You are not a risk-taker and prefer the stability of knowing how much your payment will be each month.
Since most home loans are for a period of 30 years, if you want a payment you can count on for that long of a period of time, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.
This may not always be the best choice, however. If interest rates are very high at the time you take out your loan, with a fixed rate mortgage you'll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you'll come out the winner with interest rates that will stay low no matter how high interest rates go in the future.
The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgages:
15-Year Fixed-Rate:
- Pay off the loan in half the time of a 30-year loan.
- Equity builds up more quickly than in a 30-year loan.
- Payments are higher (which may be a problem if you lose your job or become unable to work).
20-Year Fixed-Rate:
- Pay off the loan in 2/3 the time of a 30-year loan.
- The overall interest paid is considerably less than for a 30-year loan.
30-Year Fixed-Rate:
- The most common choice, especially for first-time homebuyers, as it's the easiest of the fixed-rate loans to qualify for.
- Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of
"padding" between the amount you can afford to spend and the monthly payment for your desired property.
- More desirable if you plan on staying in the same home for years, since equity builds more slowly than for shorter-term loans.
- For income tax purposes, this term provides the maximum interest deduction.
Adjustable-Rate Mortgages (ARMs)
If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate
mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect
your income to increase to cover any potential rise in the interest rate.
Generally, the interest rate when you take out your loan will be lower than a fixed-rate mortgage. Please note that this is true initially, not
necessarily long-term.
Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not
sufficient to cover the highest possible payments, then this option is not for you. On the positive side, the lower initial payments will allow you to
qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up.
Typically, ARM interest rates are tied to a specific financial index (such as Certificate of Deposit index, Treasury or T-Bill rate, Cost of
Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate]) and your payment will be based on the index your lender uses plus a margin, generally
of two to three points. Get the formula used by your lender in writing and make sure you understand what it means.
Fortunately, the amount an ARM can increase is limited. There are "caps" on how much your lender can increase your rate, both for a period of one year
and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed
by the cap for your particular mortgage. If you are not confident you'll be able to pay that amount on a monthly basis, perhaps you should reconsider this
type of loan.
Convertible ARMs
If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, perhaps the convertible ARM will be right for you. This alternative
combines the initial advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when
the initial interest rate is low and the future rate is not guaranteed.
Government Loans
Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.
- VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this
option works best for those buying a lower priced home.
- FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase "FHA approved"
when looking at ads for homes.
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Getting the Best Rates for Your Mortgage
Naturally, you want to get the best deal for the least amount of money. This holds true for mortgage rates as well.
A lower interest rate means a lower monthly mortgage payment, which can save you money in the long run. Also, it is easier to qualify for a lower payment
than a higher one.
You basically have two routes to finding the best rate. The first is to do all the research on your own. The second is to use a mortgage broker.
Do-It-Yourself
With the advent of the Internet, much of this information is readily available online. Once you have educated yourself sufficiently about real estate
loans, all it takes is the time and energy to sift through online resources to find the information you need.
Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you are looking for, submit a loan application
and lock in that rate.
Some sources for interest rates on the Internet include:
Bank Rate Monitor (http://www.bankrate.com)
E-Loan (http://www.eloan.com)
When comparing loans, make sure that you're comparing loans of the same type. For example, you find that "Loan A" for a 30-year loan has a much lower
interest rate than "Loan B" (also for 30 years). Upon further inspection, you find that "Loan A" is technically an adjustable rate mortgage. Its payment is
based on a 30-year amortization, but becomes due through either payment or refinancing at the end of 5 or 7 years. These are frequently referred to as a
5-year or 7-year fixed-rate mortgage. While both said "30-year", they are not the same type of loan.
Ask the lender for a statement detailing all fees associated with the loan. Factors such as "points" (loan fee), interest rate and "garbage fees" (extra
fees which some lenders charge) can vary greatly from one lender to another.
Mortgage Broker
If you do not have the time or experience to "do it yourself," look for a qualified mortgage broker that can assist in finding the right mortgage for
you. Ask friends and associates who have refinanced or purchased recently if they have a broker they can recommend. You'll want to find a broker who is
energetic, flexible and knowledgeable about finance and loans and someone who has your best interests in mind.
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You've Opened Escrow, Now What?
Congratulations, you are on your way to owning your very own home! Follow these suggestions (and your realtor's advice) so that escrow and settlement
with go as smooth as possible.
You will be asked for a down payment on the home you are purchasing. You can choose to put down as much or as little as you want (depending on your
mortgage), but remember, the more you put down toward the total price of your home, the less time it will take you to pay off and the less your mortgage
payments will be every month.
During this period of purchasing your home, you are going to need an escrow or settlement company to act as an independent third party so that you know
when and who to give your money to get the deed to your new home. The escrow or settlement company will hold your deposit and coordinate much of the
activity that goes on during the escrow period. This deposit check may also be held by an attorney or in the broker's trust account. Make sure that there
are sufficient funds in your account to cover this check.
