Winter 2004-05
A major portion of my job description is conducting homebuying workshops for federal credit unions. One of the things that has surprised me the most is the large number of military attendees - some heading into retirement - preparing to become first-time homebuyers.
My real estate background often leads me to think how so many people have missed out on perhaps the best opportunity in America to increase their financial wealth!
Real estate can be a very sound investment indeed. When you carefully choose a home you can afford, the payoff can be outstanding. When you make your mortgage payment each month, you are building equity in a place of your own. As you build equity, it is easier to afford another bigger and better home in the future.
Remembering that my first home was purchased for $32,000 in Birmingham, Ala., and progressively moving up, I know without a doubt that my last purchase would not have been possible without building equity and increasing the quality of home purchased with each move. When I relocated to the Washington, D.C., area, sticker shock prevented me from initially considering a home purchase here. But a year of renting and previously owning a home for many years convinced me that I needed to bite the bullet and buy. It was a financial stretch (so who really needs to eat three times a day?), but the home has appreciated phenomenally during the past three years.
Home prices rose more than twice as fast as wages during those three years. The five major housing industry forecasters predict home price gains to slow next year, but none foresees actual price declines.
But before you make this major financial decision, get educated! Gather as much information as possible. Friends and relatives who have recently purchased real estate can prove to be valuable sources of information. Many books, articles and online resources are at your disposal. Of course, face-to-face educational seminars on buying a home can provide excellent opportunities to learn and ask questions of someone who brings extensive first-hand knowledge of the process.
You will love the feeling of having something that is all yours. But there is more to owning a home than personal satisfaction: You can deduct the cost of your mortgage interest from your income taxes, and you are allowed to deduct the property taxes you pay.
Many helpful mortgage programs are available. A Veterans Administration loan is particularly favorable since it requires no down payment and no monthly mortgage insurance premium. The amount of allowable additional or "junk" fees is limited, and you have the ability to finance the funding fee. On the flip side, VA loan amounts are limited; in some areas, these limitations make it difficult or even impossible to utilize the benefits. Do your homework, talk with someone you trust in the mortgage department of your credit union or bank and let them guide you.
Home ownership isn't for everyone, so you should think carefully about the advantages and disadvantages before making this decision. From a historical perspective, however, the odds of posting significant financial gains from buying a house almost always outweigh the alternatives. Do you want to risk your hard-earned money in stocks, mutual funds or IPOs? The best opportunity for capital gains in recent years has been in residential real estate.
Military families should thoroughly research the new community before deciding to become a homeowner. How long does the average home in the community stay on the market prior to a sale? Talk to as many residents as possible to gain an understanding of the resale market.
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Lana Seale is Client Relations and Marketing Manager for SMARTMOVE®, and she has nearly 20 years' experience in real estate and mortgage banking. SMARTMOVE® partners with credit unions and corporations across the country to bring professional real estate services to their members, employees and families.
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How Much Home Can You Afford?
Generally, lenders want to see a down payment of five to 20 percent of the purchase price. The higher your down payment, the lower your monthly mortgage payments and closing costs will be. If you qualify as a veteran of the armed forces, you may be eligible for a VA loan, which has the lowest down payment requirements. Likewise, a first-time home buyer may qualify for special terms.
Once you know how much of a down payment you can afford, you'll need to calculate the monthly mortgage payment you can handle. Lenders generally want your monthly payments (which include principal plus interest, property taxes and home insurance premiums) to equal no more than 28 percent of your gross income. They also figure you can handle total debt (mortgage payments plus car payments, credit card payments, etc.) up to a maximum of 36 percent of your gross income.
A bank or mortgage lending institution can help you with these calculations, especially if you choose to pre-qualify for a loan. By pre-qualifying, you can find out exactly how much loan you can afford and the type of mortgage that's best for you.
Total monthly income: $ ___
Qualifying percentage: x .28
Maximum monthly housing expense: $ ___
Total monthly income: $ ___
Qualifying Percentage: x .36
Maximum monthly housing and long-term debt exp.: $ ___
Source: Metropolitan Life Insurance Co.