Step 1 to Financial Freedom – Buy Real Estate

Owning real estate. That’s the way to go. But you may not have the $100.000 sitting in your bank account to pay for such a hefty downpayment on your mortgage. The better choice here is to invest in an apartment. Below we take you through the full process, from where to start, to where it ends and moving into your brand new own apartment. These apartments may be lofts, penthouses, single-bedrooms, or shared flats. The same process goes for all these types of residences in the USA.

Advantages of Buying vs. Renting

You may not be sure about whether you want to buy or rent an apartment. Real estate gurus everywhere will either swear that you have to rent, or that you have to buy. In the end it’s not such a simple decision, and what the best choice in your case is, depends on many factors, such as your income, financial reserves, the location of the property, etc. The number one factor is likely how long you intend to live in the property.

Calculate your Finances

When making this decision, the most important calculation is comparing rent to mortgage payments. Let’s say you find your dream property, and you want to live here for the next 10 years. If you can rent this property for e.g. $1.000 a month, or you can buy it and pay $1.000 a month in mortgage for 10 years you can do the math yourself. You will live there either way, but when you buy it and pay mortgage you are building equity, and once you move out, you can sell it for profit. Ownership as opposed to renting also comes with a number of tax deductions which lower the amount of money you actually invest.

When you Should Rent

Of course you shouldn’t forget the fact that a purchase always includes a downpayment. If you are strapped for cash, and cannot afford this downpayment, or it would force you to take out another loan. Then you are better off renting, and avoiding high interest. This side also has tax perks, such as not having to pay property taxes.

Top Reasons to Buy an Apartment

There’s many reasons to buy an apartment. These are the top reasons which should motivate you.

• Attractive returns on Investment
• Danger of Depreciation
• Perfect Preparation for Retirement
• Flexibility
• Safe Investment
• Safety rom Inflation
• Tax deductibles

Preparing Property Purchase – Before Buying

There are a few things to take care of before you even start looking for properties. Of course, feel free to scope out the market before doing these things, but remember that it will be quite difficult to make a serious offer for an apartmentwithout these following things.

Of course, you have to decide what you actually want to invest in, let us help you with that:

• What Real Estate Should I Invest in?

Check your Credit Score – Financing an Apartment

This is the number one thing to do. Before doing going on the hunt for any real estate you should know whether you are even in financial shape to buy. Credit scores are compiled by three so-called credit bureaus: Transunion, Equifax, and Experian. They provide you a report, which can be turned into a score. This score will also play a role in deciding what type of mortgage you can get.

Contacts – Attorneys, Mortgage Broker, etc.

Before buying you need to have a few professionals by your side. It’s probably good to have an attorney set up beforehand, and in many places, e.g. when you buy an apartment in New York, it is even mandatory. Additionally, you may opt for a mortgage broker (especially when buying into a co-op, see below), and a real estate agent.

Mortgage Preapproval – Insurance for Loan

Before you go on the hunt for an apartment, you can (and should) obtain preapproval for a mortgage. This consists of a letter which certifies that you are in fact capable of obtaining the mortgage. In a sense it is the bank telling the agent and seller, that they will lend you the necessary funds to buy a property worth x dollars. This is a vital part of the process, as most real estate agents and brokers will refuse to do showings or take up contact without such a preapproval.

Let us guide you through the confusing world of mortgage:

• Mortgage Explained Easily
• Mortgage Interest – Where it is most Expensive

Buying without Mortgage Preapproval – Paying Apartment in Cash

It is possible to buy without a mortgage preapproval, given that you are paying everything upfront. This is of course not a common case, but given that you will not get a mortgage for the property you are going to buy, you can approach brokers and sellers without a mortgage preapproval. In this case though, you must present proof of funds to view properties.

Now What? More Apartment Search Tips

Now that you’ve taken care of these things you can start to look around. It is best to first get an orientation of the market and how you want to buy. This is best done by taking frequent looks at real estate listing sites and going to open houses. Also, despite internet being pretty much everywhere by now, it’s never a bad idea to go in person to smaller real estate agencies in neighbourhoods which you are interested in. Some more old-fashioned shops may not be putting their listings online.

