BuyingAHome

Guide To

C E N T R A L C R E D I T U N I O N F I N A N C I A L P L A N N I N G I N S T I T U T E

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Guide To

A s an attorney who practices real estatelaw, I have worked with hundreds ofindividuals facing the awesome

process of buying a new home. I know firsthand the potential frustrations and aggrava-tions, as well as the stress that people facewhen going through this process, particular-ly for the first time. In my experience, thebest way to circumvent problems and pitfallsis to enter the process as an educated andinformed consumer.

In order to assist in the home-buyingprocess, I have worked with the profession-als at the Central Credit Union of IllinoisFinancial Planning Institute to prepare thisbooklet. I think you'll find “Guide To Buying AHome” to be an ideal reference for each stepin the home-buying process.

I hope “Guide To Buying A Home” helpsease the worry of what is, for most, thebiggest financial decision of a lifetime, andpaves the way for a long and happy life inyour new home.

JONATHAN P. SHERRYBOARD OF DIRECTORSCENTRAL CREDIT UNION OF ILLINOIS FINANCIAL PLANNING INSTITUTE

BuyingAHome

C E N T R A L C R E D I T U N I O N F I N A N C I A L P L A N N I N G I N S T I T U T E

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Making The Dream A Reality

Buying a home is something most of us grow up dreamingabout. But buying a home is a complicated process. From mak-ing the decision to buy and saving money for a down payment tochoosing the right home and closing the deal, it can be a veryfrustrating and costly experience.

Yet the entire home-buying process is simplified when placedin proper perspective. Buying a home will probably be one of thelargest investments you ever make, and you can make smartchoices if you take the time to make decisions that are consis-tent with the other financial decisions you make in life.

Ask yourself: "What is most important to me?" The answer tothat question alone will help you determine if and when to buy,what to buy and where to buy it. Remember, buying a homeneeds to be placed in the context of your overall financial valuesbecause it is more than a purchase, it’s a lifestyle choice — oneyou must live with and in.

To Buy Or Not To Buy?Home ownership isn’t right for everyone. Consider the follow-

ing advantages and disadvantages of home ownership.

The Advantages Of Home Ownership

There are obviously many advantages to purchasing your ownhome. Some of the factors that may help you decide whetherbuying is right for you include:

Increasing Your Net Worth. Purchasing a home is a long-terminvestment that will increase your net worth. One of the benefitsof purchasing a home is the high cash return a real estate invest-ment can provide. One reason for this high return is that realestate is commonly financed and is thus a leveraged investment.

With a leveraged investment, you are using someone else’smoney to work for you. For example, if you purchase a home for$150,000 with a $30,000 down payment and property values

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increase 10%, your home value will increase $15,000. This$15,000 gain is made with a cash investment of only $30,000.

Furthermore, money invested in house payments and moneyearned from appreciation combine to create equity. Simplydefined, equity is the difference between what you owe on yourhome and your home’s current market value. As you build equity,you increase your net worth. The equity in your home can be apowerful tool in helping you achieve your financial objectives.

THE POWER OF EQUITY

If you ever need a ready source of cash, your home’s equitymay be where to find it. With a home equity loan or line of credit,you can borrow against the equity in your home for homeimprovements, debt consolidation or just about anything else.Best of all, the interest on most home equity loans is 100% taxdeductible. Consult your tax advisor for details.

Central Credit Union offers both fixed-rate home equity loansand variable-rate lines of credit. With either option, you can bor-row a percentage of your home’s current market value less yourfirst mortgage balance. For more information, including currentrates, please call (708) 649-6420 or visit Central Credit Union’sweb site at www.centralcu.org.

Reducing Your Tax Bill. Home ownership can also provide taxadvantages. The interest paid on mortgages up to $1,000,000 istax deductible as are the costs for many of your loan processingfees. Home improvements that increase the value of your homealso receive special tax treatment when you sell your home.Furthermore, real estate taxes are fully deductible on your federalincome tax return and may be partially deductible on your statereturn. For answers to questions regarding the tax benefits ofpurchasing a home, you should consult your tax advisor.

