What is a mortgage?

A mortgage is a long-term loan that you obtain from a bank, mortgage broker, online lender, thrift, or other source (sometimes even the property seller) to cover the purchase price (excluding your down payment) of your home. In exchange, the lender holds the home and land as collateral. You sign documents at the closing table that give the lender a ‘‘lien’’ against your property. If you fail to make payments as promised, the lender has the right to take the home through a process known as foreclosure. Large in size, mortgage loans are paid off over long periods, typically either fifteen or thirty years. Monthly payments chip away at the principal balance, but don’t expect to see that principal balance number go down much during your first few years as a home owner, particularly if you’re using a thirty-year mortgage. That’s because for the first few years you will be paying down your interest and not much of your principal balance. Where would we be without mortgages? For starters, there certainly wouldn’t be very many home owners. The typical individual or family isn’t able to cough up enough to cover the six-digit price tags of homes, which makes mortgages a basic necessity for home buyers. Today’s lenders offer a very wide variety of mortgage options or ‘‘products’’ (as they call them) to meet the needs of the nation’s wide and varied base of home buyers.

How much do homes cost?

Existing homes run the gamut from $40,000 (or less) condominiums to $1 million-plus single-family homes. New homes are more expensive, generally running anywhere from $125,000 and up, depending on location, size and amenities. We can narrow the ranges down to a more digestible number by looking at the National Association of REALTORS’ (NAR’s) latest statistics, which reported a national median existing home price (half of the homes sold for less, half sold for more) of $169,900 in 2003, an 8 percent increase over the 2002 median home price of $158,100. The national median new-home (newly constructed) sales price was $194,500 in 2003, up about 3.7 percent over 2002. NAR forecasted the median existing-home price to grow by 4.6 percent in 2004, while new homes were expected to increase by 5.1 percent.
Using NAR’s statistics as a guide, it’s clear that home buyers have been paying more and more for the same homes over the last few years, but the group predicted that the high level of appreciation would level off in 2004. The 8 percent increase across the board in 2003 was the strongest showing since 1980, but NAR expected the percentage to decrease to 4.6 percent for existing homes and 5.1 percent for new homes in 2004, which is good news for you.
Besides consulting with your local paper or online multiple listing service, you can compare home prices across the nation via indexes created by companies like Coldwell Banker, which publishes an annual Home Price Comparison Index (HPCI). You can access more detailed information at the firm’s Web site at www.coldwellbanker.com/homepage.html—click on Home Price Comparison Index.
The cumulative national average sales price of all markets surveyed in the Coldwell Banker_ HPCI was $318,172, a 9 percent increase over 2002. The study’s most expensive market was La Jolla, California ($1,362,375), and the most affordable market was Binghamton, New York ($121,400), indicating a price difference of $1,240,975 for a similar 2,200-square-foot home. Six of the country’s ten most expensive markets were in California, two were in Connecticut, and one each was in Hawaii and Massachusetts. Geography aside, how much you pay for a home depends on the following factors:

• The specific community or neighborhood you’ve selected
• Size of the home
• Age (in years) of the home
• Amenities the home offers
• How eager the home owner is to move out (sometimes urgency can create a ‘‘fast sale’’ environment, which is good for you as the buyer)
• The price of ‘‘comparable’’ homes that have sold in the community/ area recently
• Any other positive (or negative) features of the home or surrounding area (such as sinkholes, proximity to a large highway, or other factors)

What if I can’t find the home of my dreams?

If this is your first home, don’t expect your efforts to produce the home you’ve dreamed of all your life. Even your second or third home may not meet those expectations, but that’s really just part of the process. Once acclimated to how it works, the homebuying routine does get easier, since many of the fundamentals haven’t changed in the last few decades. The first time out, for example, you may not realize just how important a good credit rating is to your getting the right loan at the right interest rate, but after owning a home for several years and making timely payments, that score will improve and the next time out you’ll be that much closer to reaching your goals.
Unless money is no object and your choice of locations is completely flexible, the odds that you’ll find the perfect home at the right price and in the right place are pretty slim. Add in that the home search can be a timeintensive process, and the idea of perfection slips a little further away. A big part of buying such a large investment—particularly one that’s already standing and that’s been lived in by someone else—is the need for concessions that result in a good purchase decision, and that don’t necessarily address your every single want and need.
According to NAR, most buyers face budget limitations when shopping for a home. Oftentimes buyers must spend more money or be forced to compromise on their vision of a ‘‘dream home.’’ In 2003, 65 percent of buyers reported compromising on at least one characteristic of their home purchase. Buyers were most likely to compromise on the size of the home they purchased (21 percent) or the lot size (18 percent). Buyers were less inclined to compromise on neighborhood quality (12 percent) and their budget for a home purchase (14 percent).
You might, for example, give up that spare bedroom in exchange for a larger backyard for your family to play in. Or, you could cross that inground pool off of your wish list and instead purchase a town home that offers a community pool for all owners (a great way to meet and mingle with new neighbors!). Instead of that lake-view condo, opt for a unit with a garden view and save a few hundred dollars a month on your mortgage payment. Avoid ‘‘keeping up with the Joneses’’ and instead balance your and/or your family’s unique wants and needs.
As you make compromises, be sure to address all of the ‘‘hot buttons’’ that you listed earlier in this chapter. Keep the list handy and maintain a record of what you’re giving up in exchange for what to determine if the concession is worth it. Who knows, you may ultimately find your own dream home in the most unlikely of places.