- Location, Location, Location
- No No’s for the Homebuyer
- Common Mistakes
- Closing Costs
- Home Warranties
- Adjustable Rate Mortgage
- Interest Only vs. Traditional Loans
- Closing Countdown
- Home Inspections
The Jones’ family found their dream home and moved into it with all of the excitement and enthusiasm of a kid on Christmas morning. After a long and hectic day of unpacking, they collapsed into bed anticipating a good night’s rest. Unfortunately, they were shocked and dismayed when they began to hear the very obvious noise of trucks roaring along the interstate highway situated less than a half mile to the rear of their home. Too late!
This unfortunate situation exemplifies the need to focus on location when contemplating the purchase of a home. A ten million dollar mansion isn’t worth a dime if it’s sitting next to a toxic waste dump. This example is far-fetched and outrageous, but it makes the point that finding the right location is certainly as important as finding the right house.
How do you investigate a potential neighborhood? There are a number of factors and issues to be considered in your evaluation. Some of them can be covered merely through visual observation; others will have to be explored with the assistance of community and government organizations.
One of your first and most significant concerns should be the crime rate. If every other house on the block is being burglarized every other month, you might want to look elsewhere. Talk to a spokesperson of the local law enforcement agency. Ask for a listing of their monthly crime stats and a copy of their year ending report. When talking to the spokesperson about crime rates, ask about their response times in your area. If it’s over five minutes, ask why. If the community has a neighborhood watch group or a neighborhood citizens’ security patrol, attend one of their meetings or speak with their group representatives.
How far is your new neighborhood from your place of employment? How far is too far? Bottom line: check the driving time and traffic patterns, both coming and going, by driving the route you’ll take. Are there any activities or facilities in the area that will make the trip more unpleasant or time consuming on specific days of the week? As an example, is there a bridge that backs up on Friday afternoons as people rush to their weekend retreats?
If you have children, or anticipate having them, you’ll want to check out the schools in the area. Visit the schools and talk to the Principals or school counselors. Ask about class sizes, bus service, curriculum and even school menus. If your child is a gifted student, you’ll want to inquire about accelerated courses. If your child needs special education opportunities, ask about them. Knowing about your child’s school is one of your primary responsibilities as a parent.
This may sound a bit picky, but you should visit and evaluate your local markets, shops and restaurants. Do they sell quality products? Is there a convenient place to purchase daily necessities such as milk, luncheon items, coffee, etc.? Do the local restaurants suit your taste? The answers to these questions may not factor substantially into your moving decision, but they are part of the equation and should at least be recognized and considered.
Availability of community services should not be overlooked. Is there a good hospital in the immediate vicinity? Do they have an emergency room? How about parks and a library?
You should visit the neighborhood at various times of the day and night to check for sounds, smells, heavy traffic and the presence of any activities that you might find offensive as a resident.
Finally, you will want to find out if the community has a community association. If so, visit the association and ask about membership dues, restrictions and covenants. If the representative is forthcoming, ask if there are any problems in the area that you as a prospective new resident should consider.
You are about to make one of the biggest financial decisions of your life. Don’t be timid. Ask questions, make notes and weigh all the pros and cons before deciding.
There are several things that should be avoided before purchasing a home. If you aren’t careful to avoid these common mistakes, it is possible that your closing will be delayed or even canceled. Your adherence to the following rules will put the keys to the house in your hands quickly.
First, don’t damage your debt-to-income ratio by making a major purchase before closing. If you decide you can’t live without that brand new BMW, you might have to wait on owning a home. The bank could easily determine that your sky high car payment would hinder your ability to pay your mortgage. Wait until after you get the house to do some spending. No one expects a brand new house full of furniture and a sports car in the driveway unless you are a famous sports figure or Donald Trump.
Secondly, don’t change jobs. The lenders like to see consistency versus constant job-hopping. If you are just miserable with your job, maybe you can switch to a different job within the same field. Or you can tough it out until you have the house and then start putting out resumes.