Readying Purchase – Costs Preparation

When you are preparing to buy your apartment, there are a few things to straighten out beforehand. Planning is as always key, and should include all additional costs. Note that of course these things differ in different areas. Buying an apartment in Chicago is very different from when you buy an apartment in L.A.

Taxes & Property Tax Rates

Of course, when thinking about finances you will have to consider the taxes. There are three different kinds. Three taxes you pay when buying property, which includes property tax. This property tax you also have to pay repeatedly when owning said property.

Want to learn more about property tax? We’ve got you covered

• Property Taxes U.S. – Explained

Important Extra Details

There’s a ton of details you may forget about when buying a property, which bother you a lot later on. Think service charges, which you will pay to the owners of the building. Also important here, who takes care of these services, and is this company performing the services good? Also pay attention to any restrictions, like e.g. whether pets are allowed, and noise restrictions. There may also be difficult-to-detect issues in the neighbourhood, like a large shopping center opening very nearby which increases traffic, or a night club nearby which means noise at night. Or perhaps building issues are prevalent in the area because the ground is unstable. Many of these things will be highlighted by your solicitor, so make sure to listen well. The location is key, meaning New York will have different details to look out for than L.A. or Miami.

Buying Apartment – Process from Negotiation to Close

To buy the apartment finally, you will want to start negotiating.

Make an Offer – How to Negotiate Sales Price

So you decide that this is your dream apartment. What now? Well now it’s time to make an offer. That means approaching the seller with an offer. There are two sides on which to negotiate, and you must pick one or the other. Either you try to reduce the size of the sale price. I.e. buying a property for $800.000 as opposed to $850.000. The other option is to negotiate the closing costs, e.g. agreeing on the sales price, but asking the seller to pay some of the additional costs, including real estate purchase taxes. These tactics of course mean either having more money in your bank account at that moment, or reducing the amount of montly costs in the future. You can typically expect to negotiate 5%-10% of the sale asking price.

Next Steps – Building Inspections

Your lender will most certainly require you to have an inspection of the apartment building, as well as the unit itself. This usually shows slight flaws, such as necessary maintenance in the future, or e.g. structural flaws.

Reducing Sales Price on Real Estate

Now you can renegotiate. You have found flaws in the building, and now have a strong negotiation stance. Let the seller know your concerns, and they will likely be more lenient in their negotiation.

There’s also a ton you can save on the many slight additional costs which come up when buying real estate, we give you the full guide

• All Additional Costs when Buying a Home

Final Important Step! Walk-through

Don’t forget the walk-through! This is one of the most frequent beginner mistakes. After moving out, things may change, the previous owner may have broken something, or a cabinet may have been covering up a flaw. Not doing a final walk-through can be your number one regret later on. It doesn’t take that long, and will most certainly be worth it, at least for the peace of mind.

Co-op Apartment – Buying Shares not Property

Co-ops are slightly more challenging to get, with a complicated and time-consuming process, but the time investment is worth the reward, with typically lower property taxes, the possibility to build equity, and more.

What is a Co-op Apartment? Meaning, Definition, Explanation

A co-op apartment is an apartment which is administrated by a housing cooperative. If you buy a co-op apartment, you are not actually buying the property, i.e. the four walls which you intend to live in. Rather, you are buying a share in a legal entity. The shares you buy entitle you to use a specific part of the building. Therefore, you are not the owner of real property, but rather a membership which allows you to use the apartment you live in. This also means of course that you do not take out a mortgage, but rather share loans, i.e. a loan to pay for the shares.

Why you Should choose a Co-op – Advantages

Because you are not the owner of the property itself, you do not have to pay property taxes. Rather the cooperative pays the property taxes for the whole building, and these are divided among the members, i.e. residents. The main advantage of a co-op is that it is cheaper. The property taxes which each resident pays are lower, and any additional fees are also lower, because the co-op is not intended to make profit. Lastly, residents in co-ops, despite not actually owning the property, are entitled to many tax deductions which real estate owners are entitled to.

How to buy a Co-op Apartment – Step-by-Step Explanation

There are a few steps to go through before buying into the cooperative. Before approaching a co-op, or identifying an apartment which you are interested in, you have to gather an attorney, a mortgage broker, and an engineer. Although this is not necessary, it greatly increases your chances of getting the apartment you want. This is because, once you’ve identified the apartment you want, you apply. Your application is decided upon by the board. This board obviously wants the best possible residents, therefore it’s important to present yourself as a serious buyer. All co-ops have a certain list of requirements, which include the amount of downpayment you need to pay, and how much financial reserves you have. Following this, you contact the seller, begin the title search and mortgage application, and close the purchase.

