Fixed rate VS. Adjustable Rate Mortgages4/28/2015
Pay More or Less - 4/27/2015
Paying more for your house payment does not make your home more valuable. It does mean that the mortgage rate may be higher than it has to be.
Even though fixed rates may never again be as low as they are currently, an adjustable rate mortgage may provide the lowest cost of ownership depending on how long a borrower plans to own a home. There are different types of ARMs but the one in this example is a 30 year mortgage with the rate fixed for five years and can adjust every one year after that based on independent indexes.
Another feature of a FHA ARM is the maximum rate change in one period is 1% and the maximum lifetime cap is 5% over the initial rate.
In the example below, the payment on the adjustable is $153.48 lower for the first five years or 60 payments. Another interesting thing is that lower interest rate loans amortize faster than higher interest rate loans. In this example, the ARM has a lower unpaid balance at the end of the first five years by $4,239.
The total savings on the ARM at the end of the first period is $13,477. If a borrower felt confident they would sell the home prior to the breakeven point of 8.5 years, the ARM would produce a lower cost of housing even if the mortgage rate escalated the maximum at each adjustment period.
To help determine whether you pay more or less, consult with a trusted mortgage professional and your real estate agent to learn the advantages and disadvantages of different programs. To try your own comparison, check today’s rates at the Freddie Mac Mortgage Rate Survey and plug your numbers into an Equity Accelerator
Remember to take care of the basics!4/20/2015
Basic Legal Documents
Many times, young adults feel “bullet-proof” and don’t consider the urgency to get involved or spend the money to take care of certain legal aspects of their lives because they think they’re going to live forever. Since no one is guaranteed longevity of life, if you want to be in control of who gets what and who is in charge now based on an untimely incapacitation or death, it is important to investigate these basic legal documents.
Will – This is a legal instrument that specifies your desires to care for your minor children and to distribute your personal property after you die and who will manage the process. Anyone who has property and minor children needs a will.
Living Will – This legal instrument specifies your intentions regarding end of life decisions or to designate an individual to make those decisions on your behalf. Many times, a person who had been diagnosed with a terminal condition or who is facing a serious surgery or hospitalization might feel a sense of urgency to have this document.
Power of attorney – This document allows you to appoint someone you trust, not necessarily an attorney, to handle important legal and financial matters for you if you are unable to make decisions for yourself. The time limit can be for a specified period of time or indefinitely.
Trust – This arrangement involves an entity called a Trustee who takes control and manages property for someone else’s benefit called a beneficiary. When property is placed in a trust, the trust becomes the owner of the property. There are different types of trusts and a qualified advisor can explain and recommend which type would be best suited for your situation.
HIPPA Release Form – The Health Insurance Portability and Accountability Act, known as HIPPA, was created by Congress to protect the privacy of a person’s health information. Health care providers are prohibited from discussing any aspect of your medical information with anyone who is not directly involved in your care. To allow friends or family who do not have legal responsibility for you to have access to this information, this release form is necessary.
Most of the issues affecting these types of documents are determined by state law. Since they are legal documents, it is recommended that you seek sound financial and legal advice.
Are you ready to buy an new home yet?4/15/2015
Are You Ready? - 4/13/2015
For whatever reason you’ve delayed buying a home, it may be time to reconsider that decision based on today’s conditions and what is expected to happen in the future.
Rents are continuing to increase to the point that in most markets, it is significantly less expensive to own than to rent. Even after you factor repairs into the equation, the low interest rates, principal accumulation due to amortization, appreciation and tax savings lower the monthly cost of housing.
Low inventories coupled with strong demand cause a rising effect on prices. Another reason for higher values is that builders, especially in certain price ranges, have not ramped up new home starts to keep up with the demand.
Recently, the Federal Reserve announced that they intend to start raising rates. Most experts agree that higher interest rates are a foregone conclusion; it is just a matter of when it will happen.
A $300,000 home today could cost considerably more one year from now. With a 20% down payment, if prices go up by 3% and the interest rates increase by .5%, the principal and interest payment at 3.625% would be $1,094.52 for 30 years compared to $1,198.05 at 4.125%.
The question is not necessarily “can you afford the additional $103.53 more per month that you’d have to pay for the home during the 30 year term?” More importantly, “How would you feel about having to pay more because you weren’t ready to make a decision and what would you have spent it on if you didn’t have to pay a higher payment?”
