Fixed Interest Rate
Adjusted Rate Mortgages (ARM)
Reverse Mortgages
Balloon Mortgages
Graduated Payment Method (GPM)
London InterBank Offered Rate (LIBOR)
How do I choose
a mortgage program?
^TOP^
There is no silver
bullet. The right type of mortgage for you depends
on many different factors.
-
Your current financial
picture.
-
How you expect your finances
to change.
-
How long you intend to keep
your house.
-
How comfortable you are with
your mortgage payment changing.
For example, a 15-year fixed-rate
mortgage can save you many thousands of dollars in interest payments
over the life of the loan, but your monthly payments will be higher. An
adjustable rate mortgage may get you started with a lower monthly
payment than a fixed-rate mortgage -- but your payments could get higher
when the interest rate changes.
The best way to find the "right"
answer is to discuss your finances, your plans and financial prospects,
and your preferences frankly with a mortgage professional.
What does
"appraisal" mean?
^TOP^
An appraisal of real
estate is the valuation of the rights of ownership. The appraiser
must define the rights he intends to appraise. The appraiser does not
create value, the appraiser interprets the market to arrive at a
value estimate. As the appraiser compiles data pertinent to a
report, consideration must be given to the site and amenities as
well as the physical condition of the property. An appraiser may
spend only a short time inspecting the property, however, this is
only the beginning. Considerable research and
collection of general and specific data must be accomplished before
the appraiser can arrive at a final opinion of value. Due to the many types of
value, such as Fair Market Value, Insurance Value, Tax Value and
Value In Use, the need to precisely define the purpose of the
appraisal is essential.
Why should
appraisals be ordered?
^TOP^
To determine an offering or selling
price:
In the real world, very few individuals
order appraisal reports to establish an offering price or to
substantiate a purchase price. At the point that an offer to
purchase (in a typical residential transaction) is made, the price
has been set by other parties, not the purchaser. The price has been
determined by the seller, who wishes to obtain the highest price
possible, or the agent, who receives a percentage of the price as
compensation and often represents the seller in the transaction.
The real estate agent will typically perform a comparative market
analysis (CMA). The appraisal laws in most states allow real estate
agents to perform CMAs without an appraiser's license or
certification. A CMA is a necessary part of the agent's preparation
for a listing and consists of examining sales of properties in the
area to arrive at a listing price. The reliability of the CMA
depends upon the agent's experience and the characteristics of the
property. The agent will suggest a selling price to the seller based
upon the analysis. However, neither the seller nor the agent are
bound by the results of the analysis, and the agent is not required
to follow any formal procedure in completing the CMA. If a seller
wishes to list the property at a price higher than the price
suggested by the agent, then the agent may be forced to accept the
listing at that price or risk losing a commission.
Purchasers believe that they are getting a good deal if they make
an offer lower than the listed price. But how far above the market
value was the property listed? 10%, 15%, maybe even 20% above the
fair market value? A negotiated price of 10% less than the listed
price on a property that was listed at 20% above its value is not a
bargain. The agent cannot tell the purchaser that the offered price
is higher than the value, or even higher than their own CMA. In most
states, they must submit the offer to the seller.
The seller of a property may want to order an appraisal before
listing the property. Of course, the cost of the appraisal is always
a deterrent, especially if the seller knows that a buyer will pay
for it when applying for a loan. But the appraisal is often
justified. The seller could lose a sale if the property appraised
for less than the sale price when appraised by the appraiser.
To obtain a loan:
Usually, individuals applying for a loan
are only interested in obtaining the loan and unfortunately are not
worried about the prudence of buying the property at the agreed
price. In fact, many purchasers will try to encourage appraisers to
increase the appraised value so that they can purchase the home
regardless of its value.The majority of real estate appraisals
are requested by mortgage companies to validate the property's
purchase price for loan purposes. Except for periods of very low
interest rates when everyone is refinancing, most loans are for the
purchase of real estate and ordered after a sale price is
negotiated. Purchasers mistakenly assume that mortgage companies are
looking after their interests in the purchase transaction.