In addition, never let emotions guide you. Stay practical and realistic during the home buying process. Some sellers are willing to fix some of the problems with the home and others may not be as willing. Don’t let that refusal close the door on your dream home. Conversely, you shouldn’t let your loyalty to the home blind you to costly repairs down the road. You certainly don’t want to purchase a money pit.
Don’t forego inspections to save a few dollars. Home inspectors and pest inspectors perform extensive examination of the property. Problems can be discovered before you close. If your potential new home gets a “clean bill of health”, the peace of mind that can bring you is well worth the inspection cost. You might also consider inspections for radon and/or well and septic.
Another costly mistake might be forgetting to secure hazard insurance. Talk to your insurance company right away because the lender will want to see proof of coverage for the new home at closing. Failing to line up the insurance will lead to delays in closing.
Furthermore, don’t forget to have the utilities activated upon closing. The utility companies might need a few days to switch the service. Don’t forget to cancel the service at the old residence. That seems simple enough, yet many people forget this step entirely.
If the appraisal comes in too low, don’t freak out. There are several solutions to this dilemma. The seller might be willing to come down on the price of the home. The buyer can put more money down if they are committed to that home. The buyer and seller can negotiate the deal or the appraisal can be disputed.
Don’t forget to use your agent. It is the agent’s job to keep up with the daily details of the deal, including the lender, the seller, and the seller’s agent. It is also your agent’s responsibility to set up a final walk-through prior to closing.
Lastly, don’t forget to take care of your end of the deal. You must be on the same page as the lender. Provide them with the paperwork they need and answer their questions in a timely manner. Failure to do so will keep you from opening the front door of your new home.
These are some of the most common mistakes home buyers make. Educating yourself about the process will ensure a smoother transaction and a definite housewarming party.
Buying a home represents the most significant financial decision most people will ever make during their lifetime. From a person’s first home, which often establishes the foundation for future home purchases, to the purchase of the home where you’ll spend your senior years, there are definite pitfalls to avoid and suggested steps to take to assist one in making the right decisions.
One of the first mistakes people make is not getting pre-approved or pre-qualified by a bank or lending institution. Sellers and their agents are often skeptical of a prospective buyer’s ability to obtain a mortgage loan when the buyer has not been pre-qualified. When choosing between two comparable offers, or when contemplating countering a buyer’s offer, a seller will always look more favorably upon the pre-qualified buyer.
Employing the services of a Realtor makes great sense, since navigating through the home purchase process is both complex and fraught with financial dangers. However, as the buyer, you should have your own Realtor who will be fully committed to representing your best interests. The seller’s Realtor will often favor the interests of the seller, with an eye to the commission involved. Your agent will be inclined to do a “comparative market analysis”, which will establish property values and selling prices of homes in the area of your targeted purchase.
Take your time! It happens all too frequently that people rush into signing a contract to purchase a particular home and then for any number of reasons, regret their hasty decision. Remember…when you enter into a contract to buy a home, your chances of rescinding that contract are very slim. It doesn’t help that you’ve found another home you prefer, when you are under contract to make a purchase, you are expected to follow through and buy it.
In addition to finding a home they like better than the one they’ve contracted to buy, another reason people try to cancel a contract is that they realize too late that they’ve over-purchased. The mere fact that you can qualify to purchase a particular property doesn’t speak the full story. Being “house poor” is the pits. Putting the bulk of your earnings into your mortgage payment obviously detracts from your quality of life. Things you used to enjoy, such as vacation trips, going out to dinner or splurging on an expensive piece of clothing will have to be curtailed.
Some people have specific requirements for their dream home and unfortunately sometimes wait too long for that home to present itself. While waiting for utopia, people pass up excellent homes that are good bargains and would fulfill a majority of their demands. Also, in many cases, market prices and mortgage rates continue to rise.
The potential buyer should be aware that there are many types of mortgages being offered by lenders; therefore, they should explore all of their options before “locking in.” Interest only loans allow the buyer to pay only the interest on their mortgage for a period of usually up to five years.
This is an attractive option for young buyers who want to establish themselves in a home of their own, but have not reached their full earning potential. Hopefully and assumedly, at the end of the prescribed 1-5 year period the buyers will be better able to meet full mortgage payments. All other options should be explored as well.