Selecting the right lender is important !3/16/2015
Selecting a Lender
Finding a mortgage lender is not a problem. Selecting someone who will help you find the best loan product for your situation even if it means sending you to another lender is paramount.
There is a huge advantage to be able to sit across the table from someone you’re doing business with and look them straight in the eye. It’s difficult to make an informed decision based on a website and a phone call.
Doing business with a full-time professional who specializes in residential loans like you’re trying to get is important. You want the loan officer to be familiar with local conditions, values and practices.
It’s to your benefit to have a loan officer who has the experience to put the unusual transaction together even if yours is not.
Here are a few questions that will be helpful in selecting the right loan officer.
- What percentage of your business are FHA & VA compared to conventional mortgages and how long have you been doing them?
- What percentage of your loans close on time according to the sales contracts?
- Will my credit score affect my interest rate?
- Will you help me select the best loan product for me regardless of your commission?
- Are there prepayment penalties on any of the loans we’re considering?
- Are there any restrictions on refinancing any of the loans we’re considering?
- When is my loan rate locked-in? Is there a charge for that?
- Is your loan underwriting in-house?
A real estate professional can be your best source of information and can recommend a trusted lender. If you have any questions as to what kind of answers you should expect, please give me a call
Home is Worth the Sacrifice2/27/2015
There are many reasons people want a home with the most frequent responses being a place of their own, to raise their family, share with their friends and feel safe and secure. These are all strong motivations fueling the American Dream of owning your own home.
The motivation is so dominant that buyers are willing to make sacrifices to have their dream come true. According to the 2014 National Association of REALTORS® Home Buyers and Sellers Survey, 72% of first-time buyers cut spending on luxury or non-essential items. They also cut spending on entertainment, clothes and even cancelled vacation plans.
The value of getting their own home is more important than the immediate gratification of things that are considered less important. While qualifying guidelines were increased last year, there are still more buyers purchasing homes at near record-low mortgage rates.
Saving on Homeowner's Insurance2/16/2015
Insurance is a way to hedge the risk of a possible loss on an asset that a person or entity cannot afford. The cost of the coverage is determined by risk and exposure to the insurer and reflected in the premium.
Another way to say it is: don’t buy insurance when you can afford the loss. If you have a mortgage on your home, you must have insurance. It is probably prudent for most people to have property insurance but certain coverage might be avoided because you can afford the loss if you were to have an occurrence.
- Call your current agent and review your insurance coverage. Ask if there are any available discounts whether your property qualifies for now or after certain improvements are made. Monitored alarm systems, dead bolts, smoke detectors, updated electrical, certain types and ages of roofs among other things may be eligible for individual discounts.
- Compare the newly revised coverage and premium with other reputable agencies and insurers. Shopping can be time consuming but experts agree that the exercise can be valuable and should be considered every few years.
- Deductibles are an easy way to affect the premium based on the initial amount of loss that the insured wants to assume. The higher the deductible, the lower the premium. Determine the amount of risk you want to assume and select an appropriate deductible.
- Consider bundling your home and auto policies for possible discounts and leverage for better service.
- Don’t become a co-insurer. Most policies stipulate that a building must be insured for at least a certain percentage, usually 80% of its insured value to be able to collect the full amount of a partial loss. Insured value is not always the same as market value. The land is not considered in the value but replacement cost of the dwelling is.
It isn’t possible to purchase insurance after a loss; it must be purchased before a loss is incurred. Premiums are based on careful analysis of insurer’s loss and overhead expense plus a profit. As a homeowner and an insured, it would be equally wise to analyze coverage, claim service, your risk tolerance and the premium you’ll pay for that coverage.
Be safe with your Christmas Tree!12/1/2014
Holiday Tree Safety
- Select a tree with fresh green needles that don’t fall off when touched or when the trunk is tapped on the ground.
- When trees are cut too early, they have a greater risk of drying out and can become more dangerous especially with electrical lights.
- Cut 1” to 2” off the base of the tree before placing it in the stand to facilitate it drawing water to the limbs and quills.
- Trees require water similar to cut flowers or they’ll dry out. Tree stands should hold at least one gallon of water and it should be checked every day. A six foot tree could use up to a gallon of water every two days.
- Position the tree a minimum of three feet or further from heat source like fireplaces, space heaters, heat vents or candles. Do not allow the tree to block an exit.