Special – Buy Apartment New York

New York, the city of dreams. You too can live your dream of owning real estate, and that in one of the top cities worldwide in everything from fashion to finance to art and food. Buying an apartment in New York certainly isn’t the easiest of tasks, but one that is likely to leave you happy you took the risk. But! New York has a complicated real estate system as everyone knows. Buying an apartment here means many different things than it does in other parts of the U.S.A.

We take care of all questions you could have in our full guide on buying an apartment in New York

Buy Apartment New York

Special – Buy Apartment Los Angeles

Los Angeles, where dreams come true. The home of celebrities, hollywood, a sprawling cityscape, beach and surf, and everything else you can imagine. From Malibu to Bel Air, Silver Lake and Venice Beach. It’s worth the traffic and chaos of the metropolis, to experiennce the unique atmosphere of this city. So you want to live in Los Angeles, but don’t know where to start? It’s certainly not easy wrapping your head around where and how to live. Do you choose Mid City or and a retail paradise, or Silver Lake, and hang out with the young students? We give you the full run-down below. The Los Angeles real estate market, like so many of U.S.’ super cities, is doing well. Los Angeles is neither a sellers nor a buyers market. Prices are also increasing, taking single-family residences, by over 16%.

We take care of all questions you could have in our full guide on buying an apartment in Los Angeles

Buy Apartment Los Angeles

Checklist – Overview of Process: Buying Apartment

These are the most important things you need to do before and as you buy your apartment. Don’t neglect these steps, as they are each important in their own right.

Preparation Steps for Buying an Apartment

The most important things to be certain of before buying an apartment are:

1. Check Credit Score
2. Gather Professionals
3. Mortgage Preapproval
4. Remember the Details!

Remember When Buying the Apartment! Important Final Steps

During your purchase, or slightly before or slightly after, there are important things to do. These include:

1. Make an Offer
2. Negotiate Smart!
3. Inspect
4. Renegotiate
5. Walk-Through (Important!)

Condo? Apartment? House? – Type of Real Estate Decisions

So you’ve decided you want to buy real estate. Should you invest in a house or an apartment? What has better resale value? There’s thousands of questions, so below we summarize the most important facts you have to know about what type of real estate you should invest in. There are some important questions though, which we answer below.

Buying real estate? Don’t forget about the…

• 3 Taxes – Buying a House

Do I want to Live in my Real Estate Investment?

Or using the lingo: Investment or owner-occupied properties? If you’re investing in real estate, you will know whether it is for a profit via e.g. rental, flip, appreciation, etc. or whether you want to live in it yourself (i.e. as owner-occupied property). This distinction is important when deciding what type of real estate you want to invest in. For example, buying a house to flip means different taxes than when you use it as a primary residence. This is an important part of the discussion, and therefore will be mentioned often further on. The most important difference for investors is between single-family residentials (e.g. a house) or multi-family residentials (e.g. an apartment building). Note, financing with e.g. mortgages is less lucrative and more difficult to attain for investment properties.

Financing is more difficult for investment properties!

Real Estate Investment – Forming a Business Company, Types of Entities

If you’re going to invest in real estate, you will want to reduce real estate taxes, and reduce liability. This is important so that you do not become involved in a costly legal battle which can cost you your livelihood. Forming a company which rents our property means that the company is liable, and not you. There are many forms of real estate business entities, so check out the full list below:

• LLC
• Limited Partnership
• General Partnership
• S Corporation
• C Corporation
• Multiple Entities
• REIT

What Types of Real Estate are there?

There are 4 different types of real estate: residential, commercial, industrial, and land. We here focus only on residential real estate. This includes many types of buildings, which often have different names in different regions. Our list will go through the top 4 types:

1. House
2. Apartment
3. Condo
4. Townhouse

Of course, if you are deciding on a residence, you will know whether you want to live in an apartment in the city, or a house in the suburbs. Below, we focus on which type of real estate is most profitable.

Should I Rent out my Property?