Failing to require a comprehensive home inspection or relying on the knowledge of a friend, is a penny-wise/pound-foolish thing to do. The relatively minor expense of the full inspection is definitely cost-effective. The inspection should include a review of electrical system, condition of the roof, plumbing, heating and air conditioning, septic system, water quality, etc. etc. etc. This is a very important process that can save untold heartache in the future.
When selecting a home, don’t forget that your quality of life in that home extends into the surrounding community. Be sure that the school system meets with your approval; inquire about the crime rate and consider the quality of the stores and services available in the area.
Sometimes it’s hard to look into the future, but when buying a home, it’s good to think about resale value. Not that this should be the final consideration, but when touring your prospective new home you should look for things that would be a deterrent to another buyer.
Finally, before signing the contract you should be aware of any restrictions imposed by your new community association. Such restrictions can include: fencing guidelines, parking restrictions (no RV’s in the driveway), no boats in the yard, landscaping requirements, and even certain occupancy restrictions. Blindly buying into a heavily restricted community is a very common mistake.
The common buying errors mentioned here are by no means an exhaustive list of things to avoid. Buying a home should be done systematically and carefully. Checklists are available from reputable Realtors and should be consulted and utilized throughout the searching and buying process.
It might surprise you to find out that there are many fees associated with buying a home. Often future homeowners are shocked at the added costs of buying a home because of the varied closing fees for things such as document preparation and other types of administration fees.
Having an expectation of the potential closing cost associated with buying your home will aid you to budget your finances appropriately, and help you determine early on what you can realistically afford to pay for a home.
Lenders fees vary from state to state. However, you can expect certain fees to be tacked onto your loan. Make sure to check with your lender about the different costs that will be applied to your purchase for your home. Typically you will be required to pay these fees at the closing:
- Processing Fees – Monies paid to begin the processing of the loan. Costs can run from a few hundred dollars to a couple thousand dollars.
- Document Preparation Fees – A fee for the write-up of your loan. Costs run approximately from $100 – $400.
- Review Appraisal Fees – Costs vary, but you can expect a payment of $200 on average.
- Wire Fees – Electronic payment form for funding your loan. Fees fluctuate.
You need to be aware that there are other fees that will be incurred when purchasing a home. Some of the fees associated with buying a home are advanced or one-time fees and others are fees that will have to be paid again. Below are some of the other fees that you will be required to pay when purchasing your home:
- Loan Origination Fees – Fees based on a point system for your mortgage. Usually if you are able to pay more in a down payment, your points will be lower, thereby saving you costs on a higher interest rate.
- Credit Report and Underwriting Fees – Depending on the finical institution running a credit report the fees will vary, but expect to pay for a detailed report on your credit history. Costs are typically around $100. Costs for underwriting a loan can be on the costly side – running from several hundred to a thousand dollars.
- Appraisal Fees – Prices vary on home price and geographic area. Independent appraisal fees usually run from $300 and upwards.
- Homeowner Insurance Fees – Depending on the financial institution, a six-month to one-year payment for home insurance is usually required.
- Title Insurance Fees – Check with your lender on cost.
- Recording fees for things like the deed, mortgage and promissory note.
This list of fees is certainly not an all-inclusive list. Be sure to get a good faith estimate from your lender when you apply for your mortgage.
What are they and do you really need one?
A home warranty is not much different from a warranty you might have on your car, your computer or your home entertainment center. A warranty on your home usually covers all of your home’s major mechanical systems, including hot tubs, pools, wells, septic tanks and all of your appliances. Some policies even cover the roof of your home and almost anything else you’d like to include, as long as it’s specified in the policy.
Home warranties are obtainable for most any dwelling, including mobile homes, condominiums, town houses and manufactured homes. Either the buyer or the seller can purchase them; some sellers will include a home warranty policy to make purchasing their home more attractive. Including a home warranty with the sale is an excellent idea, especially if the home is older and the systems and appliances are aging.
