Lenders regularly publish mortgage rates but they may not be available for all buyers.
Imagine that the mortgage payment based on an advertised rate influenced a buyer to make an offer on a home. After negotiating a binding contract, this buyer makes a loan application and finds out that for any number of possible reasons, that rate isn’t available.
Even if the person does financially qualify for a loan at a higher interest rate, it will not be the payment that the buyer expected when the contract was negotiated.
Lenders evaluate several factors such as the borrower’s credit score, debt-to-income and loan-to-value ratios. These variables are used to assess the risk associated with the repayment of the loan.
While mortgage money is a commodity, it isn’t priced the same way items are that involve cash for goods. The lender puts up the money today based on a promise from the borrower to repay over a long term, possibly up to thirty years.
The simple solution to avoid surprises such as the one described here is to get pre-approved at the beginning of the home search process. Since pre-qualification does not mean the same thing to all lenders, call if you’d like a recommendation of a trusted mortgage professional.
Book your appointment with me to occur before December 15th and I will give you a $25 Best Buy Gift Card to help with your holiday shopping! Now is time to buy or sell a home while interest rates are still so low. Limited to the first 10 people.
Home-Ownership, part of the American Dream: a home of your own where you can feel safe, raise your family, share with your friends and enjoy life. The benefits are easily recognizable but maintenance is just a real and should be considered.Maintenance.png
Property taxes and insurance are two of the largest expenses homeowners have aside from their mortgage interest. But, as any homeowner knows, there will be occasional expenses for repairing toilets, faucets, windows and other things. There are also the significantly larger expenses that arise like replacing a water heater or HVAC unit. And don’t overlook the periodic maintenance like painting or floor coverings.
Financial experts suggest that homeowners save one to four percent of the home’s value per year for repairs and maintenance. Two to eight thousand dollars a year may sound like more than you’ll need but the cost of an air conditioning unit can easily be $6,000.
Some homeowners purchase home warranties to avoid the unexpected costs. An annual premium instead of an unexpected large expenditure. Coverage varies from company to company and are not intended to cover existing conditions.
The alternative to not saving for these anticipated expenditures means that a homeowner might have to put it on a credit card at a very high interest rate or get a home improvement loan. Appreciation is a distinct benefit of home ownership and deferred maintenance can limit the value as well as lengthen the market time when it sells.
There is certainly no shortage of retirement planning strategies available to individuals who actually take the time to consider them. What most financial experts do agree on is that the closer you are to retirement, the less time you have to recover from a loss. For that reason, many people start dialing down their risk factors as their age increases.
One way to minimize risk is to invest in things that you know and understand. For the majority of homeowners, their largest asset is the equity in their home which they generally have more familiarity than other types of investments.
Buy the home you’d like to retire to today and use it as a rental property. Finance it with a 15 year loan so it will amortize quickly and possibly be paid for at retirement.
Continue living in your current home until you’re ready to move into the home you’ve designated at your retirement home which will not create a taxable event. Prior to moving in, you can rehab the home so that it fits your style and needs exactly.
If you’ve lived in the current home for at least two of the last five years, you can exclude up to $250,000 of gain for single taxpayers and up to $500,000 for married taxpayers. The proceeds could then, be invested for income.
Some of the attractive features of this proposal is that you’re familiar with the operation of a rental due to similarity of owning a home. Most experts agree that home prices will continue to rise and so will rents. The maintenance people that you use for your home can also work on your rental. If you don’t want to deal with tenants that can easily be delegated to a property manager. Low mortgage rates with short terms and high rental values contribute to positive cash flows that will pay for the property.
Obviously, there are many other considerations you’ll want to investigate with your tax and real estate professionals these can get the conversation started.
Saving the down payment may be unnecessarily keeping would-be buyers from getting into a home. They may be unaware that the funds might be available.
The NAR Profile of Home Buyers and Sellers reports that 81% of first-time buyers got all or part of their down payment from savings. Less than 4% said that all or part of the down payment came from a withdrawal in their IRA and 8% from their 401(k) or pension fund. 21330457-250.jpg
Traditional IRAs have a provision for first-time buyers which include anyone who hasn’t owned a home in the previous two years. A person and their spouse, if married, can each withdraw up to $10,000 from their traditional IRA for a first-time home purchase without incurring the 10% early-withdrawal penalty. However, they will have to recognize the withdrawal as income in that tax year. For more information, go to IRS.gov.