The law states that if the mortgage company orders the appraisal,
the appraiser is responsible only to the mortgage company. We expect
mortgage companies to be prudent and they should be, but being
prudent is protecting their interest, not necessarily the
purchaser's. The mortgage company's position:
-
It has two sources of repayment: the purchaser's income and
the property.
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The responsibility to repay the loan is not based upon the
property's value, so the purchaser is obligated to pay the note
even if the property value declines to zero.
-
The loan may be insured or guaranteed by a government agency.
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The government does not promise to pay the purchaser's debt if
the property value is wrong.
-
If the loan is greater than 80% of the value, a portion of the
loan may be insured by a private mortgage insurer.
-
There is no decrease in risk for the purchaser regardless of
the loan-to-value ratio. The investment by the purchaser is the
same, a mixture of personal cash and a loan that must be repaid.
To settle an estate:
Taxing authorities such as the IRS often require appraisals to
establish the value of an estate when a death occurs. Generally, the
survivors want a conservative value estimate that limits their tax
liability as much as possible. Most estate appraisals are ordered by
attorneys, not by the survivors.
To establish the replacement cost
for insurance:
Appraisals obtained for establishing the loss risk in case of fire
are often limited to providing an estimate of the replacement or
reproduction cost of the improvements. The insurable value may not
be representative of market value and usually does not include the
value of the land. Insurance agents may order appraisals when their
standard cost service manuals are not adaptable to an atypical home
or structure. Or property owners may order appraisals to contest the
annual appreciation increases mandated by some insurance companies,
especially when the increase in the insurance coverage results in an
unrealistic Premium.
To establish just compensation for
condemnation:
The appraiser may represent either the
landowner or the condemning authority. Usually, the government
entity that needs the land for public use orders an appraisal and
offers to purchase the land for the value indicated by the
appraisal. If the landowner feels that the amount offered by the
condemning authority is not enough, then the landowner may also
order an appraisal. If the parties cannot agree on a price, then the
matter will be settled in court with each appraiser testifying on
behalf of their respective value estimates. The appraisers are not
advocates for their client; they are expert witnesses trying to
support their value estimates.
Often landowners do not consider ordering another appraisal from
an appraiser of their choice. Usually, they try to settle with the
authority by negotiation rather than incur the expense of an
appraisal. It is obvious that the landowner's negotiating position
would be enhanced if a supporting professional appraisal report were
available.
To contest high property taxes:
If property owners feel that their property is assessed too high,
then they may order an appraisal from a qualified appraiser to
contest the assessment. In certain parts of the country this
practice is common, but many property owners are not aware that this
avenue of reducing their tax burden is available. The return on
investment is easy to perceive when the cost of an appraisal is
compared to several years of lower taxes. Sometimes these
assignments include an appearance in front of the equalization board
to argue the landowner's case. The appraiser, however, must be
careful not to base the appraisal fee on the dollar amount of the
appraised value, which could be a violation of the USPAP.
What are some
refinance considerations?
^TOP^
When you're making your decision, there
are several things you should keep in mind.
1) Even a small rate cut can pay off quickly. That's because
you can easily find mortgage companies willing to waive routine
refinancing charges such as application, appraisal and legal fees
(which can add up to $1,500 to $3,000). Of course, in exchange for
low or no up-front costs, you'll have to be willing to accept a rate
that's somewhat higher than the prevailing rock bottom.
2) If you are planning to stay in your home for at least
three to five years, it may make sense to pay "points" (a point
equals 1% of the loan amount) and closing costs to get the lowest
available rate.
3) You can avoid laying out cash and still get a low rate
by adding the points and closing costs to your new mortgage. Does
that mean shouldering a lot of extra debt? Not necessarily. If
you've had your current mortgage for at least three years, you've
probably reduced your balance by several thousand dollars. So you
may be able to tack your closing costs onto your new loan and still
end up with a mortgage that's smaller than your original one --
plus, of course, a lower rate and lower monthly payment.