Since the policy can be purchased at closing, the seller doesn’t have to come up with the premium out of pocket. Further, the cost of the policy can be split between the buyer and the seller, depending on the terms of the sale.
Home warranty policies are generally effective for one year and are renewable. However, you can expect to pay a little more for coverage each year, as the items covered continue to age. This is reasonable. Policy costs vary according to the list of things covered, but an average cost would be between $350 and $500 per year. Obviously, when obtaining a policy it is important to be specific about coverage. You can expect to pay a small co-payment or deductible when the repair person responds to make a repair. This is an industry standard. Your payment will range from $50 upward.
According to a Gallup poll, 79% of buyers and sellers surveyed rated home warranties as one of the most important aspects of buying a home. These policies are not like hazard insurance, which covers losses due to fires, storms and accidents; home warranties cover normal wear and tear breakdowns.
If you’ve been trying to buy a house you may have noticed there are a lot of numbers to consider: the price of the house, your savings, the amounts of the down payment and monthly payments you can afford, as well as a host of other figures and fees. Trying to find a mortgage that meets your needs is another numbers game, but this one can work in your favor.
You may not realize it, but there is great variety available to home buyers shopping around for a suitable mortgage. Different banks, brokers and other lending institutions all offer their own mix of short-term and long-term mortgages, as well as both fixed rate and adjustable rate mortgages.
So how do you know which combination is the best for you? That depends on your circumstances.
Traditional fixed rate mortgages allow you the security and stability of knowing that your mortgage interest rate will not fluctuate with market conditions. This means that if interest rates spike, you will be protected. Conversely, if interest rates drop, you will not be able to take advantage of the potential savings without transferring your mortgage to another institution or making other possibly complicated arrangements.
Adjustable rate mortgages (also known as variable rate mortgages), are different than fixed mortgages in that the interest rate you pay on the outstanding principal of your loan fluctuates according to changes in the posted index rate.
There is a certain amount of risk involved with an adjustable rate mortgage in that you may end up paying more money in the long run if interest rates rise and stay high. You also have the potential to take advantage of savings if interest rates fall.
An additional bonus to adjustable rate mortgage is the lower initial interest rate. You may be risking higher or unstable payments, but you are rewarded with a lower interest rate when your loan is at its fullest point. Unless interest rates rise dramatically, this advantage is likely to save you more money than if you had chosen a fixed rate mortgage.
There are advantages and disadvantage to securing an adjustable rate mortgage loan. However, you may find an adjustable rate mortgage worthwhile if you intend to pay off a large portion of your outstanding balance early into your loan period. By doing so, you reduce the bulk of your loan while paying the initially lower interest rate.
An adjustable rate mortgage may also be the best choice for you if you anticipate greater future income or if you intend to pay off the entire mortgage loan quickly – again due to the lower initial interest rate. Even if rates were to increase early into your mortgage period, the fluctuation would unlikely be so great that it negated the difference in interest rates between a fixed rate plan and a variable rate plan.
You can reduce the financial risks associated with an adjustable rate mortgage by asking your lender about interest rate ceilings or caps that protect mortgage holders from sharp increases in the amount of money they must pay each month (or whatever their payment period is: monthly, weekly, bi-weekly, etc.).
The overall ‘ceiling’ restriction is legislated in almost all cases, and it limits the total possible interest rate increases over the period you hold the loan. Periodic caps help control interest rate hikes between adjustment periods.
Speak to your financial adviser to find a mortgage plan that fits your budget and your needs.
Do you really know what that means to you?
Mortgage escrow accounts were developed more than fifty years ago when many Americans started losing their homes to foreclosures, mostly due to late tax payments. Homeowners were burdened to come up with large, lump sums of money at tax time that was often too difficult to pay.
To ease the burden, lenders agreed to collect the taxes in small monthly payments made along with the mortgage payment. In 1934, this became standard procedure when the government stepped in and made it mandatory that lenders manage escrow accounts on all Federal Housing Administration (FHA) mortgages.
Mortgage escrow accounts are made to protect the homeowner by making sure that all insurance premiums and property taxes are paid in a timely manner. Escrow guarantees that there will always be enough money available to pay these bills on time. This way, the homeowner can avoid overdue taxes and insurance.
