Buyers & Sellers
Few of us would consider buying a used car without first having a mechanic look it over, or at least taking it out for a test drive. Yet that is exactly what many buyers do when buying a resale home. They often fail to have a professional home inspection performed on the home they are interested in, even though it is probably the largest and most important investment they will ever make.
Fortunately, there is a growing industry of home inspectors to fill this gap. Unless you are an expert, it is highly unlikely that you will catch a home's minor, or sometimes even major, problems during a typical house viewing. This is why it is important to obtain a professional unbiased second opinion before making such an important decision.
A good home inspector will give you an unbiased assessment of the structural and mechanical soundness of the home. He or she will identify any existing or potential problem areas, and give an overview of the condition of the foundation, basement, roof, windows, doors, walls, ceilings, floors, plumbing, electrical, heating & cooling systems. The best inspectors will also make suggestions on how to solve any problems they discover and give a general estimate of possible costs.
A Home Inspection is the best way to 'test drive' your new home. It allows you to make your purchase with confidence. It avoids nasty surprises once the deal has closed, and it offers the chance to rethink or renegotiate an offer if serious concerns do arise.
When hiring a home inspector, make sure of the following:
- That they are well established and have the required experience and credentials.
- That they are independent and unbiased - they have no affiliation with any firms that might create a conflict of interest.
- That they will provide a thorough written report of their findings.
- That they stand behind their work. What warranties do they provide?
- That they are members of a professional association, such as ASHI (American Society of Home Inspectors), NANB (National Association of Home Builders) or ICBO (International Conference of Building Officials).
Fixed-rate mortgages are traditionally the most popular type of mortgage in America. They are typically taken out over a 30-year period, but lengths of 15 to 25 years are also available. The interest rate and monthly mortgage payment on a fixed-rate mortgage remain the same throughout the entire life of the loan. The main advantage of a fixed-rate mortgage is that the borrower knows exactly what their monthly costs will be until the entire mortgage has been completely paid out. The main disadvantage is that the borrower pays a premium for this guarantee in the form of slightly higher interest rates.
With adjustable-rate mortgages the interest rate is linked to current market rates and fluctuates with economic changes. When interest rates go down, so do your mortgage payments. When rates go up, your mortgage payments increase accordingly. ARM interest rates are usually set lower than those found in fixed-rate mortgage, at least at the beginning of the term. This means that a homebuyer opting for an ARM will be able to qualify for a larger loan since they are paying less interest. However, because ARM interest rates fluctuate there is a level of uncertainty and risk involved if economic conditions create long-term interest rate increases. ARM interest rates are normally fixed for the first six months to a year, after which they are pegged to some major economic index such as the T-bill rate.
For adjustable-rate mortgages there are two "caps" on interest rate increases. The "period of adjustment" cap determines how much the interest rate is allowed to vary from one period to the next. For example if the agreed upon period is every six months with a period of adjustment cap of 1%, then the maximum interest rate increase over that six-month period could not exceed 1%. The second cap puts a ceiling on how high the interest rate can increase over the life of the loan. For example, the maximum increase might be negotiated to be 6%. This figure should be taken into account as the "worst-case scenario" when considering this type of financing since the interest rate could possibly rise by up to 6% from the initial rate. If you are sure that you could afford these worst-case rates then you might consider this type of mortgage since you would benefit if the rates went down.
Another feature, which can sometimes add a level of comfort to this type of mortgage, is a conversion feature. Having a conversion clause in the mortgage gives the homebuyer the option to lock in the interest rate at certain times during the term of the mortgage. There is usually a conversion charge associated with this option.
A 2-step mortgage is a combination of both fixed-rate mortgages and adjustable-rate mortgages. Generally speaking, the first 5-7 years of the mortgage are treated like a fixed-rate mortgage. During the remainder of the term, known as the second step, the interest rate is allowed to fluctuate like an adjustable-rate mortgage.
During the initial first step of a 2-Step mortgage the interest rate is generally lower than for a fixed rate mortgage but higher than for an adjustable rate mortgage. The benefit of this type of mortgage is that it initially offers the homebuyer a lower interest rate than those found in fixed rate mortgages while still retaining the stability of a fixed payment and interest rate for the first few years of the loan. The homebuyer still needs to keep in mind that in the second step, or adjustable-rate portion of the mortgage, the interest rate may move either up or down, depending on the economy. As mentioned in the above section on Adjustable Rate Mortgages, a mortgage conversion feature can sometimes add a cushion of security to this type of mortgage.
Conforming & Non-Conforming Mortgages
A conforming mortgage refers to a mortgage that is drawn up within the guidelines specified by the lending institutions referred to as Fannie Mae and Freddie Mac. The most common reason for a mortgage to be referred to as non-conforming is because the total amount of the mortgage exceeds the lending limits or total loan amount allowed. This type of non-conforming loan is often referred to as a Jumbo mortgage.