This is one question which you may not be certain on. After buying real estate, you have two main options: Sell it on, or rent it out. Of course, you can leave it empty to avoid costs of repairs and reap the benefits of appreciation later, or any other number of things, but here we will focus on these two options as they are most popular. There are pros and cons to both sides, and the answer to the question depends on a few factors.

Financing

Buying a property to rent out has different tax implications, as well as different effects on your mortgage. Almost everywhere, investment properties are encouraged, and incentivized via tax deductions. That means lower taxes on the income you make from rental properties, than from selling/flipping. Looking at rental properties, you are entitled to deduct most of the expenses of your property your tax sheet. Repair services, the expenses of home office, insurance and mortgage insurance, are all deductible. The biggest advantage is likely depreciation though, where you can write off the consistently sinking value of a property from your taxes.

• Biggest advantage: Depreciation!

Involvement

The dream of real estate mogul is connected with passive income. That is, letting your investment make you profit, without the pressure of having to run a business or go to the office yourself. That’s called passive income, and it sounds quite comfortable (more comfortable, of course, than it actually is). That’s the type of income you have with rentals, where apart from repairs (which your property manager will take care of), you have little to no involvement yourself. Active income, the opposite of passive, is what most people do in their day job, working for every cent you receive. If you plan to sell your property, you are likely much more active in the process. If you plan on flipping your house, i.e. buy-renovate-resell, you can consider this a day job, as it requires much more consistent work.

Risks

If you are looking to rent out property, there is of course the risk of not finding tenants. On the other hand, there is a similar risk for flipping, when you fail to sell the house above acquisition price (i.e. the cost of buying and renovating the property). In any case, a real estate investment only carries risks if the decision to buy is made without looking at extensive information.

What Type of Real Estate Should I Invest in?

Now that we have all that cleared up, we go on to the different types of real estate and the advantages of each.

House

The so-called single-family residential. This is something everyone is familiar with, and needs no introduction. Typically when you buy a house, you pay a percentage of the full price up front (down payment), and then monthly pay off the rest of the price (the mortgage, more on all this in our article: Mortgage Explained Easily).

Advantages

Lower up-front cost means that at the point of purchase, you have to invest less money than you would for other types of real estate. There’s also the factor that you can quite freely decorate or renovate, without worrying about a building coop breathing down your neck. Another big advantage, you’re buying land at the same time as your house. Even without the house, this appreciates in value.

• Freedom & Privacy

Disadvantages

You’re the person in charge. The same way that carries advantages it also has disadvantages. You need to do repairs, servicing, etc. Of course, there’s also the price. Houses are of course much more expensive than apartments, even when finding a good mortgage. The location, with houses often being situated in suburbs, means distance to the big events or the inner city life. Of course this is also desirable for some, such as young families.

• Responsibility & Work

Apartment

Apartments are often the first step for first-time home buyers. An apartment is any form of residence which is situated within a larger apartment building. Although they are not always the most spacious, they are relatively cheap, and offer a good choice for those people looking to live in the city, as opposed to the suburbs. People often think that it is only possible to rent apartments, and although this is definitely the most common choice, it is also possible to buy and sell an apartment.

The advantages listed above are of course the most convincing. On top of this, you have people like the property manager, who come take care of issues such as plumbing. That means less responsibility for you, the resident. Additionally, the modern apartment building has amenities such as a pool or a fitness room. Lastly, it’s much less lonely, with the common spaces giving room for interactions with your neighbours. Looking at finances though, your apartment is less likely to appreciate in price, meaning that you won’t make profit when selling it.

Condo

A condo is for many the in-between option of apartment and house. It offers the size and relative privacy of a house, without the responsibility of owning a free-standing house. Attached to condos are often things like concierges, and security. Again, here it is also possible to rent, but also buy a condo.

Like apartments, this form of real estate is also less of a risk, as well as less of a commitment, than buying a house. People often neglect the fact that, just like in apartments, you will pay fees for repairs, or to the building managers. These ‘condo fees’ are somewhere between $100 and $700 a month. Another disadvantage is also the close proximity to neighbours.