The U.S. Department of Urban Development (HUD) has administered the Real Estate Settlement Procedure Act (RESPA) to regulate all escrows and include laws for all lenders to follow when managing and funding the borrower’s escrow account.
All lenders must maintain their escrow accounts and comply with federal law, with the interpretations set by HUD. Lenders are required to release itemized statements of escrow accounts to all borrowers yearly. While most lenders already issue these statements, the 1990 Housing Bill will ensure this practice.
Although borrowers are not required to maintain an escrow account with their lender, the lender may require it of the borrower. Escrows are made to protect the lender as well as the borrower. Borrowers who do not understand the purpose of the escrow account, or those who have questions or other concerns, should consult with their lenders right away. It’s important for the borrower to understand escrow completely in order to be aware of all the benefits.
Escrows reassure homeowners that their mortgage related bills will be paid on time by automatically budgeting the borrowers insurance and tax obligations over a year’s time. This way homeowners can rest assured that their obligations are taken care of without having the burden of coming up with several large, lump sums of cash each year.
In addition, it’s comforting that homeowners don’t have to calculate any unexpected increases in their insurance premiums or taxes. It is the lender’s responsibility to allow any potential increases in the payments, therefore covering the bill, without charge to the borrower, if there are not enough funds in the mortgage escrow to pay the increased bill.
Many lenders will pay for the insurance and taxes when the payments are due regardless of whether or not the money has been collected by the homeowner at that time. In 1989, lenders advanced an estimated $600 million to homeowners to avoid penalties and any risk of not paying their insurance and taxes on time.
Escrow accounts have made it possible for lenders to lower their rates and have lower down payments while protecting the interests of the investors. This has made the home mortgages more attractive as a secure investment, allowing escrow to lead the way to a stronger home mortgage market. Escrow accounts also prove beneficial to local governments by saving them money by using a less expensive and more efficient way of collecting taxes. Municipalities will only need to collect from a few hundred lenders instead of millions of homeowners.
For borrowers who decide to refinance or transfer their loan to another lender, the new lender will take on the responsibility of managing that borrower’s escrow account. The new lender may review the borrower’s escrow account to be certain that the funds are being collected sufficiently enough to cover all payments. Should the collected amount need readjustment, the new lender will notify the borrower of the change in monthly payments. Lenders in some states may pay interest on the money held in an escrow account although the RESPA does not require it.
Some lenders may ask borrowers to keep an excess balance that is often called a cushion, in their escrow account to cover potential increases in the borrowers insurance and tax bills. Many lenders may ask that the borrowers fund their cushion to the maximum amount of one-sixth of the total amount paid each year. If for some reason a lender asks the borrower to keep more than one-sixth in the escrow cushion, the borrower has the right for an explanation. If the borrower is not satisfied with the explanation, then they may file a complaint with HUD.
There are a variety of loans available to consumers who wish to buy a home. Out of this variety there are two major choices from which most consumers will choose. These choices are the interest only loans and the traditional loans. What’s the difference? Let’s look at these a little more closely.
An interest only loan is not a type of mortgage. This is only an option that can be attached to a mortgage. Although the interest only loans are not less costly to amortize, more than 31% of all homes in the U.S. have been issued with interest only loans.
Many of these loans include refinancing as well. Interest only loans may be attractive to the first time home owners by offering low monthly payments for up to seven years, thus allowing people the opportunity to buy a home at prices they would be able to afford.
During the first few years, the borrower may not have to pay down the balance of the loan, making the payments easier and seemingly more affordable. Unfortunately, once the borrower starts paying on the principle, they may be shocked to see the payments rise significantly.
If the price of the home begins to stagnate or descend, the borrowers could find themselves between a rock and a hard place as the risks of default begin to increase.
Investors often flock to the interest only home loans when they have intentions of selling the property in a few years for a profit. Otherwise, first time home owners may need the interest only loan in order to qualify for the home they would like to buy.
