In our last blog we discussed some of the social or intangible benefits of home ownership that cannot be achieved as a Renter. Here are a few more:

• A Sense of Security
• Pride of Ownership
• Stability (Renters move every 3 years on average) remaining in one neighborhood encourages participation in community affairs and activities, you develop lasting friendships, and childred benefit from educational continuity.
• Lower Crime Rates in a stable housing area. The homeowner has a greater stake in the prevention of crime in their neighborhood. Homeowners are less likely to become crime victims, have lower teenage pregnancy rates, and achieve higher educational levels.
• Freedom - The home is yours. You can do with it what you want and you can financially benefit from it as long as you live there.
• Predictability- Unlike rent your mortgage payments don't go up over the years so your housing costs may actually decline as you own the home longer. However, Taxes & Insurance costs usually do rise. But these same costs are passed on to the renter at each lease renewal.
• Make improvements to the home which add to your quality of life, and may have the secondary benefit of adding value to the property. Remember Homeownership itself is an investment in your future.
• This is one of the only ways you can leverage of a low initial investment (down payment) to acquire a high value asset (Your Home).
• Real Estate is a low risk investment. It is a durable, marketable asset.
• It can be sold at a predictable price to a dependable group of available buyers as long as you allow enough time and exposure
• It marketability is reinforced by the fact that financial institutions are almost always willing to loan a high percentage of the home's value.
• This ability to use the Home's Equity is financially beneficial at every stage of your life including: paying off high interest debt, home improvement, college expenses, medical expenses, starting a new business, and this goes all the way to a source of retirement income.

Now we are going to explore in more detail the financial implications of home ownership.

Appreciation
Equity Creation and Uses / Forced Savings
Tax Benefits Appreciation

Although real estate moves in cycles, sometimes up, sometimes down, over the years, real estate has consistently appreciated. This consistent appreciation makes your investment in your home a hedge against inflation.

Now you need to consider some facts about this benefit. First is the fact that in the very long term over a period of 20-30 years Real Estate appreciation rates are lower than many other investments (ie. stocks other equity instruments). They more equivalent to Government Bonds. But, there are periods of great appreciation which can be taken advantage of if one is not forced to sell in a period of depressed prices.

In addition, though other investments have better long term rates of return they require investment of cash and most people are not consistent in making this investment. Because your mortgage payment is a forced saving. In addition, the leverage of a small downpayment, plus mortgage payments, will result in the eventual ownership of a an asset that could be hundreds of times greater than your investment.

The total amount of Homeownership equity is thousands of times greater than the total of all other sources of wealth for the great majority of Americans.

Equity Creation and Uses / Forced Savings

Your Mortgage payment that you are forced to pay each month is a savings account for you. Each month less of that payment is interest that goes to the bank and more cash that is going into your savings account that we call equity in your home. Over time the savings portion begins to increase dramatically each month. As we discussed above this equity savings account is financially beneficial at every stage of your life including: paying off high interest debt, home improvement, college expenses, medical expenses, starting a new business, and this goes all the way to a source of retirement income.

THE TAX BENEFITS

They say there are only two things you can count on in this world: death and taxes. But when it comes to owning a home, it appears there may be a third. And that is the favorable treatment of home ownership by the Internal Revenue Service.

YOU GET THESE BENEFITS WHEN YOU BUY - DURING ALL THE YEARS YOU OWN - THEN AGAIN WHEN YOU SELL

1. The purchase

When buying your own home, most of the expenses are not tax deductible. But there is one exception that is worth finding. The IRS says you can deduct interest in the year that it is paid, and that is usually part of each monthly loan payment. In addition, if the day you purchase is on any day other than the first of the month, you will likely pay a charge for "daily interest" between the day of closing and the end of the month. Look on line 901 of your HUD settlement statement. Much more importantly, the IRS says that, in most cases, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. Look at lines 801 and 802 of your settlement statement and see if you hit the jackpot. This is a particularly unusual deduction because you get the benefit even if the seller paid your closing costs. And because origination fees of 1% and more are common, this can amount to a lot of cash.

2. Mortgage interest

In general, you can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up.

If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in. This is truly nothing more than a subsidy to home owners, and it's a very popular deduction.