• Condo Fees: $100-$700 /month

Townhouse

A townhouse is the often-forgotten fourth option. Here, just as with a house you own the property, i.e. the land as well as the building in which you live. This is advantageous because it allows you to build equity over time. So what’s the difference to a normal house? Townhouses are usually set up in a row, wall to wall with the neighbouring houses. That means less privacy, and common issues. Yet, for this reason, and because these are usually smaller than your average house, townhouses can be cheaper to finance. Additionally, they are great options for more space in more populous areas such as downtown city centers.

If you’re thinking about buying a condo, make sure to inquire in the other condos in the association/development. At least 90% should be owner-occupied. Even if you’re renting, ask around and find out how the rest of the owners are doing financially. An association means that if a singificant proportion of tenants are unable to pay, or are simply not paying, you will have to shoulder the load. So if they don’t pay you may suffer.

• >90% of Condos should be Owner-Occupied

Invest, Sooner or Later

No matter when you do decide to invest. Real estate is often the right choice, given that the necessary leg work is done beforehand. That means, getting informed, knowing about the options, and the dis- and advantages of all these options. Our guides on mortgage, property taxes, and costs, give you a strong foundation for what you need to consider.

Looking at real estate in Germany? Our encompassing guide tells you all:

• German Real Estate – Everything you Need to Know

What is a Mortgage?

Mortgage is a key component of any property investment. No matter the wealth or region, you’re gonna have to confront the facts about mortgage, the amount you’ll have to pay in total, and the interest. To pick the right mortgage you will need to be informed about everything there is to know about mortgages. All this and more below. If you want to save money on your mortgage, and you already know about saving money on real estate taxes, you should understsand it in detail. We begin with the definition of mortgage.

Mortgage Definition & Explanation

A mortgage is a type of loan. That means it is a sum of money which a lender pays on behalf of a borrower. A mortgage is a loan which is used to pay off property. The borrower is required to pay the money which they borrowed back, but not as a lump sum, but rather in rates. This means that e.g. as opposed to paying 1 mil. in one transaction, the borrower can pay 10.000 every month for 100 months. On top of this though, the lender typically requires interest, which is a percentage of the total loan which the borrower must pay on top of the rates.

What are All the Things you Pay in a Mortgage?

In a mortgage you pay more than just the amount which you borrowed. You pay additional fees at the point of closing the mortgage, you may have to pay a private mortgage insurance, and you will have to pay mortgage interest. The amounts you pay on these usually follow a formula where the more you pay at the closing of the sale, i.e. the more you pay up front on your mortgage, the less you pay later on or annually.

These are just some of the additional costs you pay when closing the purchase of property. This and many more closing costs for house purchases are detailed in our article on

• All additional Costs and Hidden Fees when Buying a House

The Loan – Ending a Mortgage

Of course, you are required to pay back the amount which you borrowed. If you borrow $500.000, you will need to pay this back in full at the conclusion of your mortgage. This is the simplest and most overseeable part of your mortgage, as well as the most substantial sum.

Mortgage Closing Costs – Upfront Payments

These are costs which must be paid up front when closing the mortgage. They pay for things like title insurance, application fees, etc. Mortgage closing costs are of course paid by the buyer of a property at the point at which the property is purchased. There’s too many to list, and these vary and depend on many things, but below some of the common ones.

• Loan origination fee: up to 1% of total loan
• Escrow fees: $350 – $1,000 but can be much more
• Appraisal: $500-$1,000 but can be much more
• Prepaid taxes and insurance: $1,000-$4,500 but can be much more

These typically range around 2%-5% of the total loan amount. So for a $750.000 loan you can pay an additional $37.500 in mortgage closing fees. They should not be confused with purchase closing costs, such as the taxes you pay when buying a house.

Discount Points: How to Reduce your Mortgage

Discount points are points which you pay at the beginning of your loan. The more you pay here, the more discount you receive on your mortgage. If you ‘buy’ 2 discount points, you receive a discount of 2% on your mortgage.

Mortgage Interest Lowest Mortgage Interest

Interest is a price which you pay for the service and risk of someone loaning you money. Mortgage interest rates are expressed as annual payments, and are e.g. 5%. That means that every year you will pay an additional 5% of the total loan amount to the mortgage lender.

Our article covers everything you need to know about the topic

• Mortgage Interest – How Countries Compare

Who is the Lender for a Mortgage?

