Chapter 4: Forming The Right Team
With all of the helpful books, online help and magazines out there these days, it is possible for you to buy a home independently without the help of a REALTOR®, a real estate agent licensed by the National Association of REALTORS®.
Though this is possible, it is not necessarily recommended. There are some things that an expert in the real estate industry can help you with. Real estate laws are local city and statewide. You will need a team of professionals to help you make your way through local realty customs.
Your interests must come first
Begin by finding REALTORS® that will represent your interests as you search for a home. It's not as easy as it sounds. Definitely 85% of people sell their home through a REALTOR® however those agents work for the seller, not you the buyer. Since they are paid as a percentage of the sale, they will logically want you to pay more.
An ‘exclusive buyer agent' is one that works for and represents the buyer exclusively. You may be required to pay such a REALTOR® hourly or at a contracted rate. They can also split the commission that the selling REALTOR® gets. The buyer's representative has their allegiance with you even though they have full access to houses that are up for sale as the seller's representative.
If that is not enough, there are a host of hybrid REALTORS®, either called single-agency or dual agency brokers. These REALTORS® can represent either the buyer or the seller in a transaction but never both at the same time. You do not want a conflict of interest so ask your REALTOR® up front about exclusivity and any possible conflict of interest.
You can find free help in getting connected to REALTORS® on web sites such as HomeGain.
Look for a lender
Once you have a REALTOR®, you will need to find a mortgage lender. Do not rush this search. This is a loan that you will be paying for the next thirty years. Starting on the Internet is a good idea. Try LendingTree. This site can give you information on interest rates from all over the country.
Look wider than the Internet though. Use it for a preliminary search and then get on the phone to local and community banks. Do not overlook credit unions, they can often offer you better deals and they know the community.
Mortgage brokers are a great help as well. They have a thorough understanding of interest rates and mortgage lenders around the country. The bank pays the mortgage broker not you. They generally get 1.5% to 3% of the loan and there are times when this fee gets added to the closing costs. You can find mortgage brokers online or through the National Association of Mortgage Brokers.
What loan type should you go for?
There are different types of loans and each is beneficial depending on your situation. With a fixed-rate mortgage, your monthly payment will stay the same for the life of your loan. Fixed-rate mortgages are independent of interest rate hikes and dips. If interest rates fall, the only way to reduce your interest is by refinancing, meaning new closing costs.
Adjustable-rate mortgages (ARM) have interest rates that vary, they can rise or fall depending on the financial index. Banks tend to offer initial ‘teasers' on ARMs. They offer them at 2% lower than fixed-rate loan interests usually. If you are planning to sell your home within five years of purchasing it, then an ARM with a teaser rate may be your best option. You will definitely pay less than with a fixed-rate mortgage. Another option is a hybrid loan that gives you a fixed rate for 5 to 10 years and then an adjustable rate for the balance of the loan.
Paying points is another way of lowering the interest rate of your loan. Points (the loan discount cost) is a portion of your interest that you pay up front. Paying that chunk of the interest up front gives you lower interest rates. One point is the equivalent of 1% of your mortgage.
Interest rates that are rising are a risk factor. Whenever interest rates go up, people with adjustable mortgage lose out. Their payments will go up and the demand for houses to buy will go down. Therefore, during the period that interest payments are high, the value of your home could actually go down.
If buying your home is a long term investment for you and you plan on staying put, then pay points. Say, for example, a lender is offering 6% loan points or a 5.6% loan with 2 points. A 30 year, mortgage of $100,000 with a fixed rate would have a monthly payment of $600 without points. On a two point loan, the monthly payment would be $574. It is $26 per month in savings but in 6 years you would already make back the $2,000 that you spent, so staying in the home any longer than 6 years will benefit you.
Get a loan approval
Once you have decided on a lender, apply to get a loan pre-qualified. This means the lender will determine the maximum amount you will be approved for. Pre-approval is an agreement from the lender that they will give you a mortgage. If houses are going like hotcakes in the area you are buying, get pre-approved for a mortgage if at all possible. Pre-approval can cost around $100 but not all lenders charge for it. A pre-approval with give you an edge in your bidding.
Some states may require a lawyer to go over the purchase contract and help with closing. The best recommendations will be from friends and colleagues. You need a lawyer that understands local issues and customs. Use LegalMatch to get a free referral.
Other states allow closing to be handles and processed by the title company that you choose.
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Chapter 5: Looking For The Perfect Home