The deposit check will be cashed. Assuming the sale goes through, this money will be applied to the purchase price of the home. If for any reason the
sale is not consummated, you may be entitled to receive all of your deposit back, less standard cancellation fees. In certain instances, the seller may be
able to retain this money as liquidated damages. Prior to executing a purchase contract, it would be wise to speak with your counsel regarding whether or
not it is your best interest to have a liquidated damages clause as part of the contract.
The period that you are "in escrow" is often 30 days, but may be longer or shorter. During this time, each item specified in the contract must be
completed satisfactorily. By the time you have opened escrow, you have come to an agreement with the seller on the closing date and the contingencies. Each
contract is different, but most include the following:
- Inspection contingency: this should be completed as soon as possible after the contract to purchase is signed as unsatisfactory
results of the inspection may mean that you will want to cancel the contract.
- Financing contingency: once the contract is signed, you have a period of time to secure funding. If, for any reason,
you are unable to secure funding during the period of time granted to you by the contract (and the seller will not provide a written extension of time), you
must decide whether you want to remove the contingency and take your chances on getting a loan. You may choose to cancel the purchase contract.
- A requirement that the seller must provide marketable title.
With an attorney or title officer, review the title report. The title must be "clear" to ensure that you do not have legal issues regarding your ownership.
Check into local and state ordinances regarding property transfer and make sure that you and/or the seller have complied with them.
Secure homeowner's insurance. This will probably be required before you can close the sale. Due to such requirements as special fire and earthquake
insurance, obtaining this insurance may require a lengthy period of time. It would be in your best interest to apply for insurance as soon as possible after
the contract is signed.
Contact local utility companies to schedule to have service turned on when you close escrow.
Schedule the final walk-through inspection. At this time, you should make sure that the property is exactly as the contract says it should be. What you
thought to be a "permanently attached" chandelier that would come with the property might have been removed by the seller and replaced with a different
fixture entirely.
You've made it! Once the sale has closed, you're the proud owner of a new home. Congratulations!
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Sellers Articles
The appearance of your home, a buyer's first impression, and other considerations can also affect the sale of your home. Have you considered that home prices in your neighborhood and the value of your property are also factors used for pricing your home? When selling your home, there are no guarantees that a buyer will simply walk through the front door. In many cases you may have to bring your home to the buyer. Effective marketing will help ensure that your property receives maximum exposure to attract a ready, willing and able buyer.
Below are some articles that you might find useful in the home selling process. Please feel free to click on one the links to read more.
Seller Articles
Risks of Remodeling Without a Permit
Most cities require that homeowners obtain a building permit before making modifications to their residence. Which modifications require a permit vary by city. Also, some cities are more vigilant than others in enforcing permit laws.
In order for the homeowner to receive a permit, the homeowner or his/her designee are required to file plans and pay fees to the city. In addition, the improvements are given a value. If they increase the value of the property, this may result in an increase in property taxes. Inspections are often required, and this means having to schedule and then wait for inspectors to approve the work to be done. This process can be time consuming and inconvenient in the short run. It is for this reason that some homeowners skip the permit process.
If a permit is needed and you fail to get one, the city may discover this at some time in the future and getting a permit retroactively can frequently be significantly more expensive and much more problematic than having obtained the permit before work commenced. If work is not done in accordance with city procedures or if the inspector is unable to determine if the work has been done properly, the homeowner could be required to open walls, tear up floors, so that the inspection may take place. In addition, by law, work not permitted where a permit was required must be disclosed to any prospective purchaser. This may cause the owner to discount their sale price or perform costly or time-consuming repairs before title can be transferred.
For prospective buyers of a property, save yourself the future hassle and loss of money by researching whether all work on the premises has been done according to code and with the proper permits. You may obtain these permits by going directly to Building & Safety in the municipality in which the property is located or by hiring a "permit puller" who will research the permits for you.
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Traversing the Pitfalls of Home Inspections
June and Fred Smith were diligent about getting their home ready for sale. They ordered a pre-sale termite inspection report. The report revealed that their large rear deck was dry-rot infested, so they replaced it before putting their home on the market.
The Smiths also called a reputable roofer to examine the roof and issue a report on its condition. The roofer felt that the roof was on its last legs and that it should be replaced. The Smith's didn't want buyers to be put off by a bad roof, so they had the roof replaced and the exterior painted before they marketed the home.
The Smith's home was attractive, well-maintained and priced right for the market. It received multiple offers the first week it was listed for sale.
But the buyers' inspection report indicated that the house was in serious need of drainage work. According to a drainage contractor, the job would cost in excess of $20,000. Fred Smith was particularly distraught because he'd paid to have corrective drainage work done several years ago.
