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Pros And Cons Of Fixed Rate Mortgages

by Jon Smith, CRB, CRS, GRI

If you are in the market for a new home, chances are you have researched the different types of financing. There are many types of mortgage products on the market today.  But the vast majority of them are fixed rate mortgages with a 15 year or 30 year term.  These traditional mortgages are amortizing, which means that you pay off the entire loan amount by the end of the term of the loan. While these are still the most common type of loan, there are advantages and drawbacks to these mortgages.  Depending on your financial situation, and the prospects of changes in your financial future, a fixed rate mortgage may or may not be the best product for you.

     Let's look at the pros and cons of fixed rate mortgages:

PROS

  • Interest rate on your mortgage cannot be increased for the life of your loan
  • Monthly payment will remain the same for the life of the loan
  • Loan will be completely paid off by the end of the term

CONS

  • Fixed monthly payment amount may be difficult to make at the start of the loan
  • Large percentage of payment goes to interest payment in first years of the loan
  • Usually has a higher interest rate than a variable rate loan initiated at the same time
  • Interest rate cannot be reduced as in some variable rate programs
  • Maybe harder to qualify for, as higher income may be required

Depending on your financial situation, a fixed rate mortgage may be the best solution for you.  If you can afford the monthly payment required to obtain the loan, then the fact that your interest rate and monthly payments will stay the same for the life of the loan while give you peace of mind and make monthly budgeting easier.

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Common Problems With FHA Loans

by Jon Smith, CRB, CRS, GRI

If you're planning to buy a home and are researching the different types of financing, you might apply for an FHA mortgage.

This type of mortgages are great for first-time homebuyers, buyers, buyers with bad credit as well as those homebuyers who do not have the funds for 20% downpayment.

With an FHA loan, it helps banks mitigate this risk by insuring otherwise risky borrowers' mortgages. The FHA agrees to pay the difference between what a home gets at a post-foreclosure auction and what's still owed on the home when a borrower defaults.

With the sluggish economy and problems with the real estate market, the FHA may soon begin tightening its loan standards, leaving some borrowers without the financing they need.

Below are a few of some potential roadblocks you might encounter if you are applying for an FHA loan, and how to get through them.

  • The FHA requires a new property to be livable from day one. As a result, the agency has a strict inspection requirement intended to catch any potential health or safety hazards. You should make sure everything is in working order and address things like a broken window, or a broken fire alarm, as these can create significant delays in the buying process. It is of course difficult to repair these issues if you are not yet the property owner but you will need to communicate with the seller and negotiate the necessary repairs.
  • The FHA also has limits for how high a borrower's debt-to-income ratio can be. It will be more difficult for homebuyers who have more than 30 percent of their monthly income on a mortgage payment or 43 percent on all debts combined. Below are also some additional requirements borrows will need to face:  Show consistent or increasing income, have a steady employment record (at least 2 or more years with the same employer) as well as have no bankruptcies in the last two years.
  • Another issue is that if the property appraisal comes in below the price you've negotiated, the deal is off. A possible solution is that the buyer could try to come up with a larger down payment to help to make up the difference between the appraisal and the negotiated price or possibly negotiate a new price based on the appraisal. Buyers have the advantage in today's real estate market, so the chances of a motivated seller accepting a lower price is good.            

 

Mortgage Renegotiation

by Jon Smith, CRB, CRS, GRI

Foreclosures are everywhere and with the economy being strained, many homeowners are struggling to make the monthly mortgage payment.  The good news is that many lenders are more willing than to negotiate terms to help homeowners avoid foreclosure. By renegotiating their mortgage, homeowners may be able to get a lower finance rate as well as change your rate from a high fixed-rate mortgages or adjustable-rate.

Most lenders require that you have at least 10 percent equity in your home. You can easily check the value of your home on sites such as Zillow.com and I can provide you with a free and quick estimate of your home’s worth. Today's lenders typically will require that you have a credit score of at least 720 to qualify for good rates.

Lenders are aware of the many fiscal difficulties borrowers have in making their mortgage payments when hardships arise. However, they typically won't volunteer or advertise their help. So if you are struggling to make your payments on time, it is vital that you take the initiative and contact your lender and give them a heads up on your current financial hardship before you miss payments.  Keep in mind that lenders have more incentive than ever to work with you. Plunging property values mean they’re recovering less now on foreclosures. Plus, many that received cash infusions from the U.S. Treasury are under pressure to show that they’re responding to the housing crisis.

Assumable Mortgages

by Jon Smith, CRB, CRS, GRI

Assumable mortgages are a unique lending instrument that allows someone else to take over the payments for you. The assumable mortgage is an alternative to the traditional financing most homeowners go with.

Assumable mortgages are very different and are also usually not very common today's market but depending on your situation, they may work for you. Below are the basics of assumable mortgages and what they can do for you.

