Home Matters

Home ownership has proved over time to be a solid investment, despite the recent real estate bubble and bust. That’s especially true for a primary residence, where owning a home offers a number of important financial benefits. The key to successfully purchasing a new home – especially your first home – is to make sure you choose a home you can genuinely afford.

First Midwest Home Matters 

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Lessons Learned

When the real estate bubble burst, many homeowners who found themselves in the worst financial straits were those whose calculations had depended on their home values rising quickly. As home values began to shrink instead, many were caught in a double bind, with an adjustable rate mortgage that was about to reset at a much higher rate, and limited opportunities, if any, for refinancing. What these events taught us was the need to be conservative when calculating how much home you can afford.

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Affordability Factors

It’s no longer safe to assume home values will rise quickly, or that credit will be cheap or easily available. You need to consider whether you have enough money saved for a down payment, as well as how much other debt you’re carrying. You also need to factor in the “hidden” costs of home ownership, such as property taxes, homeowners’ insurance, maintenance and repair costs, and condominium or association fees.

Most experts suggest basing your calculations on some variation of the “28/36 Rule.” This means:

  • Your total monthly house payment – principal, interest, taxes and insurance – shouldn’t equal more than 28% of your gross monthly income (before taxes and other deductions).
  • Your house payment plus all your other debt obligations – car loans, student loans, credit card payments, etc. – shouldn’t be more than 36% of your gross income.

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Advance Preparation

If you’re thinking about buying your first home – or moving up to a larger home – and  you don’t already have a budget, now’s the time to create one. A good idea is to build your budget around the larger payment you expect to assume, and save the difference between that and what you’re currently paying for monthly housing expense. That will help you accomplish two important things:

  • Putting money aside for the down payment you’ll need.
  • Getting used to the higher expense before it’s a requirement, or discovering, before it’s too late, that you’re not financially ready after all.

Here are some other important things you can do in the long and the short term to help you prepare for buying a new home:

  • Protect your credit rating to make sure you can qualify for the best terms on a mortgage – this can save you tens of thousands of dollars over time.
  • Before you start shopping for your new home, get pre-approved by your lender, meaning they have verified your income, checked your credit, and agreed in writing that you have qualified for a mortgage up to a certain amount. This will help you avoid disappointment and set expectations on how much house you can really afford.

Call 800-241-1749 to learn more or to apply for your mortgage today.

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Financial Benefits of Home Ownership

Home ownership can provide important financial benefits. First, you will build equity – the difference between what your home is worth and how much you still owe – over time.

A second financial benefit is the homeowner’s tax deduction1, which currently allows you to deduct the amount you pay for mortgage interest and property taxes on a principal residence when you itemize deductions on your yearly tax filing.

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Protecting Your Asset

In addition to homeowners’ insurance, and private mortgage insurance (PMI) that may be required if you do not make a large enough down payment, consider purchasing additional life insurance to make sure there will be money to pay off the mortgage in the event of your death; and disability insurance to help cover your payments should you become seriously ill or injured.

Call 800-241-1749 to learn more or to apply for your mortgage today.

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Selling Your Home

When selling your home, whether due to relocation, or the desire to scale your living space up or down, timing issues can be tricky. The biggest risk you face is the possibility of having to make payments on two houses for a while, or requiring a bridge loan if the old house doesn’t sell in time for the closing on the new home. You may be able to negotiate an extension of closing dates to avoid this complication. Another strategy could involve making your offer on the new home contingent on the sale of the old one.

A real estate professional, and perhaps an attorney, will be your best source of help advice when it comes to these types of issues.

Call 800-241-1749 to learn more or to apply for your mortgage today.

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