This type of mortgage is usually amortized over the traditional 30-year period, but the actual length of the loan, or the term, is much shorter. At the end of the term, the homeowner must renegotiate a new mortgage at the new current interest rates. The amount still owning at the end of a balloon mortgage term (that is the original loan amount less the payments made against the principle during the term) is then due in full. The homeowner will then have to obtain a new mortgage (either another balloon mortgage, or switch to a fixed-rate or adjustable-rate mortgage) to replace the expired one. The benefit of a balloon mortgage is that the interest rate is noticeably lower than that for traditional 30-year fixed-rate mortgages.
Please note that homebuyers need to understand that...
- Once a balloon mortgage is due their next mortgage will be set at the new current interest rates, which could be higher or lower than before.
- They may not have a guaranteed renewal privilege and may have to go elsewhere to obtain a new mortgage.
- They may have to financially re-qualify for the next mortgage.
- Refinancing fees may be charged.
Federal Housing Administration Mortgages (FHAM)
These are mortgages that are guaranteed against default by the Federal government. Lenders are willing to give mortgages to homebuyers with smaller down payments than under conventional financing because the Federal government guarantees the loan against default. The homebuyer must pay an insurance premium for this privilege and this cost is usually added to the mortgage. In order to qualify for an FHAM the property in question must meet certain requirements. The maximum amount of loan allowed under this system varies from region to region and is based on the average price of housing in each area. You should contact your REALTOR or mortgage specialist for further information.
Veterans Administration Loans (VA)
VA loans are restricted to qualifying U.S. veterans for the purchase of a home with no down payment and lowered closing costs. page top Fannie Mae and Freddie Mac Both Fannie Mae and Freddie Mac are independent, privately run companies that operate under special congressional charters. Their mandate is to ensure that mortgage funds are made available to a broad spectrum of the American public. They do this by buying mortgages from approved lenders and then packaging those monies into securities backed by Fannie Mae/Freddie Mac. Those securities are then sold to investors in the secondary mortgage market. Fannie Mae and Freddie Mac are independently owned companies that compete with each other for mortgage business. This competition ensures that there is an ample supply of low cost mortgage money available to the American homebuyer.
The selling and buying of a house can be a stressful and confusing process. Not only is it very expensive to 'learn from your mistakes' but very few people move often enough to gain the needed experience.
Although there is no substitute for doing your homework (start by asking your family and friends who have recently moved for their experiences), the following list of common pitfalls may be helpful.
- Looking for a house without getting pre-approved by a lender: When you are pre-approved, you are effectively a cash buyer. This makes it much easier to negotiate with the seller. Do not mistake pre-approval with pre-qualification; pre-qualification is only the first step in gaining pre-approval. Ask your Banker or REALTOR for details.
- Failing to check out the neighborhood thoroughly before buying: How do traffic patterns change depending on the day, or even the time of day? Are there any future developments in the works? Is that nice greenspace down the road actually zoned for high-rise development? Ask around - check it out first.
- Making an offer based upon the asking price, not the actual market value: Do your homework. What have similar properties sold for in the immediate area? How long were they on the market? How does this one compare? Is it over-priced, under-priced, or fair value? Ask your REALTOR for an up-to-date market summary.
- Letting "first impressions" affect your decision too much: There are entire books written on how the first impression of a home is the single most decisive factor affecting many purchasers' decision to buy. Don't let bad décor or messy housekeeping scare you away from a structurally solid home that meets all your needs. Remember, you are buying the house, not the furnishings.
- Buying a home without a professional house inspection: When buying a house, consider getting a professional property inspection. Not only will you know what you are buying, but these reports will protect you from unforeseen nasty surprises in both the short and long run.
- Assuming that the Bank's quoted mortgage rates are written in stone: Like many industries, banks are experiencing increased competition and are often willing to negotiate mortgage rates. Depending upon the market and profit spreads, it is sometimes possible to negotiate substantial savings. Ask your Banker or REALTOR for details.
- Not shopping for home insurance until you are ready to move: If you wait until the last minute, you will be rushed in finding insurance. Allow time to shop around and get the best deal.
- Signing documents without reading them: Do not wait until the last minute before reading the documents; there probably will not be time. Try to get copies of all documents early on in your home search so that you can peruse them at your leisure.
- Making verbal agreements: Not only are they harder to enforce, but any written contract you sign will override a verbal agreement. Contract law says that verbal agreements are not enforceable when they deal with Real Property. Always get it in writing!
- Not knowing your rights & obligations: If you do not know your rights, then you can be taken advantage of. If you do not know your obligations, you may inadvertently cause friction between yourself and those with whom you are about to enter a contract. Both your REALTOR and Lawyer are great sources of information concerning this - make use of their expertise and resources.