Indecision Costs

iStock_000009336073Small 250.jpgMore money has been lost to indecision than was ever lost to making the wrong decision. The economy and the housing market have caused some people to take a “wait and see” position that could cost them in lost opportunities as well as almost certain higher costs in the future.

To illustrate what the opportunity cost might be, let’s compare what the value of the down payment two years from now would be if it was invested in a certificate of deposit, the stock market or used to purchase a home today.

A 3.5% down payment on a $175,000 home is $6,125.00. If it was invested in a CD that would earn 2%, a person would have $6,372 in two years. The earnings would be taxed as ordinary income tax rates. It wouldn’t earn much but it would be safe and secure.

The same amount would grow to $7,013 in the stock market if you picked the right stock or fund and it yielded 7%. The earnings would be taxed at the long term capital gains rate. The return could be greater but so is the risk involved.

If this person were to purchase a home today that appreciated 2% in value over the next two years, the equity in the home would grow to $18,769 due to value going up and the unpaid balance going down.

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The question, we all must ask ourselves is “where should our money be invested?” Try Your Best Investment to see the difference it will make based on your price range, down payment and earning rate.

Every Renter Should Know

Questions.jpgThe first home purchase can be the culmination of years of planning and consideration. Buyers typically look for 12 weeks and use a variety of information sources for research before purchasing. However, many renters are not near as thorough in their study.

Like any other commitment a person makes, careful consideration and understanding is required. There are things that every renter should know before they rent a home or apartment.

  1. A lease is a binding, legal document.
  2. Understand the lease before signing and ask questions.
  3. Get the complete agreement in writing instead of verbal statements.
  4. Tenants have rights too and they vary depending on the state and city.
  5. Tenants need renter’s insurance for their personal belongings and liability.
  6. The landlord is responsible for a habitable and safe environment and should typically pay for repairs due to normal wear and tear.
  7. Do a walk-through of the property before signing a lease.
  8. Don’t withhold the rent to settle a disagreement with landlord.
  9. The landlord must return your deposit or tell you why it is being held in a reasonable time.
  10. It may cost you considerably less to own the home than to rent.

With the exceptionally low mortgage rates available, the house payment including taxes and insurance can easily be less than the market rent of a home. By the time you factor in appreciation, forced savings due to amortization, leverage and tax savings, the actual cost of housing could be close to half of the rent even if a reasonable repair allowance is factored. Check out your net cost of housing.

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Fifteen Will Get You Three

15 vs 30.pngFreddie Mac chief economist, Frank Nothaft, says that affordability, stability and flexibility are the three reasons homebuyers overwhelmingly choose a 30 year term. However, for those who can afford a higher payment, there are three additional reasons to choose a 15 year term: save interest, build equity and retire the debt sooner.

First-time buyers have a higher tendency to use a minimum down payment and are very concerned with affordable payments. It is understandable that the majority of these buyers select 30 year, fixed-rate mortgages.

Consider a $200,000 mortgage at 30 year and 15 year terms with recent mortgage rates at 4.2% and 3.31% respectively. The payment is $433.15 less on the 30 year term but the interest rate being charged is higher. The total interest paid by the borrower if each of the loans was retired would be almost three times more for the 30 year term.

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Another interesting thing about the 15 years mortgage is that more of the payment is going to principal than interest from the very first payment. It would take over 13 years on the 30 year mortgage for the principal to exceed the interest allocation.

Some people might suggest getting a 30 year loan and making the payments as if they were on a 15 year loan. That would certainly accelerate amortization and save interest. The real challenge is the discipline to actually make the payments on a consistent basis if you don’t have to. Many experts cite that one of the benefits of homeownership is a forced savings that occurs due to the amortization that is not necessarily done by renters.

Make Good Offers Better

iStock_000019216251Small-250.jpgIt’s disappointing, frustrating and sometimes, discouraging when you lose a home you want to buy.

One of the hardest lessons for today’s buyers is that writing an offer doesn’t mean that you’ll get the home or even a counter-offer. The low inventory affecting many of the housing markets requires a different strategy to give you the best chance to get the home you want.