Should I
refinance? ^TOP^
Traditionally, the decision on whether or
not to refinance has meant balancing the savings of a lower monthly
payment against the costs of refinancing. In recent years though,
companies have introduced "no cost" and low-cost refinancing
packages that minimize or completely eliminate the out-of-pocket
expenses of refinancing. (These refinancing packages compensate with
a higher interest rate, or by including some of the costs in the
amount that is financed.)
With traditional refinancing, the most common idea
is that the interest rate for your new mortgage must be about 2
percentage points below the rate of your current mortgage for
refinancing to make sense. With the newer low- and no-cost
refinancing programs however, it can be worth your while to refinance to
obtain a smaller reduction in interest rates.
How long you expect to stay in your home is also a factor to
consider. If you'll be moving in a few years, the monthly
savings may never add up to the costs that are involved in a
refinancing.
Should I
refinance multiple times?
^TOP^
When rates fall steadily, refinancing may
make sense even if you have done so once already. Drew and Katie
Hamilton of Seattle, Wash. refinanced twice within three months in
1999. In December, they trimmed the rate on their 30-year fixed
mortgage by a full point -- from 9.33% to 8.33% -- for a monthly
savings of $93. Plus, because home prices in their area had boosted
their home equity, they were able to stop paying private mortgage
insurance that cost them $190 a month.
To take advantage of a continued decline in rates, the Hamiltons refinanced
again in February. Their new 30-year fixed mortgage is at 7.475%,
lowering their monthly bill by another $75. Since the couple had
chosen a no-cost refinancing each time, their total out-of-pocket
expenses came to just $400 in appraisal fees. So by the time you
read this, they will already have recouped their up front costs.
"Now we can use the savings to help pay for our son's education," says
Drew.
If you are considering a second refinancing, don't overlook this
potential tax write-off: When you pay points to refinance, you must
deduct the amount over the life of the loan, usually 30 years. When you refinance a second time,
however, all of the points that have not
yet been deducted from the first refinancing can be written off in a
lump sum. If you refinanced to a 30-year mortgage in 1993 and paid
$3,000 in points, by now, you would have written off roughly $500.
If you refinance again this year, you could deduct the remaining
$2,500 on your 1998 tax return. For a homeowner in the 28% tax
bracket, that works out to a savings of $700 -- enough to offset
some or all of your costs this time around.
What does
"second mortgage" mean?
^TOP^
Some second mortgage loans may extend for as long as 15 or 20
years; others may require repayment in one year. You will need to
discuss the repayment terms with the individual mortgage company and
select one that offers terms that best suit your needs. For example, if
you need to borrow $20,000 to make repairs on your home, you may not
want a loan that requires you to repay the entire amount in one or two
years because the monthly payments may be too high.
What should I
do when considering a 2nd mortgage?
^TOP^
Be sure you understand how much your monthly payments will
be and what they cover. Your mortgage company should be able to give you
this information in advance. With some loans, you will be required to
make monthly payments on the principal and interest. With other loans,
you may be required to pay interest only on the borrowed amount. With
these loans, your monthly payments will not reduce the principal amount
of the loan. With such a loan, you will be required to pay back the
entire borrowed amount at the end of the loan period. These loans are
popularly known as "balloon loans." If your loan has a balloon payment,
you should consider how you will arrange to repay the entire amount when
it becomes due. If you want to take advantage of our online
calculators, please
click here.
On "home equity lines," the mortgage company does not have to give
you the exact amount of the monthly payment, but must explain how it is
figured. This is because the borrowed amount will vary and your
outstanding balance will change if you use the line of credit. However,
if your monthly payment term is 5% of the outstanding balance and your
outstanding balance is $5,000, your minimum monthly payments would be
$250.