Other Benefits. Home ownership provides freedom, security andstability. Furthermore, once you outgrow a home and purchaseanother, you can always retain the original property as a rental.Although rental properties will cost you in terms of upkeep andinsurance expenses, they can provide tax benefits and a sourceof income. Finally, a good record of timely mortgage paymentswill reflect positively on your credit history, which can contributeto your ability to obtain credit for future purchases.

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The Disadvantages Of Home Ownership

There are some potential drawbacks to home ownership, andyou should understand their implications before you leap into thehome-buying process.

Roots Are Binding. Once you invest a large amount in a home,you are inherently less mobile. So before you make the choice tobuy, you need to ask yourself how committed you are to stayingin one place for a given length of time.

Possible Financial Loss. Purchasing a home is an investment,which is not without risk. Factors that can make or break yourinvestment include when you buy, what you buy, how much youpay and how long you plan to stay.

And while purchasing a home is an investment, it may not bethe best investment for you. If you’re not looking to plant roots,you may find that you are better served financially by buildingyour net worth through investments other than real estate.

Time And Money Factors. While home ownership gives you thefreedom to do as you please with your home, all repairs andmaintenance that need to be done must be done by you and areyour financial responsibility.

Can You Afford It?Once you have decided that home ownership is right for you,

you’ll want to determine if you can afford it. Key factors to con-sider are your current assets, monthly expenses, salary andfuture earning potential as well as the money you’ll save throughthe tax benefits you’ll receive as a homeowner.

CLEAN YOUR FINANCIAL HOUSE BEFORE YOU START SAVING FOR A REAL ONE

Before investing in a home, get your financial house in order.To get the highest return on your investment and to maximize

your chance to qualify for the best rate possible, you’ll want topostpone large purchases, conserve your cash and pay down yourexisting debt, especially credit cards and other unsecured debts.

By consolidating your debt under one low rate, you can

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reduce the amount of total interest you’ll pay, possibly lower yourmonthly payments and pay off your debt more quickly. For moreinformation regarding debt consolidation options, call CentralCredit Union at (708) 649-6420.

Also keep in mind that you won’t want to tie up all of your capi-tal in your home. In general, it is wise to have some financialreserves on hand to cover your home costs as well as othermajor monthly expenses and incidentals in case of income loss.

Down Payment

Ideally, you’d like to have enough money for a down paymentof 20%. If you put down less than 20%, you’ll probably berequired by your lender to purchase Private Mortgage Insurance(PMI), which protects the lender should you default on your loan.If you are required to obtain PMI, it will be an expense added toyour monthly mortgage payment.

If you are unable to save 20% for a down payment, don’tdespair. You might have other options.

Seller’s Second Mortgage. If the seller of the home you’d like topurchase really wants to sell, he or she may be willing to hold asecond mortgage for part of your down payment.

80/10 Loans. An 80/10 loan is a first mortgage of 80% of yourhome’s purchase price with a 10% equity line, which will enableyou to only put down 10% of the purchase price. Because themortgage is only for 80% of the purchase price of the home,you’ll be able to avoid purchasing PMI.

SAVING FOR YOUR DOWN PAYMENT WITH A ROTH IRA

There are many ways you can invest to grow your money for adown payment on a home. One option is to save with a Roth IRA.

While contributions to a Roth IRA aren’t tax deductible, yourearnings grow tax free as you save for retirement or your firsthome purchase. Contributions to Roth IRAs are subject to incomerestrictions.

Once your money has been in a Roth IRA for five years, youmay withdraw the funds tax free, up to $10,000, and put them

toward your first home purchase.Central Credit Union offers numerous Roth IRA and other invest-

ment products. For more information, please call (708) 649-6410.

Monthly Mortgage Payment

When budgeting, consider the cost of your monthly mortgagepayment and the total cost of your other current monthly expens-es. Furthermore, keep in mind how your monthly expenses mightincrease or decrease once you purchase a home.