In addition, you can always deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose. This gives home owners the ability to do what is called "debt-shifting."

For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you bought a house, obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible.

Furthermore, the rate on the home equity loan is likely to be around prime plus one or two, usually much lower than credit card rates. This same technique works with any and all personal debt, from car loans to consolidation loans - with only one hitch. In every home equity loan, you have pledged your house as collateral for the loan. If you fail to pay the payments as agreed, you could lose your house to foreclosure. So be careful in using this technique.

3. The sale

This is the best. In fact, I can hardly believe this myself. Here's how it works: If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that house and pay no federal income tax whatsoever. That's assuming you are married - singles get up to $250,000 tax free.

And here comes the kicker: You can do this as often as every two years for the rest of your life. This is as good an excuse for getting married as I have ever heard. Buy a fixer-upper in an up and coming neighborhood, work on it nights and weekends for two years, then sell it at a nice profit and pocket the cash, totally free of federal taxes. And most states recognize the federal exclusion, so you put the cash away totally tax free. You don't have to re-invest, you don't have to be age 55, and you can do this every two years forever.

No, I'm not kidding. The one restriction is that you MUST own and occupy the house as your principal residence, so don't try this on a rental property by pretending you live there when you don't. I hope that you will find something of value in each BLOG entry. In addition, I hope that you will consider contributing something of value by adding your comments to any blog entry.

Return frequently to see what is new,

Evelyn Bruder,REALTOR, CRS, GRI, ABR, E-PRO

This is the final blog in a series on financing your home. Before we get to the final step, let's review the first 5. 

Step 1: How Much Can You Afford?

Step 2: Selecting a Lender

Step 3: Selecting a Loan

Step 4: Shop. Compare. Negotiate

Step 5: Loan Pre-Qualification & Pre Approval

And Finally, Step 6: Loan Approval

Processing and Underwriting - Expect a time delay in getting final loan
Avoid the most common problems with these worksheets:
Mortgage Application Checklist
Mortgage Loan Flow Sheet

Neither pre-qualification nor pre-approval nor a means you are guaranteed a mortgage. In order to get final loan approval and money delivered to the title company at closing, the loan must be processed and then be underwritten.

The processing department must order appraisals, title work, and verify employment and credit report. The underwriter must make sure that your loan meets the requirements for the particular loan program you are using. Problems with these final steps can often be traced to buyers not having submitted the necessary financial items and paperwork in a timely manner, and the fact that Processing and Underwriting are separate departments within the lending institution which can create a bureaucratic delay in completing this process.

For more information on Financing Your Home, visit our Buying a Home Website. 

For the past few weeks we've been discussing financing. Last week we covered Selecting a Lender and Selecting a Loan. 

This week we want to talk about the next two steps in the process. 

Step 4) Shop! Compare! Negotiate!

In "Step 3) Selecting A Loan," we provided the Mortgage Shopping Worksheet so that you could compare the loans being offered by different lenders.

Now that you know about rates, points and fees, and different types of mortgages, we want to provide you with 2-calculators
•Which loan is better?
•Which lender has the better loan?

These will help you when you are using your work sheets to compare products and making your final decisions. Remember Mortgage Loans are a commodity! Use your "Worksheet and Questions" to make lenders and brokers compete with each other for your business. Let each lender know that you are shopping for the best deal.

You are the Buyer; the Lender wants your business Negotiate, Negotiate, Negotiate until you get to the best possible Rate and Terms.

Step 5. Loan Pre-Qualification & Pre Approval

In "Step 1) Determine How Much Can You Afford," we emphasized the need to meet with a loan officer and get a Pre-Qualification Letter listing an estimated amount that you qualify to borrow.This was based on your credit report and information you provided about your income and debt payments. Your qualification amount was based on this information, and the affordability calculator we provided.

Now that you have determined the Lender and the Type of Mortgage that you are going to use to finance your home purchase, it is time to go to the next level - Pre-Approval.

What's the difference? Pre-qualification is an estimate based upon your credit report and the income and debt information you provided. The Pre-Approval process now requires you to provide all the documentation required in a full Loan Application, and the lender will now verify all of that information. This Loan Application Checklist will help you have all the documentation the lender needs.