Mortgages are most often loaned by independent mortgage companies. That means organisations who are specialized in lending mortgages. Although financial institution such as a bank or credit unions. In the USA, banks make up 32.4% of mortgages, credit unions make up 8.8%, with mortgage companies making up 54.4% of the market. These are not all the types of lenders though. Below is a list of all types of lenders in the USA.

What’s Better, Mortgage Companies or Banks?

It’s not difficult to save on real estate taxes generally, but you don’t want to spend more than necessary on your mortgage. Typically mortgage companies (or mortgage lenders) are more flexible. That means they can customize your loan, close your loan faster, and more open to negotiation. They also, because they are specialized in loans, typically have more expertise.

• Mortgage companies (e.g. Quicken Loans)
• Banks (e.g. Wells Fargo)
• Savings associations/loan associations (e.g. Mortgage Bankers Association)
• Online lenders (e.g. GuaranteedRate)
• Credit unions (e.g. Connexus)
• Private individuals (e.g. Family Friend)

What are the Most Popular Lenders?

The top lenders in the USA are Quicken Loans, United Wholesale Mortgage, and Wells Fargo. You can see quickly that specialized mortgage lending companies are the most popular choice at the moment. Here a list of the most used lenders in the USA for mortgages.

1. Quicken Loans – 541,000 loans
2. United Wholesale Mortgage – 339,000 loans
3. Wells Fargo – 232,000 loans
4. JPMorgan Chase – 186,000 loans
5. Fairway Independent Mortgage – 147,000 loans
6. LoanDepot – 146,000 loans
7. Caliber Home Loans – 136,000 loans
8. Bank of America – 134,000 loans
9. Freedom Mortgage – 110,000 loans
10. U.S. Bank – 94,000 loans

Should You use a Mortgage Broker?

What are the advantages of mortgage broker versus a direct lender? A direct lender is an entity (e.g. a bank or credit union) which provides you funds, and to which you in turn pay interest. A mortgage broker is a middle man who is an expert in finding the best mortgage loan. In other words, a mortgage broker takes care of contacting and researching a direct lender.

• Direct Lender: Banks, Credit Unions, etc.
• Mortgage Broker: Middle man who finds the best deal

Mortgage brokers are advantageous if you have difficulties finding a loan. This can be down to low credit scores, or an income which makes lending to you unattractive. Mortgage brokers also often have access to mortgage lending programs unavailable to the typical citizen. Though you will have to pay an extra fee of course to pay the broker for their services.

• Brokers good for low credit scores or low income

Direct lenders such as banks are advantageous because you cut out a middle man. In this case you only have to pay a commission fee to the loan officer (the individual overseeing your loan at the institution). This also has the advantage that the broker is not acting in his own interest, e.g. choosing the institution which pays the highest broker fees.

• Direct Lenders allow to avoid broker fees

What are the Different Types of Mortgages?

There are a few different types of mortgage loans. These differ on three important variables. In other words when shopping for a mortgage loan, you must decide beforehand in which category you fall for each of the following three variables.

Type of Loan: Conforming vs. Non-Conforming Loans

The U.S. government has set certain guidelines delineating ‘conforming’ and ‘non-conforming’ loans. These loans differ in the amount which you can borrow. This limit (as of 2020) is $510.000. That means when you receive a loan for more than this amount, you are receiving a non-conforming loan. Non-conforming loans have worse interest rates and fees than conforming loans. Within non-conforming loans the most popular is the ‘jumbo loan’.

Type of Loan: Fixed Rate vs. Adjustable Rate

Fixed-rate loans and adjustable rate loans (also called adjustable rate mortgages) differ in the variability of interest rate, as the name states. That means fixed-rate loans incur the same interest over the whole period of the loan, while adjustable rate loans incur a rate which is set to change across the lifespan of the loan.

The first, fixed rate loans are attractive because there is safety. The interest rate will not change, and therefore budgeting and planning is easy. Typically fixed rate loans are more expensive at the outset than adjustable rates. Additionally, fixed rate loans are designated by time period. The most popular time frame is a 15-year fixed rate loan. That means the borrower pays back the loan and the same interest rate over 15 years.

Second, adjustable rate loans, are attractive to start with, because the rates are lower. Yet, because they can change, borrowers can be surprised that the interest rate increases over time. These also usually begin with e.g. 5 years of a fixed rate, after which the rate begins to vary.