Taxes

Although home ownership will probably provide you with sometax relief, you also need to take into consideration new taxes youwill have to pay. Homeowners most commonly pay real estatetaxes into an escrow account with their lender. Homeowners whohave sufficient equity in their homes may not be required to havean escrow account. In such cases, homeowners can save fortheir taxes in an interest-bearing account or investment of theirchoosing.

Insurance

Premiums on homeowner’s insurance and other insuranceproducts can be costly. Contact your insurance agent prior to ahome purchase to receive policy estimates.

Up-Front Points And Closing Costs

Points and closing costs are up-front expenses that you willneed to pay before you close on a home. In general, closingcosts range from 2% to 5% of a home’s purchase price. Yourlender will be able to give you an itemization of many of thesefees. Some of the sources of the costs involved in closinginclude:

■ Lender’s appraisal, processing, funding and document preparation fees

■ Title insurance■ Title company closing fee

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■ Real estate transfer tax■ Attorney’s fees■ County recording fees

Other potential closing costs include initial escrow amounts forreal estate taxes and insurance and mortgage interest from theday of closing to the end of the month in which you close.

Maintenance

In estimating your budget, remember to include money for thelittle disasters that pop up when you own your own property.

Don’t Shortchange The American Dream

If you find your means are limited, don’t give up. You may stillhave some options.

Federal Housing Administration Loans

If you’re in need of assistance, you may qualify for a loanthrough the Department of Housing and Urban Development’sloan insurance program. While the program is a government pro-gram administered by the Federal Housing Administration (FHA),loans are issued through private lenders.

While closing costs and fees may be higher than with conven-tional loans and you may be required to pay one year’s mortgageinsurance premiums at the time of closing, you may be able toobtain a mortgage with as little as 3% to 5% down. The maximumamount you can borrow may be based on the county location ofthe property you’re purchasing.

Veterans Administration Loans

You might also qualify for a VA loan if you’re a veteran or in themilitary. With a VA loan, you’ll generally pay less interest andwon’t need a down payment. The loan itself is guaranteed to thelender by the Veterans Administration. VA loans don’t limit your

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purchase price, but you’ll obviously need to pay any amount theloan doesn’t cover.

Leasing With An Option To Buy

If you’re short on a down payment, you may be able to find aseller who will lease you a home with an option to buy at a laterdate. In such a case, a seller benefits through rental income andtax advantages and you benefit by having your rent paymentsallocated toward an agreed upon purchase price. Remember toconsult an attorney before entering into any legal agreement toensure that the terms of your lease are a win-win for both parties.

Special Packages For Low-Income Borrowers

Many lenders offer special packages for first-time home buy-ers and borrowers of limited means. Contact your state and localgovernments to see if they have any programs for which youmight qualify.

On Your Mark, Get Set...Give yourself a competitive edge in the home-buying process

by getting pre-qualified or pre-approved for a loan.

Loan Pre-Qualification vs. Loan Pre-Approval. Most lenders willpre-qualify you at no charge. A pre-qualification is a lender’s bestestimate of the maximum amount you’ll qualify to borrow basedon the information you provide. A pre-qualification is not a loanguarantee, but rather a good estimate of how much you’ll be ableto borrow and therefore the maximum price range you can afford.

To know exactly how much you’ll be able to borrow, you’llneed to get pre-approved for a loan. A pre-approval differs frompre-qualification in that it is a guarantee of a loan based on con-firmation of your financial status, credit history and the other fac-tors your lender uses for loan evaluation. Most lenders charge forloan pre-approvals.

The Pre-Approval Advantage. Before you apply for a loan pre-approval, make sure your credit report is free of mistakes. Errorscan hold up the approval process.

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Armed with a pre-approved loan, you’ll have a definite advan-tage in the marketplace. By knowing how much capital you haveand the maximum you’ll be able to borrow, you can narrow yourshopping focus to a particular price range. But keep in mind thatfinal approval of your loan amount is contingent on the appraisedvalue of the home you want to purchase. If the home you want tobuy is valued less than the price, you may not get your loan.