A Pre-approval Letter is a firmer commitment on behalf of the lender as to the amount they will loan you.

The lender has now done all the verification work required for a full approval except for a final repeat credit report, verification of income, the home purchase agreement, appraisal, title search, and finally underwriting.

Last week we started talking about our 6 Step Process to Financing Your Home. We covered the first step: Determining How Much You Can Afford. This week we want to cover selecting a lender and selecting a loan. 

Step 2) Selecting A Lender

While there are many people who prefer to deal only with their regular banking institution, as your REALTOR advisors, we will probably suggest you SHOP around to find both a lender and a loan that are most suited to your needs.

Home Financing is a competitive market. Visiting with Banks is OK, but you should consider contacting more than one Lender and lending institution (Banks, Credit Unions, Private Mortgage Lenders, Mortgage Brokers, as well as a host of reputable Online Lenders).

You need to interview and evaluate each individual lender personally as well as rate their company, and the products they offer. Be prepared with a questionnaire and compare them side by side. We will provide a Mortgage Shopping Worksheet to assist you.

Whomever you choose to represent you, make sure that you have selected the Lender that you trust, and who you believe has expertise, and will provide you with the service and results that you expect and deserve.

Step 3) Selecting A Loan

A mortgage is a product! There are many different models and prices.

Each mortgage / home loan product has a different price, different terms, with different benefits and drawbacks. You have a variety of financing options available to you, each one is designed to meet different goals and financial situations. You'll want to compare all of these factors.

Shopping, comparing, and negotiating may save you thousands of dollars. Two tools that will be particularly useful for you are this chart comparing the pros and cons of the most common types of Home Loans and who may find them most useful, and this Mortgage Shopping Worksheet with questions you should ask each lender about each type of Mortgage that they offer so that you can compare them side by side to help decide which lender and which loan is best for your needs.

Next week we'll talk about steps 4 and 5. To read all 6 steps visit our Buying a Home in Las Cruces website. 

We've outlined a 6 Step Process to Financing your new home on our Buying a Home in Las Cruces website. 

This morning we want to talk about Step 1 in that process: Determine How Much You Can Afford

You should not even begin the Home Buying Process until you determine
•Is it better for YOU to Rent or Buy?
•Have you considered the Pros vs. the Cons of Homeownership?
•Can you afford to be a Homeowner?

If being a Home Owner is still right for you, now, you can you take the first step in the Financing Process:

Determine What Price Home Can You Afford to Buy?

Knowing what you can afford will save you a lot of time and frustration because you can limit your search to homes thatare appropriate for you, and then and then when you make an offer you know that you probably qualify to buy that home.

The Evelyn Bruder Dream Team Buyer's Agent will assist you in setting up meeting with lenders, in person or online. We will do this as soon as possible.

The amount that you are "qualified to borrow," or getting Pre- Qualified does not obligate you to any particular lender, but it will allow you to determine:

•What price home you can you afford.
•How much of a Mortgage you will qualify for.
•What will your Monthly Payment Be?

The Evelyn Bruder Buyer's Agent knows the main factors that determine the amout of loan you qualify for are your credit score, current salary, employment history, and current debt. We will provide you with an "Affordability Calculator." Using this, you can get an idea of what price home you are qualified to buy even before visiting Lenders .

Your Lender will do similar calculations base on the information you provide, and then give you a "Pre-Qualification Letter" stating that you should qualify to borrow this amount of money for your home purchase.

Your Buyer's Agent Realtor, as your trusted advisor and counselor will tell you that Lenders often qualify a homebuyer for a loan amount that exceeds what you really can afford. Together you should determine if you really should borrow that much. Willyou have extra money left, or will you be "house poor"? You and your Realtor can decide the actual amount you want to borrow. Remember that you can always borrow less than you qualify for.

Congratulations! You have completed Step 1 of the Financing Process

Next week we will continue our introduction of these remaining steps in the financing process. If you'd like to read all 6 steps right now, visit our Buying a Home in Las Cruces website.

It is important to note that the financing process is an essential part of the home buying process and you should be following these steps at the same time that you are home hunting. It is only when these two come together at the end that your home purchase is successful and hassle free