Allowable withdrawals from traditional IRAs can be from yourself and your spouse; your or your spouse’s child; your or your spouse’s grandchild or your or your spouse’s parent or ancestor.
Roth IRA owners can withdraw their contributions tax-free and penalty-free at any age for any reason because the contributions were made with post-tax income. After age 59 ½, earnings may be withdrawn as long as the Roth IRA have been in existence for at least five years.
Up to half of the balance of a 401(k) or $50,000, whichever is less, can be borrowed by the owner at any age for any reason without tax or penalty assuming the employer permits it. There can be specific rules for loans from a 401(k) that would determine the repayment; interest is usually charged but goes back into the owner’s account. You can consult with your HR department to find out the specifics.
A risk in borrowing against a 401(k) comes if your employment ends before the loan has been repaid. The loan may have to be repaid as soon as 60 days to keep the loan from being considered a withdrawal and subject to tax and penalty. Even if you continue with the same employer, failure to repay the loan could be considered a withdrawal also.
Your tax professional can provide you specific information on how making a withdrawal from your retirement program might affect you. Additional information can be found on www.IRS.gov.
When the rate goes up
It’s not “if” the rate goes up but “when” the rate goes up; it could make a big difference for some buyers. Freddie Mac predicts that mortgage rates will be at 4.5% a year from now.
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If buyers can afford a home with higher interest rates, it means higher payments. Higher payments might mean they won’t have the money to spend on other things like furniture or improvements to the home or an unrelated purchase like a new car.
When the rate moves 0.50% on a $250,000, the payment goes up by $70.66 a month. If it moves 1.00%, the payment goes up by $143.74 per month, each and every month for the entire term of the mortgage which means paying over $50,000 more for the house.
The question facing every borrower in this situation is “How will you feel about having to pay more to live in the same house because you were not ready to commit?”
Then, there’s the borrower who is absolutely maxed out as to what they can qualify for or sometimes, it is a borrower who just refuses to pay a higher payment. When that’s the case, the buyer has to make a larger down payment. In the same example, a 0.50% increase in rate would require $14,873 more in down payment. That could make the purchase impossible or require the buyer to buy a lesser price home that will not have the same amenities.
Mortgage rates have been low for so long that some people think that is what they should be. There are some economists who believe that the economy will not be strong again until mortgage rates are in the 7% range.
To see how this type of scenario might affect you, go to the <a href=“http://www.betterhomeowners.com/FinancialApps/RateGoesUp.aspx”
Fair market value is the price that real estate would sell for on the open market without any unusual forces being involved. The definition is relatively simple but there certainly different methods of determining what it is.
A homeowner could order an appraisal before they put their home on the market but would incur the expense of an appraisal and more likely than not, it won’t or can’t be used by the buyer or their lender. The advantage is that an appraisal is a professional approach by a disinterested party to establish value.
Licensed appraisers use three approaches to value: the market data, the replacement cost and the income approach. The appraiser can put more weight on one approach than another based on his/her assessment of what would be appropriate.
The replacement cost looks at what it would cost to rebuild the property today less the depreciation it has experienced by age and wear and tear plus the value of the lot.
The income approach uses a capitalization rate based on the net operating income of a property to determine value. It is more applicable to commercial properties than it is for homes used by homeowners and not rented.
The market data approach relies on recent sales of similar properties near the subject. The appraiser will make monetary adjustments for differences in the comparables that are used to create a more accurate comparison.
Real estate agents use a similar approach to determine fair market value by performing a Competitive Market Analysis, CMA. Like the market data approach of an appraisal, it looks at recent sales of similar properties, it also considers properties currently for sale and what homes were unsuccessful in their attempt to sell. This approach is sensitive to supply and demand and may be more reactive to rapidly rising or declining markets.
Both appraisals and CMAs have a distinct advantage because of the personal opinion as a professional compared to online website estimates using raw data and mathematical formulas. Regardless of which method is used, it is an estimate. Obviously, some estimates are more accurate based on the experience of the person making the estimate. A price is placed on the property by the seller but value is ultimately determined by the buyer when a final sale is achieved.
I preview homes daily so I know the market!
Your home’s listing price can make or break your sale. HGTV.com provides tips to give you a starting point for pricing your home.