• Fixed-rate = Same rate for full term
• Adjustable Rate (ARM) = Variable rate

Type of Loan: Conventional vs. Government Backed

Government backed loans are loans which are insured or guaranteed by the government. Examples are Federal Housing Association (FHA) loans or Veterans Administration (VA) loans. If you have a non-conforming loan it is impossible to receive government backed loans. The main differences between conventional loans and government loans are that conventional loans have stricter requirements (e.g. better credit score and higher income), are insured privately, and the guidelines are more relaxed, meaning less paperwork.

Mortgage Terminology Explained

There are many words unique to the real estate loan market which are not used in every day life, making the understanding of mortgages more complicated for the layman. These words are explained below, with definition and explanation

Escrow – Meaning

An escrow or escrow account is a savings account where funds are placed. This account is managed by your servicer, who deposits a portion of each mortgage payment into your escrow account to cover your estimated property taxes and insurance premiums. Not all mortgages come with escrows.

What is a Mortgage Principal?

Mortgage principal, also called loan principal is the amount outstanding on your loan. In other words, the amount left to be paid from the amount you borrowed. E.g. if you borrowed $400.000, and have paid $320.000, your loan principal is $80.000.

Down Payment – First Mortgage Payment

A down payment is a sort of deposit. It is the money you pay in advance to buy a house. You almost always have to pay a down payment to receive a mortgage. A larger down payment generally means better credit terms and a cheaper monthly payment.

Take for example a 5% down payment on your $1 mil. house. You only pay $50.000 at the point of purchase, but will pay a monthly private mortgage insurance, and likely higher interest rates. You can also receive discount points when paying more on your down payment, which reduces the interest rate. If you pay a 25% down payment, you’ll pay $250.000 at the point of purchase, but you will not have to pay private mortgage insurance, as well as receive a better interest rate.

• Larger down payment = lower interest

Mortgage Term – Length of a Mortgage

This is the period of time in which you pay off your loan. E.g. the fixed rate 15 year loan, has a mortgage term of 15 years. The longer the mortgage term, the higher the interest rates, and the longer the loan will be following you. Yet you will have to pay less each month.

Want to learn more about the many additional, and often hidden costs of buying a home? Our article covers everything you need to know

• All Additional Costs of Buying a Home Explained

Real Estate – All Taxes you Pay when Buying Real Estate

Buying a house is a massive investment, and most people are surprised by the many additional costs. To begin to understand all the extra costs which the purchase of a house brings, means understanding the taxes. That means, that the three types of taxes listed below are all the necessary costs which you will pay to the government in the area of the home you are purchasing.

Upfront Taxes – What are Pro-Rata Taxes?

When buying a home in the United States, you are typically required to pay 6 months of property taxes in advance upon purchase. That means six months worth of property tax, called pro rata. Yet, on the purchase of the property, there are only three taxes. Which makes this quite easy to understand. The property tax is the tax which an individual has to pay annually for owning property, the transfer tax is the tax on the purchase of the home, and the mortgage recording tax (where it exists) is the tax on the recording of the mortgage.

• Taxes you pay in advance!

Many of these taxes can be deducted from your federal tax sheet. Learn more:

• Real Estate Tax Deductions Explained

Do you have to pay Sales Tax on Real Estate?

No. In federal law, real estate such as homes, property, or land, are not subject to sales tax. Although some states do have sales tax on items which may be interpreted as being a home (e.g. a mobile home).

Taxes You Must Know – Most Important Real Estate Taxes

These are the taxes you have to know about when paying for your home. How each of these is calculated depends on the city, county, and state the real estate is bought in. The three relevant taxes which you will incur when purchasing a home are property taxes, transfer taxes, and mortgage registration tax. Not all exist in all states, and there are many intricacies to note.

Property Taxes – Do You have to Pay Property Tax when Buying a Home?

Property Taxes are ad-valorem taxes which you pay for owning property. Most typically, this property consists of land, as well as anything which is permanently attached, such as any real estate, but also, roads, docks/wharfs, pools, etc. In some states, the property tax even includes items such as boats. When buying a house, these must be paid in advance, and then received back from the seller. Property taxes are typically a rate which is multiplied by the estimated value of the property. This value is estimated by an appraiser, and takes into account location, age, etc.