Also, remember that just because you’re pre-approved for acertain amount doesn’t mean that is the amount you have to bor-row. It is merely your upper limit. Remember, the money you savein purchasing a home is money that you can invest elsewhere.

CENTRAL CREDIT UNION MORTGAGE PRE-QUALIFICATIONS AND

PRE-APPROVALS

Central Credit Union’s mortgage services include loan pre-qualifications and low-cost pre-approvals. If you’re looking to buy,call (708) 649-6420.

Mortgage OptionsThere are many different types of mortgages from which to

choose. The most common mortgage options are as follows:

Fixed-Rate Mortgages

Fixed-rate mortgages are generally for 15- or 30-year terms.With a fixed-rate mortgage, you lock in your interest rate for thelife of your loan and can feel secure knowing that your monthlypayment is fixed.

Fixed-rate mortgages are generally most popular when ratesare low, which allows borrowers to lock in a low rate for theirentire loan terms. However, since lenders are concerned aboutfuture rate increases, they price fixed-rate mortgages higher thanvariable-rate loans.

Locking in a low rate with a fixed-rate loan will benefit you intimes of inflation when other costs increase but your mortgagepayment remains the same. Additionally, if you ever anticipate

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turning the property into a rental property and you have locked ina low 30-year rate, you will have the benefit of increasing rentover the years while your mortgage costs remain constant.

Adjustable-Rate Mortgages (ARMs)

With an adjustable-rate mortgage, your interest rate is subjectto change usually on a semi-annual or annual basis. Because therates adjust to market conditions, these loans are of lower risk tothe lender. Therefore, you are often able to obtain a much lowerrate with an ARM than with a fixed-rate option. This can makeARMs particularly appealing if you only plan to stay in your homefor the short-term.

Because rates are generally lower on ARMs and you’ll there-fore pay less interest, you may be able to qualify to purchase ahome with a higher purchase price. But remember, just becauseyou can, doesn’t necessarily mean you should. Keep in mind thatyou’ll still need to be able to make your monthly payment if yourrate reaches its cap. Plus, you could spend or invest elsewherethe money you’d save with lower mortgage payments.

With an ARM, you’ll also automatically benefit from fallinginterest rates in the market place without needing to refinance.However, you’ll also feel the impact when interest rates increase.

Hybrid Mortgages

An option that is particularly attractive to short-term borrowerslooking for low rates is the hybrid mortgage. These mortgagestend to be priced lower than fixed-rate mortgages but offer thesecurity of a fixed rate for a number of years and provide financ-ing at a variable rate beyond the fixed-rate term. This ensuresthat you have financing should you decide to remain in the homelonger than originally anticipated.

Balloon Mortgages

With a balloon mortgage, you’ll enjoy the advantages of aninterest rate lower than those on other loans with a large lumpsum payment due at the end of your loan. This option may beappealing if you only plan to stay in your home for the short-termand plan to make the balloon payment when you sell.

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If you go with this option, make sure you have made arrange-ments to finance the large balloon payment that will be due orthat your loan has a conditional right to extend the loan at theend of the original term to a 30-year, fixed-rate loan.

CENTRAL CREDIT UNION MORTGAGE OPTIONS

Whether you’re looking to buy or refinance, Central CreditUnion has the mortgage options you need and the rates you’relooking for. The credit union offers fixed-rate mortgages,adjustable-rate mortgages, hybrid mortgages, balloon mortgagesand jumbo loans.

For more information, including current rates, please call (708) 649-6420.

Factors To Consider With Any Mortgage

Whichever mortgage option you choose, there are several factors that will influence your total cost.

Interest Rate

The interest rate you obtain on your mortgage will have a significant impact on the amount you pay over the life of yourloan and on your monthly payment and consequently on the purchase price you are able to pay.

Points

Points are up-front interest that you pay at the closing of yourloan. Points are usually a percentage of your total loan amountand are inversely related to your interest rate. In other words, thehigher your rate, the fewer points you’ll tend to be charged.

