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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