Welcome to Ameritrade Plus University
  Buying a home
Top 10 things
The details:

Are you ready?

Lining up cash

Picking a team

The hunt

Closing the deal

For sellers only
Take the test
  Setting priorities
  Making a budget
  Basics of banking
  Basics of investing
  Investing in stocks
  Investing in bonds
  Buying a home
  Investing in mutual funds
  Controlling debt
  Employee stock options
  Saving for college
  Kids and money
  Planning for retirement
  Investing in IPOs
  Asset allocation
  Hiring financial help
  Health insurance
  Buying a car
  Home insurance
  Life insurance
  Futures and options
  Family law
  Estate planning
  Auto insurance

|> About Money 101

investing 101

  Picking a team
Don't try this without professional help

With all the tools and advice available today -- ranging from the Internet to books and magazines and online advice like this lesson -- it would theoretically be possible for you to buy your home almost completely without the aid of real estate professionals.

We don't necessarily recommend this. The housing market, like politics, is basically local, and each state, city and even neighborhood has a thicket of local laws or customs that you need to understand in order to operate profitably. For that, it helps to have a team of professionals to guide you -- and so this section is about how to assemble the right team.

You might want to start by finding an agent who can represent your interests in the search. This is not as simple as it sounds. Sure, 85 percent of sellers list their homes through an agent -- but those agents are working for the seller, not you. They're paid based on a proportion (usually six percent) of the purchase price, so their interest will be in getting you to pay more. What you need is one of the newer, smaller group of agents who call themselves "exclusive buyer agents." Sometimes buyer agents are paid directly by you, on an hourly or contracted fee. Other times they split the commission that the seller's agent gets upon sale. A buyer's representative has the same access to homes for sale that a seller's agent does, but his or her allegiance is supposed to be only to you.

To complicate matters, there are hybrid agencies called either single-agency or dual-agency brokers. In both cases, an individual agent in the firm may represent either sellers or buyers, but never both in the same transaction. Potential conflicts of interest abound in this situation, so if you are seeking a buyer agent but no exclusive buyer agent is available, make sure to ask the agent about conflicts of interest.

Almost all of the good real estate websites have resources for finding an agent. Realtor.com is operated by the largest member association of real estate agents. Also try the National Association of Exclusive Buyer Agents. And iOwn.com offers a list of questions to pose to an agent to help you find one who best understands your needs.

Next start looking for a mortgage lender. Take your time, since you could be paying this loan for 30 years. Start on the Internet at places like iOwn.com, Quickenmortgage.com and E-loan.com. You may also want to check out the rates at Money.com, Bank Rate Monitor or HSH. These sites carry nationwide listings of mortgage interest rates and other related information.

Don't limit your search to the 'net, though. Once you have an idea of the best rates from national lenders, get on the phone to your community banks and any other institutions -- including credit unions -- with which you may have a relationship. Ask if they can beat the national rates. Often, the local lender can offer a better deal simply because he or she knows the local market and wants to keep your business.

You might also consider using a mortgage broker, a middleman who keeps tabs on rates from a multitude of lenders. The mortgage broker isn't paid directly by you but gets paid by the bank. However, the fee -- usually 1.5 percent to 2 percent of the loan amount -- gets transferred to you in the closing costs. Most search engines have extensive listings of mortgage brokers. There's also a trade group, the National Association of Mortgage Brokers.

There are several different loan types, each suitable for different homebuyers. First determine whether you want a fixed-rate or an adjustable rate mortgage. With a fixed rate, you lock in a monthly payment amount that will remain constant throughout the life of the loan, even if interest rates rise. If interest rates fall, you can either continue paying your higher preset rate, or you could refinance your loan, though that would mean paying additional closing costs.

An adjustable rate mortgage (ARM), on the other hand, has an interest rate that rises or falls in step with a financial index, such as the one-year or three-year Treasury rate. Banks typically offer an initial "teaser" rate on ARMs that is 2 percent lower than that for fixed-rate loans. For this reason, you might choose an ARM if you plan to sell your home within four or five years. During that short period of time, you will almost certainly pay less than you would with a fixed-rate mortgage. Alternatively, you can look into a hybrid loan, which offers a fixed rate initially -- usually for the first five to ten years -- and then converts to an adjustable rate for the rest of the term.

You may also want to pay points to lower the interest rate on your loan. Basically, points -- or the "loan discount cost," as they're more formally known -- represent a portion of the interest that you pay up front in exchange for a lower rate thereafter. One point equals one percent of the loan amount, and most loans carry a charge of one to three points.

The longer you plan to stay in your home, the more you should consider paying points. For instance, a lender may offer an eight percent loan at no points, or a 7.6 percent loan with two points. If you have a 30-year, fixed-rate mortgage of $100,000, your monthly payment for a no-point loan would be $734; on the two-point loan, it would be $706. That's a small difference, just $28 a month. But if you pay the points, you'll recoup the $2,000 you spent in a little under six years of payments. And over the life of the loan, you'll save $10,000. So in this case, if you planned to stay put for six years or more, it would make sense to go with the points.

Once you choose a lender, try to get yourself "pre-qualified," which merely means that the lender has determined the maximum home price for which he will approve a loan. If the housing market in your area is very competitive, with homes selling just days after they go on the market, then you might also consider getting "pre-approved." That means the lender agrees to provide a mortgage even before you have selected a house. Not only will this help you to move quickly to close on a home once you find one, it can also give you an edge if others are competing to buy the same property. Pre-approval can cost $150 or more.

The last person you need on your team is a lawyer. He or she will review the purchase contract, and an attorney may be an excellent middleman in negotiating finer points, like who must pay to fix the leaky faucet before the deal is set in stone.

Use recommendations from friends or colleagues, or even from your real estate agent, to help you find one who knows local real estate customs. You can expect to pay an hourly fee of anywhere from $70 to $250. Depending on local rates and the complexity of the sale, the total fee could run anywhere from $500 to $2,500.

Next: The hunt


© 2003 Cable News Network LP, LLLP.