The money you pay in points is tax deductible. However,points can be a hefty up-front expense, so be sure to shoparound keeping in mind that a loan without any points may haveother hidden fees.

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Other Expenses

You’ll also want to compare what various lenders charge forapplication fees, appraisals, processing and closing. Any rep-utable lender should be willing to provide you with written docu-mentation of these charges.

Shopping Around CouldMake All The Difference

There are many mortgage options, so it definitely pays to shoparound. Consult realtors, family, friends, newspapers, real estateattorneys or your credit union for referrals, and make sure you’recomparing apples to apples. Again, this is more easily done ifyou obtain all rates and potential fees in writing.

Another good place to shop is on the Internet. Many sites likewww.quickenmortgage.com and www.totalmortgage.com offercurrent rates and other valuable information for the home buyer.You will find other valuable information regarding mortgages onCentral Credit Union’s web site at www.centralcu.org as well ason the individual sites of various realty and brokerage firms.

People Who Need PeopleAre Smart Home Buyers

A real estate attorney, a realtor familiar with the area and areputable home inspector are must-haves when shopping for ahome. A good attorney will help ensure that any contract is inyour financial interest and that all important details have beenaddressed. A knowledgeable realtor can provide valuable insightinto unfamiliar neighborhoods and can also offer informationimportant to the negotiation process. Finally a reputable homeinspector will ensure that the property you are buying is as itappears and that you are not stuck paying for hidden problemsfurther down the road.

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Save yourself money and heartache when assembling yourhome-buying team by asking questions and demanding refer-ences. Then, check them out. Also, be wary of anyone who isbeing compensated for referrals, and beware of lenders and real-tors who push you to buy outside of your budget.

Shop With Wisdom And Inner Resolve

As with any major purchase, you’re likely to get a better dealand be more pleased with your purchase if you have a good ideawhat you want before you shop.

When deciding what you want, consider the differencesbetween purchasing a house, a condominium or a multi-unitdwelling. While a house offers more space and control, you mightbe better suited to life in a condo if you’re looking for low mainte-nance. And, while a multi-unit dwelling is more labor intensivewith management responsibilities, you have the benefit of havingsomeone else help pay your living expenses.

When shopping, keep in mind resale value. Because yourhome is an investment, you’ll want to maximize your opportunityfor a high return. When thinking about resale value consider loca-tion, floor plans, neighborhood norms and problems that will bedifficult to fix.

Make Them An Offer They Can’t Refuse

You’re most likely to get the home you want at a fair price ifyou consult your realtor and make a reasonable bid based on:

■ How long the house has been on the market■ How the asking price compares to other houses being sold in

the area■ Drawbacks to the house that would bring down its price■ How quickly the seller wants to close

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Tie Up All The Loose EndsThe best deal on your dream home can fall apart, unless you

follow through. The best sales contract will be contingent on:

■ Getting your mortgage. This should go smoothly, becauseyou were already pre-approved.

■ Obtaining a positive report from a building inspector. It isbest for both you and the seller to be present at the inspectionof both the inside and outside of the property. Doing so willensure that all parties have a clear understanding of theinspector’s comments.

■ Having a thorough legal review. Buying a home is a largeinvestment. You’ll sleep much better once a qualified attorneyhas reviewed your contract for any loopholes.

■ Establishing an adequate time frame. Both you and the sell-er need to agree on a realistic time frame. Keep in mind thatbefore you close you’ll need to purchase title and homeowner’s insurance, establish rights of ownership and take yourfinal walk-through.

Enjoy Your PurchaseIf you’ve made it this far, you’ve dedicated a lot of time to the

home-buying process, not to mention money. So be sure to pro-tect your investment.

Make Timely Payments

Making late mortgage payments or missing them altogethercan be costly and detrimental to your credit rating. To avoid mak-ing late payments, arrange with your lender to have your pay-ments made electronically. And, if your payment is ever going tobe late, inform your lender as soon as possible.

