Should a Pastor Purchase a Home? Chris Bouchard Director, C2FM
The American Dream Is it right for you at this time?
The Dream • Control – Do what you want with your living space – Mortgage is fixed, rent can go up – You decide when to move, landlord may not renew • Investment – Increases your net worth – When the mortgage is paid, lowers your living expenses • Peace of Mind – Investments go up and down, your four walls surround you even when real estate values fluctuate. • Love to fix it up
Counter Point • Home ownership controls you – Repairs and maintenance are your responsibility – Owning can cost money and time • Investment – Can be costly, especially short-term – Understand all the costs of buying/selling • The Itinerant System You don’t get to choose when to sell
Closing Costs Origination fees : administrative fees charged by the lender Points : charged by the lender for different loan products Appraisal fees : required by the lender to determine the amount they are willing to loan Title search & insurance : the lender requires this, you should too if you are paying cash Inspection Other costs : pre-paid escrow & interest, filing fees According to www.Smartasset.com, closing costs in Missouri range from 1.6% to 2.8% of the value of the home.
Private Mortgage Insurance (PMI) • Costs between .3% to 1.2% of the loan amount. – Credit Score & down payment effect rate charged – Lenders use a sliding scale dependent on down payment (higher down payments pay lower %) • Waived if 20% is put down • Automatically removed when equity hits 22% – Can be requested when loan to value ratio is 80%
More about PMI • Lender paid PMI : cost is typically rolled into the loan by charging a higher interest rate – Borrower will pay, just in a different way • Piggy back loans : take out a second loan in order to have enough for a 20% down payment – Carefully consider the affordability and risks
Loans with no PMI • VA loans : military and veterans – Up front fees from 1.25% to 3.3% depending on size of the down payment Mortgage Insurance Premiums (MIP) required on: • FHA loans : low to moderate income – 1.75% upfront fee; .45% to 1.05% (most pay .8%) annual fee for the lifetime of the loan • USDA loans : rural areas – 1% upfront fee; .35% for the life of the loan
Borrow vs. Afford • What can you afford? – A good rule of thumb is to keep your mortgage payment and other monthly fees to under 25% of your monthly take home pay. • Monthly fees include insurance, taxes, PMI • Lenders will loan you more – Don’t let your lender set your home buying budget
Types of Mortgages • Term : the length of time to pay it off – The shorter the term, the less total cost but higher monthly payment Example: $175,000 loan @ 4% (15 yr.); 4.3% (30 yr.) Note longer term = higher interest – 15 year: payment $1,295; total interest $58,000 – 30 year: payment $866; total interest $136,769
Additional Items • ARM (Adjustable Rate Mortgage) – 5/1 ARM: • 5 = # years at given interest rate • 1 = amount interest can change at adjustment • Balloon – the loan principle is due in full on the balloon date – Most people refinance on or before the balloon date
Annual Percentage Rate (APR) • Good way to compare offers • APR includes – Annual percentage rate, fees and discount points
Lowering Risk • Make a larger down payment • Choose a shorter term loan • Keep payments within 25% of your monthly income • Stick to YOUR budget, don’t be swayed by how much you can borrow. Think about selling within 5 years vs. your dream home Modest, well-maintained homes sell quicker
A True Story A pastor received a new appointment and put their house on the market. They had 15% equity if it sold at the asking price. They listed the house in April, by the middle of June it had not sold and they were moving to the new appointment. The spouse’s income in the new location declined about 50% since it was difficult to find an equivalent job. They took the house off the market to spruce it up and fix delayed maintenance items. The house sold in October at a price where they had 9% equity remaining. However, this equity did not provide enough cash at closing to pay their mortgage, closing costs and delayed maintenance expenses. They borrowed money from their UMPIP retirement account in order to close on the house.
What can be learned from this story? • The importance of having three to six months of expenses saved before buying a house • How a larger down payment reduces the risk to a pastor in an itinerant system • Consider your feelings when you see a nicer, more expensive home versus an adequate less expensive one. • The cost of home maintenance and how delaying it increases your risk – Larger homes cost more to maintain
Selling a Home • Work with a professional realtor! • Select a listing price so it will sell in a reasonable time • Clean, pick-up and pack items not needed to live while the house is listed. An uncluttered, clean house will sell faster. • Address low cost maintenance: paint, weed, wash windows, etc. Use your realtor to point out things you don’t see anymore.
Should you sell or rent your house? • Consider what it is like to be a landlord – What do you do if • Renters are late with the rent • Neighbors complain about noise, junk in the yard, etc. • Leave the property damaged or dirty when they leave • When a repair is needed, how will you fix it? • Do you have the time to do it yourself • What is the cost to have a person do it for you • What is the cost to hire a management company? – Will rent cover the cost of your mortgage, insurance, maintenance AND the management fees? • Can you cover expenses if it sits empty for a period of time?
Being a landlord Investment property can be part of your portfolio, but consider all the costs, risks and total return on your money. It IS a part time job to be a landlord, do you really want that job? • I’ve never had my mutual fund call and tell me the toilet is leaking.
Today’s Market Chris Martin President, Columbia Board of Realtors Reece & Nichols Mid Missouri 2401 Bernadette Dr. Columbia MO. 65203 573-445-7737 ext.209 Office 573-808-5060 Cell ChrisMartin@ReeceNichols.com
Want more help? Contact Chris Bouchard at cbouchard@mumf.org, (573) 875-4168
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