Letter Re: A Home Purchasing Guide for Rookies

Mr Rawles,
I read the article “A Home Purchasing Guide for Rookies” and the response to it. A few additional points occurred to me:

Taxes:

“Almost all counties publish their tax rates on their public web sites.” In fact, while they do publish their rates, and their rates can be taken as accurate, those rates do not reflect the whole picture.

Buyer beware. Research carefully and thoroughly. Follow through on due diligence. While looking in a place where I’m now no longer looking — for this very reason — I found that the property taxing authority first decides how much money it will spend, then decides the tax rates needed to meet that requirement. In that region without some legal limit imposed on them they assess values for the properties that have no basis in the market for those properties except in their fevered imaginations. Such assessments ensure that the taxing region obtains what they have decided are their spending requirements. Imagine a retailer first raising prices 200% then offering a 25%-off sale and that nobody else sells those products to get the flavor of this.

This is precisely counter to a fiscally responsible approach that assesses according to the market value of the property based on what it actually could or did sell for, using its last sell price as a base then cutting costs in the taxing region so that their expenses can be paid for with the taxed revenue actually acquired. Without a more fiscally responsible approach properties are overassessed, people are priced out of their homes, which leads to the taxing region losing its tax base and trashing its economy. Yet, they continue the practice.

When evaluating the region’s taxes, do not depend solely on the published tax rates. You may have paid $X for the property, but those responsible to the taxing authority for assessment claim the value is $Y and will apply the published tax rate accordingly. Find out more about the region’s tax rate decisions, the kinds of spending it tries to do, the way properties are assessed, and how closely properties’ prices match their assessed values.

Finance:

“…I have chosen to place this mortgage with the small community bank in the rural city we are moving to.”

Mortgages are typically sold by the initial mortgage lender to other investors or companies to service. There may be several such sales during the lifetime of the mortgage. While the small community bank gets some benefit, and good for them, they are not likely getting the effect of all the interest money paid on the loan. Selecting the local bank may not accomplish as much for the local community as you think.

Budget – Down Payment:

“…and 30 years of monthly payments (that should be small enough to pay off long before 30 years by making extra principal payments).”

Use a loan calculator. Given that your 30-year loan allows you to pay extra to the principal with each month’s regular payment without any early payoff penalty and without any limit to the extra principal payment, figure the monthly payment by calculating an annual payment then divide by 12 to get the monthly. For example, financing $100,000 at 4% for 30 years gives an annual payment of about $5,783. After 30 years you have paid about $173,000. Dividing that annual payment by 12 makes a monthly payment of about $482. Recalculate by adding only one month extra payment to the annual ($5,783 + $482 = $6,265) changes the payoff period from 30 years to about 26 years (about $6,257 per year, or about $521 per month). By shaving off about 4 years, that $6,257 annual payment amounts to about $163,000 for the payoff period or over $10,000 savings (about 5.78%) for the life of the loan. If you can afford to pay more to pay it off sooner, recalculate the loan with a shorter period, such as 10, 15, or 20 years, and pay the extra to the principal to meet that payment amount. But because the loan is a 30-year contract, when times get rougher you can fall back on the 30-year payment amount. – Larry R.