- Lights should be labeled from an independent testing laboratory and intended for indoor use.
- Follow manufacturer’s recommendations for how many strings of lights can be connected to each other.
- Turn off all tree lights when you go to bed or leave the home.
- If the tree becomes dry and begins shedding needles, it can be a fire hazard and should be removed from the home. Even if the holidays are not over, it is not worth the risk to keep it in your home.
- After the gifts have been opened, don’t return the paper and boxes under the tree.
- Remove the tree as soon as possible after the holidays.
- Trees should never be burned in a fireplace. The trees will burn very hot and quickly when they are dry and could spread outside of the fireplace which could cause an unfriendly fire.
- Check to see if there is a recycling program for holiday trees in your community.
The National Fire Protection Association reports that “one of every three home Christmas tree fires are caused by electrical failures and a heat source too close to the tree causes roughly one in every six of the fires.”
Verify your Property Tax payment with your lender11/24/2014
Verify with Your Lender
IRS requires that expenses must actually be paid in the year that a deduction is to be taken.
The predicament occurs when you’ve made your payments but the mortgage company didn’t pay the taxing authority in the tax year they were due. If they paid your 2014 taxes in January of 2015, they wouldn’t be deductible for you until you file your 2015 income tax return.
Verify with your lender after you make the December payment that they did indeed pay your property taxes. The question for your lender’s customer service is: "Have you or will you pay the 2014 property taxes this year so I’m eligible to deduct them on my 2014 income tax return?”
Enjoy your improvements and profit from them11/18/2014
Homeowners can raise the basis or cost in their home by money spent on capital improvements. The benefit is that it will lower their gain and may save them taxes when they sell their home.
Improvements must add value to your home, prolong its useful life or adapt it to new uses. Repairs are routine in nature to maintain the value and keep the property in an ordinary, operating condition.
Additions of decks, pools, fences and landscaping add value to a home as well as new floor covering, counter-tops and other updates. Replacing a roof, appliances or heating and cooling systems would be considered to extend the useful life of the home. Completing an unfinished basement or converting a garage to living space are common examples of adapting a portion of the home to a new use.
Other items that can raise the basis in your home are special assessments for local improvements like sidewalks or curbs and money spent to restore damage from casualty losses not covered by insurance.
Here’s a simple idea that could save you money years from now.
Every time you spend money on your home other than the house payment and the utilities, put the receipt or canceled check in an envelope labeled “Home Improvements.” Regardless of whether you know if the money would be classified as maintenance or improvements, the receipt or cancelled check goes in the envelope.
Years from now, when you’ve sold your home and you need to report the gain on the property, you or your accountant can go through the envelope and determine which of the expenditures will be adjustments to your basis.
Some people disregard this idea because of the generous exclusion allowed on principal residences. At the unknown point in the future when you sell your home, circumstances may have changed and the proof of these expenditures will be valuable. The tax laws could lower the exclusion amount or eliminate it altogether. Your marital status may change because of death or divorce. The market value of your home may skyrocket.
Since the future is unknown, it is better to keep track of the improvements as they are made and how much is spent on them. Download an Improvement Register and examples or read more in Publication 523 on Increases to Basis.
Consider an Adjustable Rate Mortgage11/18/2014
Consider an Adjustable Rate - 11/17/2014
With fixed rate mortgages as low as they are, most purchasers or owners wanting to refinance might not even consider an adjustable rate loan. The determining factor should be how long the person plans to be in the home and which mortgage will provide the cheapest cost of housing.
For instance, if you compare a $300,000, 30 year term mortgage with a 4.125% rate on the fixed and a 3.25% on the 5/1 adjustable, the breakeven point would be almost seven years assuming the rates adjusted the maximum that they could in each year.
Therefore, if a person is going to stay in the house less than 7 years, the ARM would provide the cheapest cost of housing. This example shows that at the end of five years, the ARM would generate almost $13,000 savings over the fixed-rate.
On the other hand, this could be a good time for homeowners with an existing adjustable rate mortgage to consider refinancing into a fixed-rate mortgage. The longer that they intend to stay in their home, the more advantageous it might be for them to convert their mortgage to lock-in their payment and fix their housing costs.
A trusted mortgage professional can analyze the alternatives to provide you with the information necessary to make a good decision. You can try the Adjustable Rate Comparison with your own numbers to see the effect.