How They Work

An assumable mortgage works in that another person can take over the loan that was originally issued to someone else. In order to assume the mortgage, the purchaser must qualify for the loan and pay closing fees, including the appraisal cost and title insurance. This can be beneficial for a piece of property that has been difficult to sell. A potential buyer can take over the current mortgage rather than obtaining their own financing. If you are in a situation where you need to sell a home quickly this can be an option.

Benefits of Assumable Loans

• The process of converting the original loan to an assumable mortgage, is relatively simple. Because the buyer will not need do go thru the closing process or obtain a property appraisal, the entire process can be completed quickly. 

•If the original loan was written during a time when interest rates were low, that is a big benefit to the buyer. The buyer is guaranteed the original interest rate, they do not have to take whatever rate the market is at currently. dictates to them.

•If you are the seller and need to sell the home quickly, offering an assumable mortgage is a big attraction to buyers. 

Disadvantages of Assumable Loans

• One risk for this type of mortgage can exist for the seller of the home. Some assumable mortgages can hold the seller liable for the loan itself even after the assumption takes place. Thus if the the buyer were to default on the loan, potentially the seller could be left responsible for whatever the lender is unable to recover. The homeseller can avoid this by indicating their release their liability in writing at the time of the assumption.

•Sometimes large down payments can be required and could be difficult for some buyers to obtain.

 

 

The Escrow Process Explained

by Jon Smith, CRB, CRS, GRI

During the process of purchasing a home you will need to enter into escrow. Many first time homebuyers have many questions about the escrow process. 

What exactly is an escrow?
An escrow is an arrangement in which a disinterested third party, called a escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer’s and seller’s instructions. The escrow becomes the depository for all monies, instructions and documents pertaining to the purchase of your home.

How does the escrow process work?

The escrow is a depository for all monies, instructions and documents necessary for the purchase of the home, including  funds for the down payment, lender’s funds and documents for the new loan. The duties of an escrow holder include: following the instructions given by the principals and parties to the transaction in a timely manner; handling the funds and/or documents in accordance with instructions; paying all bills as authorized;  closing the escrow only when all terms and conditions have been met; and, distributing the funds in accordance with instructions.

Do I need documentation?
Receipt of your deposit is generally included in your copy of your purchase contract. Your funds will then be deposited in your separate escrow or trust account and processed through your local bank.

What information will I have to provide?
Typically you will be asked to complete a statement of identity as part of the necessary paperwork. Because many people have the same name, the statement of identity is pucused to identify the specific person in the transaction through such information as date of birth, social security number, etc. This information is kept confidential.

How long is the escrow?
The length of an escrow is determined by the terms of the purchase agreement and can range from a few days to several months. Typically an escrow often takes an average time of 30 to 45 days.

When does the escrow process end?

The escrow process ends when you actually close on the home, during the closing procedure. This is when all funds are transferred accordingly, when all documents are signed, and when you get the keys to your new home.

 

Common Mortgage Terms

by Jon Smith, CRB, CRS, GRI

If you are purchasing a new home, most likely you will be researching a mortgage as well. This can be a confusing process, especially if you are first time homebuyer. You will hear many different terms when dealing with lenders, agents and brokers. Below are some of the common terminology used so you can become familiar when going thru home buying process.

Annual Percentage Rate (APR): The APR for your home loan is an annual cost that includes the interest rate quoted by your mortgage company plus additional home loan costs such as origination fees and points.  Required by law, this amount is to be disclosed to the homeowner by the lender under the federal Truth in Lending Act. This amount includes up-front costs paid to obtain the loan but does not include the PMI,  title insurance, appraisal, and credit report.

Closing Costs: These are the expenses aside from the price of the property that are incurred by buyers and sellers when transferring ownership of a property.  These costs include origination fees, property taxes, charges for title insurance, escrow costs, appraisal fees etc.  Many times these costs are shared by the buyer and the seller.

Escrow: During the home loan process, a neutral third party known as Escrow holds documents and money (including earnest money deposits) for safekeeping until the real estate transaction is complete.

Points: The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount. This means that, to lower your interest rate by one point on a $300,000 mortgage, you’ll need to pay an additional $3,000 at closing.

Private Mortgage Insurance (PMI):  If you are purchasing a home and you do not have a the traditional 20 percent down payment,  lenders will require you to carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan’s structure.

Title Insurance: This type of insurance protects both the buyer and the seller against legal issues that may arise with a  home’s title. If a problem occurs, the title company pays the associated legal fees to correct the situation.   

There are  many different terms out there that will come up when you buy a home and apply for a loan. If you are ever confused or have any questions about a particular term or contract be sure to ask your realtor or real estate attorney for clarification before signing any legal documents.

Avoiding Loan Scams

by Jon Smith, CRB, CRS, GRI

One of the major things you will need to do if you are purchasing a new home, is to obtain a home loan. Unfortunately with the difficult economy and the availablity of loans more difficult, loan scams are on the rise. People with bad credit and the elderly are the most vulenderable and often targeted. Below are some tips to help you from being a victim.


