your loan approved
and closed. Delays in providing documents can result in a costly delay.
Not getting a rate lock in writing. When a mortgage company tells you
they have locked your rate, get a written statement which includes the
interest rate, the length of the rate lock and details about the
Pulling cash out of your credit line before you refinance your
Many lenders have cash-out seasoning requirements. This means that if you pull
cash out of your credit line for anything other than home improvements, they
will consider the refinance to be a cash-out transaction. This usually results
in stricter requirements and can, in some cases, break the deal!
Getting a second mortgage before you refinance your first
Many mortgage companies look at the combined loan amounts (i.e., the first
loan plus the second) when refinancing the first mortgage. If you plan on
refinancing your first loan, check with your mortgage company to find out if
getting a second will.
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Not knowing if your loan has a pre-payment penalty
If you are getting a "NO FEE" home-equity loan, chances are there's
a hefty pre-payment penalty included. You'll want to avoid such a loan if you
are planning to sell or refinance in the next three to five years.
Getting too large a credit line. When you get too large a credit
line, you can be turned down for other loans because some lenders calculate
your payments based upon the available credit--not the used credit. Even when
your equity line has a zero balance, having a large equity line indicates a
large potential payment, which can make it difficult to qualify for other
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Not understanding the difference between an equity loan and an
equity line. An
equity loan is closed--i.e. you get all your money up front and make fixed
payments until it is paid if full. An equity line is open--i.e. you can get
numerous advances for various amounts as you desire. Most equity lines are
accessed through a checkbook or a credit card. For both equity loans and
lines, you can only be charged interest on the outstanding principal balance.
Use an equity loan when you need all the money up front--e.g., for home
improvements, debt consolidation, etc. Use an equity line when you have a
periodic need for money, or need the money for a future event--i.e.
children's' college tuition in the future. Pinehurst condos for sale.
Not checking the lifetime cap on your equity line. Many credit lines have lifetime cap
of 18 percent. Be prepared to make payments at the highest potential rate.
Getting a home-equity loan from your local bank without
shopping around. Many consumers get their equity line from the bank with which
they have their checking account. By all means, consider your bank, but shop
around before making a commitment.
Not getting a good-faith estimate of closing costs. See item number four above
Assuming that your home-equity loan is fully tax-deductible. In some instances, your home-equity
loan is NOT tax deductible. Do not depend on your mortgage company for
information regarding this matter--check with an accountant or CPA.
Assuming that a home-equity loan is always cheaper than a car
loan or a credit card. Even after deducting interest for income tax purposes, a
credit card can be cheaper than a credit line. To find out, compare the
effective rate of your home-equity line with the rate on your credit card or
Effective rate = rate * (1 - tax bracket)
Example: The rate of the home-equity line is 12 percent, your tax bracket is
30 percent, your effective rate is:12*(1-.3).12* .7 =.084 = 8.4 percent.
If your credit card is higher than 8.4 percent, the equity loan is cheaper.
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farms for sale.
Getting a home-equity line of credit when you plan to
refinance your first mortgage in the near future. Many mortgage companies look at the
combined loan amounts (i.e., the first loan plus the second) when refinancing
the first mortgage. If you plan on refinancing your first, check with your
mortgage company to find out if getting a second will cause your refinance
to be turned down. Getting a home-equity line to pay off your credit
cards when your spending is out of control! When you pay off your credit
cards with an equity line, don't continue to abuse your credit cards. If you
can't manage the plastic, tear it up!
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Commercial real estate.
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