  1. Make your best offer initially; you may not get a chance to accept a counter.
  2. Submit a written pre-approval letter from the lender.
  3. Increase earnest money above what is considered normal.
  4. Make a larger down payment.
  5. Eliminate unnecessary contingencies.
  6. Don’t ask for personal property not included in the listing agreement.
  7. Pay your own customary closing costs.
  8. Shorten the inspection period.
  9. Buy the home “as is” subject to inspections which still allows you to get your earnest money back if the inspections are unacceptable but doesn’t require the seller to make repairs.
  10. Write the seller a hand-written, personal letter telling them why you want their home; include a picture of your family.
  11. Offer to use the seller’s or listing agent’s preferred title company.
  12. If you can pay cash, do so and arrange financing after closing. Be prepared to show proof of available funds.
  13. Schedule the closing as soon as possible but let the seller know you can be flexible.
  14. Once you decide on a home, act with expedience.
  15. Ask your real estate professional if they have any other suggestions.

Think of making an offer like applying for a job. You want to make your best impression and show why you are the best choice. You won’t always know that there are multiple offers. Approach the process like the competition is doing their best to get the home.

An Unexpected Expense

iStock_000023022788Small-250.jpgIn a study released by TD Bank, 65% of buyers with mortgages that required mortgage insurance said the higher monthly payment was more than they originally expected.

Private mortgage insurance is required on loans that exceed 80% of the home’s value. For conventional loans, the premiums range from 0.5% to 1% annually. The PMI could add close to $100.00 a month to the payments on a $200,000 mortgage and over $200.00 a month on a FHA mortgage.

FHA has two components to its mortgage insurance which includes an up-front charge on closing of the loan and an annual charge. The up-front premium is 1.75% of the mortgage which can be paid in cash at closing or added to the mortgage amount. The annual premium ranges from 0.45% to 1.35% depending on the loan-to-value and term of the mortgage.

Most lenders are required to automatically cancel coverage when a 78% loan-to-value is reached which on a 30 year loan with normal amortization could be eight to eleven years depending on original loan amount and interest rate. If the value of the home has increased as documented by an appraisal so that the current mortgage is below 80% loan-to-value, the lender can be petitioned to eliminate the PMI.

Beginning in April, 2013, FHA requires the mortgage insurance to be paid for the entire term of the mortgage. Prior to this rule change, it was required to remain in effect for a minimum of five years but could be cancelled when the mortgage is reduced to 78% of the original purchase price.

A homeowner can greatly reduce their cost of housing by avoiding mortgage insurance with a minimum 20% down payment. If a higher loan-to-value mortgage is required to purchase the home, the objective should be to pay down the mortgage amount to relieve the need for the mortgage insurance. Generally, loans with lower loan-to-value mortgages also have lower interest rates.

What is a Seller’s Market?

iStock_000030508968Small-250.jpgIt is generally considered a seller’s market when the conditions favor the seller. This condition exists when demand is high and supply is low without any significant adverse economic conditions taking place.

Demand is determined by ready, willing and able buyers. Low interest rates with indications that they will begin to rise fuels part of this demand. Rising prices also creates a sense of urgency to avoid higher housing costs.

Inventory is currently below what is considered balanced in most areas. In some areas and price ranges, homes are selling very quickly, with multiple offers and sometimes at above the listing price. When too many buyers are chasing too few properties, things get competitive and the seller is the beneficiary.

Even when buyers and sellers come to an agreement on price and terms, a challenge can occur if the appraisal doesn’t meet the sales price. Either the purchaser has to come up with the additional cash or the purchase price has to be renegotiated.

A typical seller wants the most money possible for their home in the shortest time frame with the fewest inconveniences. A Seller’s Market provides the most likely environment for this to happen.

Don’t Leave Home Without…

iStock_000019660747Small 250.jpgPlanning a summer trip is usually focused on what you’ll do, see and experience. Enjoy it even more by spending a little time before you leave to make sure your home is safe while you’re gone.

Consider these suggestions along with your other normal efforts:

  • Tell your neighbors you’ll be out of town and to be aware of any unusual activity.
  • Notify your alarm company .
  • Discontinue your postal delivery.
  • Use timers on interior lights to make it appear you’re home as usual.
  • Don’t make it easy for burglars by leaving messages on voice mail or posting on social networks.
  • Post on social networks about your vacation after you’ve returned.
  • Remove the hidden spare keys and give one to a trusted neighbor or friend.
  • Lock everything, double-check and set the alarm.
  • Take pictures of your belongings in case you need them.
  • Disconnect TVs and other equipment in case of unexpected power surges.
  • Adjust your thermostat.
  • Arrange for lawn care.
  • Consider disconnecting the garage door opener.
  • Put irreplaceable valuables in a safety deposit box.

It’s nice to go out of town on a well-deserved trip and it’s always nice to get back home…especially when it is just the way you left it.