Avoid Being A Victim

  • Avoid Unsolicited phone calls. Be wary of any phone call offering remarkably low interest rates on loans, especially if you have registered your phone number with the Do Not Call Registry. Most major nationwide lenders do not solicit business over the phone. Never give out personal information over the phone unless you are absolutely sure who you are speaking with.
  • Don't agree to anything with a too-high interest rate
  • Don't buy insurance from a lender without shopping around first.
  • Watch the terms for reinforcing. They might end up worse than what you've got now.
  • Don't sign anything that's been given to you as a surprise! If the terms aren't what you'd agreed on, do not sign the document.
  • Avoid bad credit mortgage rates when looking for a loan.
  • Many loan scammers use high pressure sales tactics, so if you feel pressured or uncomfortable in anyway, never sign anything. It is a good idea to contact a real estate lawyer if in doubt to review the documents. If the company is legit, they should have no objection to a lawyer looking over the loan agreements before you will sign them.

Warning Signs

  • Do business with reputable companies, stay away from unsolicited calls, e-mails or letters offering you a loan.
  • Never do business with anyone who asks for money to be sent in advance to cover "processing", "application", "insurance", or the "first month's payment". Legitimate lenders never ask for these things to be paid before a loan is disbursed.
  • Requests that you "wire" or "send" money, as soon as possible to a large U.S. city or to another country, such as Canada, England, or Nigeria, by Western Union, Moneygram, or similar means.

What To Do If You Think You Have Been Scammed?

If you feel that you have been scammed or the company you have been in touch with is suspicious, contact the below agencies.

  • The FTC
  • The FBI
  • File fraud alerts with each of the three credit bureaus. This is important if you have provided the scammers with your sensitive information, such as your Social Security Number and information on your driver's license. They can use this to obtain credit in your name.

The Pre-Approval Letter - What It Really Means

by Jon Smith, CRB, CRS, GRI
Though you may be willing to spend a certain amount, the real determination of how much house you can afford is driven by how much a lender calculates you can afford. So before you begin to search for the perfect house, it is very important to begin the home buying process by getting pre-approved. Getting pre-approved for a home mortgage loan will provide you with a preliminary statement on the size of loan for which you can qualify. Knowing this, you can then focus your home search.

In general, lenders allow your total monthly housing costs to go as high as but not more than 30 percent of your gross monthly income. The second requirement is that not more than 36 percent of your gross monthly income can be tied up in the total monthly house payment and payments on long-term debt.

Lenders use slightly different formulas for determining the "total monthly house payment.” These costs generally include the mortgage principal and interest payment, property taxes as a monthly sum, and hazard insurance as a monthly sum. These four items are referred to as PITI (principal, interest, taxes and insurance). Other costs may be included in this calculation if your down payment is less than 20 percent or if you are responsible for homeowner’s association dues. The calculations may vary from lender to lender, but will provide you with a gauge.
The Preapproval Letter

Your friends and family may know you to be reliable, dependable and someone who pays bills on time, but all others in a real estate transaction will require you to prove it. That’s where preapproval comes in. A preapproval letter is more reliable than a pre-qualification letter. In the preapproval process, a lender will examine your finances and will make a preliminary statement on the size of the loan for which you’ll qualify.

Preapproval is an involved process. The lender will take all pertinent information regarding your finances and perform an extensive check on your current financial status. This procedure will ultimately give you the exact loan amount that you will be eligible for (depending on what type of loan you decide to select.) Being preapproved lets the seller know that you have gone through an extensive financial evaluation and there should be no unexpected obstacles to buying the home. It makes your offer much more powerful.

Preapproval gives you a very good indication of:

  • How much down payment you’ll need
  • Your closing costs
  • Your monthly payment (including PITI: principal, interest, taxes and insurance)
  • The type of loan for which you qualify and which best suits your needs; and,
  • Special programs for which you may be qualified, including those for veterans, first-time buyers, teachers, etc.
  • To become preapproved you will need to provide a lender with the following:
  • Your employment and income history (including recent pay stubs)
  • Your monthly debts
  • The amount and source of cash available for the down payment and closing costs
Pre-approval letters are not binding on the lender, they are subject to an appraisal of the home you want to purchase and are time sensitive. If your financial situation changes, interest rates rise or a pre-determined date passes, the lender will review your situation and recalculate your maximum mortgage amount accordingly. You can research lenders yourself and ask them to pre-approve you.

Displaying blog entries 1-8 of 8

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Contact Information

Photo of Jon Smith, CRB, CRS, SRES, SFR Real Estate
Jon Smith, CRB, CRS, SRES, SFR
Iowa Realty
3521 Beaver Ave.
Des Moines IA 50310
515-240-2692
Fax: 515-453-6404
 

 

 

Licensed in the State of Iowa