In today’s mobile society where some home owners tend to change residences every seven years, the lower monthly payments with the interest only loan can make sense. But if the home decreases in value over this time, the home owner may decide not to sell and will be left with the high back end payments they didn’t mean to make.
Many lending institutions may charge higher rates to the interest only loans because of the high risks of default. Interest only loans may seem borrower friendly on the surface and most lending institutions will be more than willing to accommodate you on this kind of a loan.
But – Buyer Beware! Interest only loans are starting to drop in popularity due to the long-term interest rates dropping to record lows. These low rates are causing people to rethink their interest only loans and having them want to get out of the interest only loan and into a long term loan at a fixed rate.
As an alternative to the interest only loan, a more traditional home loan such as a fixed rate mortgage can offer the predictability of a fixed monthly payment with a choice between a 15 to 30 year loan terms. These fixed rate loans are available for either purchasing a new home or refinancing a home.
The fixed rate mortgage is a traditional loan that offers a fixed interest rate over the entire life of the loan, which can run from 10 to 30 years. With a fixed rate loan, the monthly payments for principal and interest will never change, although your property taxes, insurance and escrow may change each year.
Down payments required for these fixed rate loans may be as low as 5%. This is a good deal for those who wish to have predictable mortgage payments over the entire life of the loan.
There are also those adjustable rate mortgages (ARM) that basically start at a low interest rate, with even lower monthly payments. But the interest rates and monthly payments can fluctuate regularly depending on the current market interest rates.
The ARM loans have become increasingly popular with those buyers who are expecting an increase in their income over the next few years so they can buy more home on their current lower income. Confidence in their increasing income can make the higher payments more affordable, especially if the interest rates go up in the coming years.
While you are shopping for a mortgage, take advantage of the online tools that can help you learn more about the variety of mortgages offered and choose carefully what kind of mortgage loan will work in your best interests.
The trauma of moving can be an added stress for buyers and sellers. Offer this advice to make things calmer before closing.
- Weed out items you won’t be moving; hold a garage sale or donate them to charity.
- Get estimates from moving companies.
- Make a list of people and organizations—credit cards, magazines, college alumni associations—that will need to be notified of the move.
- Look at schools and day care facilities in your new area. Forward school records.
- Complete change-of-address forms.
- Contact doctors and ask for referrals if you’re moving to a new city. Forward medical records.
- Check homeowners’ policy to see if possessions are covered during the move.
- Decide how you’ll move valuables.
- Get information on driver’s license, insurance policy, license plates, and auto stickers if you’re moving to a new city.
- Contact utility companies—gas and electric—in both cities.
- Register with an Internet service provider.
- Contact phone service—see if your long distance, cellular, and pager carriers operate in the area.
- Contact satellite and cable TV providers.
- Empty and defrost refrigerator.
- Map out driving route to new city.
TIP: Pack one or two boxes of must-haves—children’s toys, toilet articles and towels, can opener, flashlight, light bulbs, paper plates and cups—and carry it with you so you can find it fast after the move.
Choosing the right house for you is a critical and important decision. When you find the house that is right for you, you need to find a home inspector to educate you about the condition of your new home. Even when buying a newly constructed home, the additional peace of mind that a professional home inspection offers is invaluable.
Professional Home Inspectors, Inc
710 Grant Wood Drive SE
Cedar Rapids, IA 52403
403 Stonehaven Lane NE
Cedar Rapids, IA 52402-1452
All Pro Home Inspection
324 Lee Street
Cedar Rapids, IA 52246
Elite Home Inspections
Cedar Rapids, IA 52402
A Closer Look
512 Memorial Drive SE
Cedar Rapids, IA 52403
Kevin Bird, ACI
Birds Eye View
PO Box 403
Marion, IA 52302
Heartland Pest Control
D&R Pest Control
Alias The Bugman
Radon Elimination Professionals
PO Box 197
West Liberty, IA 52776
**Skogman Realty and its associates make no recommendations or endorsements of any particular company. Buyers and sellers are encouraged to contact the company directly for inspection rates, treatment options, warranty details and rates for properties outside the Cedar Rapids area.