First-Time Tip: If you get an alarming inspection report on a home you're buying or selling, don't panic. Until you see the whole picture clearly, you're not in a position to determine whether you have a major problem to deal with or not.
What happened to the Smiths is typical of what can happen over time with older homes. The drainage work that was completed years ago was probably adequate at the time. But since then, there had been unprecedented rains in the area, which caused flooding in many basements. Drainage technology had advanced. New technology can be more expensive but often does a better job.
The Smiths considered calling in other drainage experts to see if the work could be done for less. After studying the buyers' inspection report, the contractor's proposal and the buyers' offer to split the cost of the drainage work 50-50 with the sellers, the Smiths concluded that they had a fair deal.
The solution is not always this easy, especially when contractors can't agree. Keep in mind that there is an element of subjectivity involved in the inspection process. For example, two contractors might disagree on the remedy for a dry-rotted window: one calling for repair and the other for replacement.
Recently, one roofer recommended a total roof replacement for a cost of $6,000. A second roofer disagreed. His report said that the roof should last another three to four years if the owner did $800 of maintenance work. Based on the two reports, the buyers and sellers were able to negotiate a satisfactory monetary solution to the problem for an amount that was between the two estimates.
It's problematic when inspectors are wrong. But it happens. Inspectors are only human. Here is another example: A home inspector looked at a house and issued a report condemning the furnace, which he said needed to be replaced.
The sellers called in a heating contractor who declared that the furnace was fit and that it did not need to be replaced.
The buyers were unsure about the furnace, given the difference of opinions. The seller called in a representative from the local gas company. The buyers knew that the gas company representative would have to shut the furnace down if it was dangerous. He found nothing wrong with the furnace, and the buyers were satisfied.
In Closing: Sometimes finding the right expert to give an opinion on a suspected house problem is the answer, but it is always good to get two opinions.
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What is a CMA and Why Do You Need One?
CMA is real estate shorthand for "Comparative Market Analysis". A CMA is a report prepared by a real estate agent providing data comparing your property to similar properties in the marketplace.
The first thing an agent will need to do to provide you with a CMA is to inspect your property. Generally, this inspection won't be overly detailed (she or he is not going to crawl under the house to examine the foundation), nor does the house need to be totally cleaned up and ready for an open house. It should be in such a condition that the agent will be able to make an accurate assessment of its condition and worth. If you plan to make changes before selling, inform the agent at this time.
The next step is for the agent to obtain data on comparable properties. This data is usually available through MLS (Multiple Listing Service), but a qualified agent will also know of properties that are on the market or have sold without being part of the MLS. This will give the agent an idea how much your property is worth in the current market. Please note that the CMA is not an appraisal. An appraisal must be performed by a licensed appraiser.
The CMA process takes place before your home is listed for sale. This is a good assessment of what your house could potentially sell for.
CMAs are not only for prospective sellers. Buyers should consider requesting a CMA for properties they are seriously looking at to determine whether the asking price is a true reflection of the current market. Owners who are upgrading or remodeling can benefit from a CMA when it's used to see if the intended changes will "over-improve" their property compared to others in the neighborhood.
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The Home Sale: Securing the Deal
Ready to close the deal? Maybe not.
Sometimes unforeseeable issues arise just prior to closing the sale. Hopefully, with negotiation, most of these have a workable solution. Unfortunately, this is not always the case. But don't panic. Another buyer might still be found who is willing to accept the house as is.
Imagine that your prospective buyers are a couple with young children. They envision your unused attic as the perfect playroom for the kids but, before closing the deal, they request an inspection to see if it's safe and also if they will be able to install a skylight to provide natural light to the new space.
This inspection reveals that under the shingles that are in good condition is a roof that will only last another year or two. The prospective buyers immediately balk, not wanting to incur the time and cost of replacing the roof. Their plans were to move in and only have to spend time and money renovating the attic. The additional cost of the new roof, they say, is just too much.
At this point, you sit down with the prospective buyers and calmly discuss the situation and how it can be solved to the benefit of all. First, you agree to get another professional opinion on what really needs to be done. Inspectors are only human, and are not infallible. Once the extent of the damage is agreed upon, you can jointly decide what to do about it. While the buyers hadn't planned on that expense, you show them that instead of a limited roof life that they would get with most existing homes, they'll have a new worry-free roof that won't cost them in repairs for the next decade or so. Since the roof wasn't in as good shape as you had thought, you agree to lower the purchase price to help offset the cost of the new roof.
By negotiating calmly and looking at all possibilities, what could have been a "deal breaker" can be turned into a win-win situation for both the buying and selling parties. In other cases, the most workable agreement for both parties might be for the deal to be called off. The seller can always find another buyer and the buyer can always find another home.
To protect yourself against last minute "buyer's remorse," make sure the purchase contract anticipates and closes as many loopholes as possible after all known defects have been fully disclosed.
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