Avg. US Property Tax: 1.11%

To calculate property taxes, you receive a rate, which is influenced by local, county, and state laws. E.g., a house in Hawaii, worth USD$1 mil., will cost USD$3,000 in property taxes a year. Yet this does not take into account the rate which a specific county in Hawaii may add to this.

• U.S. States Property Taxes

Transfer Taxes – What is it? Who Pays transfer Taxes?

Transfer taxes are argued to be taxes which pay for the work and materials invested when documenting the purchase of a new home. This is why they are sometimes also called documentation taxes. They are one time fees upon the transfer in ownership of a home, i.e. when buying or selling a house. These are sometimes paid by the seller, and sometimes by the buyer, with some states stipulating who, and sometimes the real estate agent mediates between seller and buyer.

• Sometimes paid by seller, sometimes by buyer

Avg. US Transfer Tax: 0.6%

These are often felt to be one of the more complicated taxes because the rate does not only differ by state, but also between counties and between cities. E.g. in New York you have the New York State (0.4%), New York City (1,4%), Mansion (1%, only when buying a house > USD$1 mil.) transfer taxes. Meaning when you buy a house for USD$1 mil., there is a total of USD$28,250.

• U.S. Real Estate Transfer Taxes

Mortgage – What is a Mortgage Registration Tax?

This tax is based on the amount of debt being secured by the procurement of real estate. It is a state-based tax, and is paid towards the locations where the mortgage is documented and recorded. If the buyer wants a mortgage, the buyer pays the registration fees for the mortgage. In Minnesota, there may be an additional tax such as an “environmental response fund tax”. The 7 states which require a mortgage tax are Alabama, Florida, Kansas, Minnesota, New Yoek, Oklahoma, and Tennessee.

Avg. US Mortgage Registration Tax: 0.2%-.4%

The amount required is again based around the amount included in the mortgage. E.g. in Minnesota county, there is a 0.23% mortgage registration tax, when a mortgage worth USD$1 mil., you will pay USD$2300 in mortgage registration tax.

• U.S. Mortgage Taxes

Closing Costs Real Estate – Hidden Additional Costs

These taxes are just some of the many additional costs which accompany the purchase of real estate. Buying a house means paying attorneys, brokers, and many other individuals or organisations. And these additional costs can equal as much as 5-6% of the total purchase price of the property. We’ve broken down all the costs you have to know about in our article

• Buying Real Estate – All Additional Costs

Which Construction Loan Fits your Financing Wish?

All construction financing and credit for house construction or house and apartment purchase fall into the category construction loans. The most frequently requested and applied for building loan is the annuity loan, which is reminiscent of the slightly outdated mortgage loan in its contract details and coverage. The right decision for a building loan depends on various factors and conditions. In addition to the annuity loan, you can choose, for example, a construction savings loan, a building loan continuation, or a combination of various building loans.

We will calculate your personal advantage and put together an offer of conditions for you based on your financing requirements, the preferred security of the loan and your equity capital as well as your credit rating. The object to be financed is an important part of the loan arrangement. For a new building, other building loans are available than for an old building, for a condominium, other financing options are suitable than for a single-family house with a large plot of land.

Building Loans for Initial and Follow-Up Financing

An important difference between the individual building loans is based on whether you want initial financing or follow-up financing. You can also opt for a construction loan which is linked to a modernization loan and provides you with money for the renovation or repair of the property in addition to the purchase of the house. We at Lukinski – Your House Sale will find the right building loan for your financing and show you which advantages in terms and conditions you will get with the right choice. We are happy to compare different offers with each other or make several proposals, which you can compare and contrast based on their conditions. With Lukinski you can finance construction and chewing projects in real estate in a favorable and advantageous way.

Real Estate Loans & Financing Possibilities

Would you like to fulfill your dream of your own home, a condominium, a building plot or a commercial property? Then the right choice of real estate loan will determine how much interest you will have to pay and thus the total cost of your real estate loan. Already when choosing a real estate loan, you as a potential buyer are faced with many questions and considerations, for example, whether you should choose a classic annuity financing or opt for another form of financing.

Follow-up financing is also possible in various ways. Ultimately, you are faced with the question of whether you are better advised with a long and fixed debit interest period or with a flexible real estate loan.