English | Español   About Banco General | Contact Us
Personal Banking
Business Banking
Private Banking
other Services
Sus Buenos Vecinos Foundation
Financial Advisor


Planning to Buy a Home

By: Gonzalo Carrillo

When planning to move to a new home, the first point to consider is if you should rent or own.The advantages of homeownership are:
  1. Builds equity,
  2. Potential tax savings,
  3. More living space for less money
  4. Protection against rent increases.

The advantages of renting are:
  1. Minimum down payment,
  2. Avoid searching for buyer in case you relocate
  3. Free of maintenance and repairs responsibility, or risk of home values falling.
This article deals mainly with the subject of owning a home. It is important that you remember that the purchase of a home is an investment decision; and thus, you must take into account its potential resale value. You must first learn if there are government-sponsored home buying programs available that grant subsidies for first-time homebuyers. The type of home that you buy will depend on the loan you obtain, so you must know its maximum limit and loan conditions.

Home loans
There exist certain factors that determine loan approval and the maximum loan amount you can qualify for. Important requirements to consider are:
  1. Credit history,
  2. Current assets,
  3. Steady source of income,
  4. Purchase details (property value, loan amount, etc.)
  5. Present and future housing expenses.
During the approval process, two tests are commonly used:
  1. The percentage of housing expenses with respect to gross household income.
  2. The ratio between all financial obligations and gross household income.


Interest rate
The interest rate can be fixed or variable. The fixed-rate mortgage facilitates planning since monthly payments do not fluctuate over the life of the loan, even in the event of changing market conditions. Therefore, you will not benefit when interest rates fall because your initial rate will remain the same.

An adjustable-rate mortgage, which fluctuates based on market conditions, makes planning difficult, even though loan conditions may set yearly maximum and minimum rate limits, or sometimes for the life of the loan. Although the initial interest rate on an adjustable-rate mortgage is lower, it could later increase and bring the total loan amount ultimately higher.

As a result, if you plan to remain in the home for a long period of time, the fixed-rate mortgage is preferable, even though its initial interest rate is higher. In case you plan to live in the home for only a few years, a combination of both is recommended: the first three to ten years at a fixed-rate (generally lower than the 30-year fixed-rate mortgage), and later years at an adjustable-rate. Given that you plan to move in the first few years, you will have sold before taking on the final payments on the loan. In addition, it is important to mention that you should always consider the possibility of deducting the mortgage interest costs from your taxable income.

Refinancing
Refinancing saves money by switching mortgage types and taking advantage of changes in interest rate trends. Nevertheless, before deciding on this option, you must also evaluate the closing costs in refinancing your loan, possible loan prepayment penalties and the repayment terms. Thus, if after evaluating your options some saving exists, refinancing is a good idea.


Down payment
The down payment determines the amount of subsequent monthly payments. A larger down payment also lowers your monthly payments and lessens the total amount you have to pay off. If you plan to remain in the home only a short time, a smaller down payment is preferred, as you can use the available money on other investments. However, the potential returns on these investments must be clearly known. A similar situation occurs with the term of the loan: a shorter term means you pay off the loan sooner. However, a longer term loan means smaller monthly payments and the possibility of placing the excess cash in other investments, although the profitability of these investments must also be considered.


Total Home Expenses
Your total home expenses depend on several factors:
  1. The value of the home plus homeowner’s insurance coverage,
  2. Maintenance; and
  3. Property taxes, although part of these may be income tax deductible.
Movements in the economy and interest rates, both positive and negative, affect the property value respectively. The total amount of the loan fluctuates with the initial down payment, the interest rate and the length of the repayment term. In addition, the closing costs and mortgage insurance must also be considered.


Conclusions
Buying a home is an investment and must be focused on as such. The first step is to find out what type of financing and loan conditions are available, in order to determine the total loan costs. Subsequently, you must consider all additional housing expenses you will face after the purchase, as well as the community in which you will live and transportation facilities in the area, which are extremely important factors when choosing your new home. You are now ready to start your search. Good luck!


"This article has been reprinted in its totality with express permission of the author or copyright holder. The content of the same does not necessarily represent the opinion of Banco General".