Home Buyer’s Guide

Everything you need to know when considering buying or selling your home.

Why own a home or condominium?

To hedge against inflation. Real estate values rise when construction and land costs rise. Even if annual inflation is only 4%, the cost of a $100,000 home will increase $4,000 a year, or $333.33 a month.

To reduce taxes. Interest and taxes on a home purchase are tax deductible. The actual monthly cost of buying a home is much less than the check you send to your mortgage company. For example: On a $100,000 home with $5,000 down and a mortgage
of $95,000 (30 years at 7%), the monthly payment for principal, interest, taxes and insurance is $760. Of this, the first month’s interest will amount to $554. If you’re in the 28% tax bracket, your federal income taxes will be reduced $155 a month. This makes your true monthly interest cost $399. Real estate taxes will be about $100 per month and this will reduce your federal income taxes by an additional $28 per month. (See “How do I figure monthly costs?”)

To obtain leverage. If you put $5,000 down on a $100,000 home that increases 4% in value within the next year, you have a gain of $4,000 on your $5,000 investment. This is an 80% return – thanks to leverage.

To build equity. The equity buildup in your home can be used to back a note. Or you can re-mortgage your home (the net proceeds are tax-free).

To avoid rent escalations. As inflation increases real estate values, rental property doubles over a period of time; rents will increase accordingly.

How much can I afford to pay?

Do you know your paycheck gets BIGGER when you buy a home? A large portion of the mortgage payment is tax-deductible interest. While some people prefer getting money back from the IRS, others prefer to increase their allowable deductions and get the “tax-saving dollars” to help them make the mortgage payments.

Start by determining how much you can invest in the down payment. Second, figure out how much you can afford in monthly payments.

Your monthly mortgage payment covers principal, interest, property taxes and insurance; often referred to as PITI. If you buy a condominium or a home in an area governed by a homeowner’s association, your monthly costs would also include association dues, condominium fees and perhaps mortgage insurance.

What about financing?

The four most popular ways to finance the purchase of a home are:

A fixed-rate mortgage loan – either conventional, FHA or VA. The interest rate you pay does not vary during the life of the loan – typically a period of 15, 25 or 30 years.

The 15-year mortgage is an increasingly popular way to reduce total costs while accelerating equity growth. And because of the shorter commitment, lenders usually offer a lower rate of interest.

Adjustable Rate Mortgage (ARM). ARMs carry a rate that adjusts to interest rates in general and protects the lender. ARMs are attractive to buyers, too, because they offer a lower initial interest rate than conventional fixed-rate mortgages. If interest rates in general rise or fall, so will your ARM rate. ARMs come with “caps.” This is the maximum amount the interest rate can be raised or lowered at each adjustment period. The annual cap is usually about 2%. If your initial ARM rate is 6% and your cap is 2%, the most your rate can be raised in the first adjustment period is to 8% (or lowered to 4%).

Often an ARM includes a lifetime cap limiting the total amount the rate can be adjusted – commonly, 5-6%.

A few other terms relating to ARMs...

INDEX. Each ARM is based on a monetary index such as one, three or five-year U.S. Treasury bills, or the average mortgage rate published weekly by the Federal Home Loan Bank Board.

MARGIN. A lender adds a percentage of interest, or margin, to the index rate to determine the mortgage interest rate at each adjustment period. The margin generally ranges from 1.5% to 3.6% and includes the lender’s loan service
costs, risk and profit.

Adjustment Period. This refers to the time between interest rate adjustments and typically is one, three or five years.

Conversion. Some ARMs carry an option permitting conversion to a fixed-rate loan and this could save the borrower money.

Mortgage Assumption. Here the buyer merely assumes or takes over the seller’s mortgage.

Contract. More popular during times of high interest rates, buying a home on contract requires the seller to carry the financing – usually at more favorable terms.

Where do I get the down payment?

Most people turn to their savings to come up with at least part of the down payment on a home, but there are other sources – including these...

Home Equity Loans. Parents with substantial equity in their own homes are using this asset to make a gift to their children. Under the 1981 federal tax law, each parent may make a tax-free gift of $11,000 to a child per year. Parents pay no federal gift tax and the young people pay no income tax on the gift. However, some lenders will ask for a “gift letter” verifying that parents do not expect repayment.

Profit-sharing. A parent or friend might be found who is willing to provide part of the payment if they share in any “profit” or net equity of the house when it’s sold. This is called “shared equity.”

