January 5, 2007

Today’s Real Estate

Homeownership: Is it right for you?

By Donna Nardi
Special to the Times

Homeownership is as American as baseball and apple pie, and everyone wants a slice of the pie. It is the pinnacle dream of many. Yet, with the very high-priced market in Silicon Valley, it often seems unattainable.

While having no desire to suppress an individual’s desire to own a home, my goal is to educate clients to enable them to make the best decision for their future. Each person has unique circumstances and needs. The decision to buy a home, and the loan to allow them to do so, should be tailor-made for them.

Banks are in business to make money. Understanding many could ill afford to purchase a home in our area with the “old-fashioned” 30-year fixed rate loan, banks created new loan products to enable homeownership to this unique group. The details and terms of these new products can make the average person’s head spin.

Most of us don’t have the mathematical mind to fully comprehend the pros and cons of each loan. However, a homeowner must understand the loan for which they are contracting. One loan product that may be great for one borrower may not necessarily be in the next person’s best interests.

One of the more risky loans is the Option ARM. While it enables many to purchase a home that would otherwise be unattainable, it’s not for everyone. Each month, the homeowner has a choice of three different payment options. The highest payment would be fully amortized, which includes both principal and interest. The lowest payment is the fixed amount that is lower than the interest only portion but adds the balance of the unpaid interest to your principal.

For example, say your interest only option is $1,500, but your minimum payment option is $1,200. You would then have $300 added to your principal balance. So, instead of paying down the principal as on a standard loan, the principal would be increasing, making earning equity less likely. The borrowers benefiting most from this product are those expecting their income to climb over the next year and beyond, and don’t mind losing some equity in the short term.

This way, they will be able to live in their home of choice at the lower market purchase price, and eventually be able to pay down the principal, or refinance. However, it’s very easy to get into trouble with this loan, so that both education and playing by the rules are of extreme importance.

It is important to have a “team” looking out for your best interests. You need a competent realtor who will take the time to educate you. Your realtor should have licensed lenders on his or her team capable of educating you to obtain the best loan for your current and future needs.

Make your short-term objectives, and your long-term goals known. The length of time you plan to live in that home is a critical factor. Your lender should be comfortable with getting a second lender’s opinion to be sure you have a clear understanding of the loan terms and whether it fits your life goals.

Often, hearing another point of view allows a clearer understanding. Then use the lender that you feel is the most objective, offers the loan most suitable to your own needs, instead of merely selling you a loan. One great educational source on loans is www.sjhousing.org.

I spoke to our in-house office lender, Chet Ford, of the Home Loan Group. He creates a profile of the borrower, counsels and educates, then offers the various options to the borrower to enable them to make the best choice for their future.

He cautions that every borrower should know the up- and the downsides to each loan product. Be aware of all costs related to the loan. After all, you don’t want to be robbed of your hard-earned money.

Also, be careful of the pre-payment penalty, which can be very costly when refinancing or selling the property. At times, a short-term prepayment penalty is acceptable, which allows a lower interest rate. But, be sure you know and understand the terms!

The goal of realtors and lenders in this industry should be to educate, and allow homebuyers to make the best decision for their future. It is essential for individuals to be a good steward with their money. Don’t allow family, friends, or society to pressure you to be a homeowner until you have done your due diligence.

It is important for a potential homeowner to carefully seek out a realtor and licensed lender; one that can be trusted, who has the proper experience and qualifications and who takes the time to educate his clients.

How do you know? The easiest, yet most effective method is to ask friends and family who they were happy with when purchasing their home. Or, after noticing and hearing of a realtor or lender, contact them and ask questions about their philosophy of selling. Make sure they will look out for your best interests.

The goal of the realtor and lender should be for you to be happy with your decision to purchase a home one year, 10 years even 20 years from now, and be thrilled to refer them to your own friends and family.

While I am of the opinion it is almost always in an individual’s best interest to own a home, there are circumstances where it isn’t. It is the duty of each potential buyer to answer that question, fully educated, before making that decision. Getting an education, and attempting to qualify for a home loan costs you nothing. However, the rewards of homeownership are endless and not just monetary but far beyond.

Armed with the necessary education, you will be able make the best decision for yourself and your family.

Donna Nardi is a full-time Realtor with Prudential California Realty in San Jose. You can reach her at (408) 918-4410, or donna.nardi@prurealty.com, or www.happywayhome.com.