Housing

How much money do I need to buy a house?

In most cases, you'll need to put 20% down. Often, lenders are hesitant to approve a loan when the typical buyer provides less than a 20% down payment. It is a good idea to plan for a 20% down because it puts you in better position to compete for that house. Your offer on a house may be taken more seriously when you have better credit or a larger cash down payment. How much you invest in real dollars is related to how much the actual house costs.

How expensive of a house can I afford?

The rule of thumb that I use is 1/3 gross income. If you make $100,000 a year, you can afford total housing costs of $33,000 per year, or $2750 per month. This includes mortgage payment, taxes, HOA or monthly expenses and homeowners insurance. If costs exceed this, the house is too expensive for you. This ratio is something lenders look at very closely, since it indicates your ability to make your mortgage payments. It is even better to use a 25% ratio to give yourself a little bit of room for unexpected expenses.

What is the best type of loan for me.

Finding the best loan for you involves many factors. There are many types of loans, depending on how long you want to lock in your interest rate, and whether you want to pay interest only or if you want to pay principal, too. How long you have your interest rate determines what the interest rate is.You can typically find locked-in interest rates for 1, 3, 5,7 or 10 years, up to the traditional 30-year mortgage. Generally, the longer the period of time that you lock in your interest rate, the higher the interest rate that you will pay.

Another option is whether to pay interest and principal on your loak, or interest only. This is a big factor when planning for your future, since paying principal plus interest will be more expensive than just paying interest by itself, but you will be increasing the equity in the home. Paying interest only is typically more affordable, but payments will likely increase once you start paying principal on the loan.

One of the most important things you need to consider when assessing your mortgage is how long you plan on living in the house. Our advice is not to buy a house unless you plan on living there for a minimum of 5 years. The cost of moving, plus the commission for selling the house will prevent you from making money in an average real estate market if your time frame is less than 5 years. It's better to rent if you’re not sure where you want to be in the next 5 years.

On the other hand, if you're buying a family home and you expect to be there for the next 10 to 15 years, or maybe even longer, then a longer term mortgage is better, like a 30 year fixed loan. Then, you know exactly what your payments will be every month for the next 30 years.

Renting vs owning

How long do you plan on being in a particular location? Can you afford a down payment? Do you have reserves for home repairs or an emergency that inevitably comes up? You also have the risk of owning a home: earthquakes, floods, fire, or natural disasters that you don’t have when renting, so having financial reserves when owning a home is one of the most important deciding factors to renting or owning.

One of the advantages when owning a home is that your payments can stay the same, whereas when you rent, your payments can increase every year. It can actually be cheaper in real dollars to own a home over the long term because of inflation. What does that mean? Well, in the recent past the cost of living has gone up 3% a year, so your rent would otherwise go up 3%, but your mortgage stays the same year after year. In essence, your house is getting 3% cheaper to own every year while the house itself is appreciating at 3% every year, since your house typically increases in value as inflation goes up.

On the other hand, I have no problem with people renting a home, because renting gives you other advantages. Maybe you're not building equity and not building your home, but you don’t have the risk of ownership, so there are advantages and disadvantages on both sides. Remember, owning a home is very permanent, whereas when renting, you can move every time your lease expires. If you have bad neighbors when renting, you can move, but when owning, you have to deal with that.

There are many factors to consider when deciding whether to rent or own, but themain questions are: first, do I have the financial reserves? and second, what is my time frame?

How do I know what a house is worth (comparables, sq feet, lot, age)?

This is one of the most difficult and confusing issues for someone to asses when purchasing a house. One of the most commonly used methods is a comparable price technique. When you look at all the sales of houses in your area that are similar to yours, you can determine a price per square foot.

The price per square foot for your house is a very important metric for determining the value of your house, and every neighborhood has a different price per square foot for the typical house. After we figure out the typical price per square foot for a neighborhood, we then have to determine if your house is greater or nicer than the average, or if it's older and needs more upgrades, and then make adjustments accordingly.

We also need to determine the size of the lot. The larger the lot, the more value we have to assign to the house, because you're purchasing more land. We have to look at many factors when in valuing a house in the comparable method

The other way to value a home is the replacement cost method. This is basically figuring out how much it would cost to buy a piece of land and build a house similar to the ones in the area. The cost of building a house varies greatly, depending on the type of construction, the existing infrastructure, and the materials, as well as the neighborhood. It’s more expensive to do construction in Venice than in Lancaster since Venice has more regulations and requires more permits. Typical costs to build a house range from $150 per square feet to as much as $350 per square feet, so we must factor in these prices when valuing a house.

The age of a house also greatly impacts the price. According to depreciation schedules from the IRS, single family homes depreciate over 27.5 years. What this means is your typical house will lose all its value over 28 years, so if I buy a house now, in 30 years I should have to replace everything. Knowing this, the age of a house is a huge factor for your price per square feet. A brand new house should have a premium over a house that’s 10 years old.

The bottom line is that there is no exact science to understand what a house is worth, and using many methods to come up with a price is definitely a science AND an art form. There are some widely available websites, such as Zillow.com or Redfin.com, that offer you a lot of information that will help you determine the value of a house. They may not be perfect because they do not take into account the individual characteristics of each house, but you can get an idea of what you think a house is worth. Not only can you see the comparables in a neighborhood, but you can also review the history of the sales for any house through these databases.

So it’s a very effective way tot determine the value of the house by using these websites. To try to a ballpark figure of what the house is worth. But than again, using a skilled and knowledgeable real estate agent will help you A) determine the value of a house and the comps, B) help you with the whole process of buying a home, and C) contact a proper mortgage broker to put your loan financing together.

At Gerber Kawasaki, we can help you decide if buying a house is right for you or help you afford the perfect home.