Life Insurance. Cash values on life insurance accumulate over the years. You may find that your insurance policy will permit you to borrow a substantial amount at a more favorable rate of interest than you would find elsewhere.

Stocks & Bonds. If you own stocks and bonds, but do not wish to sell them at present, you might be able to use your portfolio to secure a bank loan.

Employer Profit-Sharing or Savings Plan.
If you have built up funds in your firm’s profit-sharing or savings plan, you may consider
withdrawing them to invest in a home.

What about the closing and its costs?

At the closing or settlement, you will review and sign the mortgage note, lender forms and settlement sheets. You will be expected to pay the balance of the down payment and your part of the closing costs with a cashier’s check or certified check.

Closing costs vary widely but the buyer’s costs usually average between $1,000 and $1,500. They must cover such things as loan origination fee, mortgage insurance premium, attorney fees, title insurance, recording fees, survey, appraisal and credit report. You may also make an advance deposit in escrow for property taxes and insurance.

How do I figure monthly costs?

Here’s an example to help you estimate net monthly costs of buying a home. Figures are based on a 30-year fixed-rate mortgage at 7%.

PRICE
Purchase price
Down payment
Mortgage
$100,000
$20,000
$80,000
GROSS MONTHLY COSTS
Principal & interest
Real estate taxes (estimated)
Homeowner’s insurance premium
Other costs
Monthly cash outlay (estimated)

$532.24
$100.00
$30.00

$662.24

MONTHLY TAX DEDUCTIONS
Mortgage interest (estimated)
Real estate taxes (estimated)
Total monthly tax deductions (estimated)
$467.00
$100.00
$567.00
MONTHLY COSTS
Monthly cash outlay (PITI, est.)
Monthly interest and real estate tax savings
(assuming 30% tax bracket)
Net Monthly cost (est.)
$662.24
$170.10

$492.14

Monthly payments per $1000 loan for 30-year term

3.5%.....................$4.50
4.0%.....................$4.78
4.5%.....................$5.07
5.0%.....................$5.37
5.5%.....................$5.68
6.0%.....................$6.00
6.5%.....................$6.33
7.0%.....................$6.66
7.5%.....................$7.00
8.0%.....................$7.34
8.5%.....................$7.69
9.0%.....................$8.05

How is the purchase negotiated?

You’ve discovered your dream home, and you’re eager to buy it at the best possible price. You submit a signed Offer to Purchase.

If the seller accepts your offer, this will be the sales contract. So before you sign it, be sure you and your Tucker Sales Associate have read it carefully and understand every detail. Be sure any verbal agreements made with the seller are written into the contract.

Some of the things you may want to put in your contract include a contingency on financing, which specifies the total loan amount and exact financing terms; a contingency on an inspection of the property by qualified experts; and conveyance of personal property such as drapery rods, chandeliers, appliances or any other item not permanently attached to the structure.

When you sign the Offer To Purchase, you must also submit a deposit to indicate that you are a bona fide and earnest buyer. That’s why your deposit is called “earnest money.”

What about condominiums?

Buying a condominium is just like buying a home. You are the owner with a clear title, a mortgage and all the benefits of homeownership. In addition, many communities offer amenities which most homeowners couldn’t afford – a clubhouse, swimming pool, tennis courts. The upkeep of these facilities plus grounds management and maintenance are covered by a fee. A complete list of these costs should be reviewed prior to purchase.

What do REALTORS® really do?

Simply, they make sure the buyers and sellers they represent get the most for their money. A REALTOR’S® business is based on referrals.

A REALTOR® knows the market . . . knows the value of locations throughout the area . . . understands the complexities of a real estate transaction and makes sure you understand all that you need in order to make wise decisions. Whether you’re looking at builders’ homes or condominiums or pre-owned homes or condominiums, the services of a REALTOR® will not add to your cost.

A Sales Associate of the Tucker Company is prepared to make your home-buying experience pleasant and efficient. Tucker Sales Associates are professionals ready to help you – just as they help thousands of others make homebuying dreams come true.

We’re in your neighborhood...open 7 days a week! The Tucker Company has 15 sales office locations within and surrounding the Metropolitan Indianapolis area. In addition, there are more than 30 independently owned and operated affiliate offices in Indiana, Kentucky and Florida. This network provides more than 1,000 real estate professionals to meet our clients’ needs throughout Indiana, and beyond.