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Keep Good Records

To maximize your financial return, be sure to keep records ofthe interest you pay on your mortgage, your real estate tax pay-ments and any improvements you make to your home thatincrease its value. These items provide certain tax advantages.

Ignore Unsolicited Offers

Be sure to throw away all of the unsolicited offers for mortgageinsurance and payment plans you’re sure to receive by mail. Forthe price, you might benefit more from a good life insurance poli-cy and disability coverage. And payment plans encouraging youto pay off your mortgage early might end up costing you more inthe long run, especially if your mortgage has prepayment penal-ties. Furthermore, you could come out ahead if you invest themoney elsewhere that you would have put toward the extra pay-ments.

Watch The Market

Although you shopped around and got a good deal, you mightbe able to get an even better deal if interest rates fall, especiallyif you opted for a fixed-rate mortgage. So watch for any financial-ly beneficial refinancing opportunities.

Home Is Where The Heart IsThere is nothing quite as gratifying as realizing the dream of

home ownership. While the process can be long and complicat-ed, it is much easier and can be less costly when taken one stepat a time.

If you take the same time and care in purchasing a home andapply the same values as you do in making other major financialdecisions, you should come out ahead. You’ll be free of buyer’sremorse and will have money left over to invest in other thingsthat are important to you.

Good luck, and enjoy your new home!

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Index80/10 Loans................................................................................5Adjustable-Rate Mortgages ................................................10-11Balloon Mortgages ..............................................................10-11Can You Afford It? ..................................................................4-7Central Credit Union Of Illinois

Debt Consolidation..................................................................5Home Equity Lines Of Credit ..................................................3Home Equity Loans ................................................................3Loan Pre-Approvals ................................................................9Loan Pre-Qualifications ..........................................................9Mortgage Options ................................................................11Rates ................................................................................3, 11Roth IRAs ................................................................................6Tax Advantages ......................................................................3Web Site............................................................................3, 12

Closing Costs ....................................................................6-7, 12Debt Consolidation..................................................................3-5Don’t Shortchange The American Dream ..............................7-8Down Payment ....................................................................5, 7-8Enjoy Your Purchase ..........................................................14-15Equity......................................................................................3, 6Factors To Consider With Any Mortgage ............................11-12Federal Housing Administration Loans ......................................7Fixed-Rate Mortgages ....................................................9-11, 15Hybrid Mortgages ..............................................................10-11Increasing Your Net Worth ......................................................2-3Insurance ................................................................3, 5-7, 14-15Interest ..........................................................................5, 7, 9-12Leasing With An Option To Buy ................................................8Loan Pre-Approval ............................................................8-9, 14Loan Pre-Qualification ............................................................8-9Maintenance ....................................................................4, 7, 13Make Them An Offer They Can’t Refuse..................................13Making The Dream A Reality......................................................2Monthly Payments....................................................5-6, 9-11, 14Mortgage Options ................................................................9-11People Who Need People Are Smart Home Buyers ..........12-13Points....................................................................................6, 11Prepayment Penalties ..............................................................15Private Mortgage Insurance ......................................................5Real Estate Taxes..........................................................3, 6-7, 15Refinancing ..................................................................10-11, 15Rental Properties..............................................................3, 8, 10Resale Value ............................................................................13Roth IRAs ................................................................................5-6Seller’s Second Mortgage ..........................................................5Shop With Wisdom And Inner Resolve ....................................13Shopping Around Could Make All The Difference ..................12Special Packages For Low-Income Borrowers ..........................8Tax Advantages ......................................................3-6, 8, 11, 15The Advantages Of Home Ownership ....................................2-3The Disadvantages Of Home Ownership ..................................4Tie Up All The Loose Ends ......................................................14To Buy Or Not To Buy? ............................................................2-4Veterans Administration Loans................................................7-8Web Sites

www.centralcu.org ............................................................3, 12www.quickenmortgage.com ................................................12www.totalmortgage.com ......................................................12