In
order to obtain a home loan, a borrower is usually required to have a
homeowner's insurance policy in place. Experts agree that the most
important question homeowners should ask when shopping for a plan is the
A.M. Best rating of each company. New companies pop up all the time,
and homeowners
need to be informed about what a company can offer in terms of
protection against potential risk.
Consumers should also become familiar with the liability portion of
their policy. ACV (Actual Cash Value) policies pay claims based upon the
depreciated value of the item or items lost. However, replacement cost
policies will pay the full cost required to actually replace the items.
To ensure that the right amount of insurance is purchased, homeowners
should obtain an appraisal every five years or so. If additions are made
or remodeling takes place, homeowners will need to revisit and possibly
upgrade their plan as well.
Experts say there are several important mistakes homeowners should be
especially careful to avoid. The first is being dishonest on an
application. This is absolute grounds to reject any claim. Secondly, if
the property contains a detached structure - such as a guest house, a
barn, a workshop, or a garage - be sure to include each one on the
insurance policy. Finally, do not over-insure. Homeowners can save a
little money by insuring only those items and structures that need to be
replaced.
A
15-Year Fixed Rate loan works well for borrowers who are nearing
retirement and want to be debt-free when they get there. Because
payments in a 15-year scenario are amortized over half the length of a
30-Year Fixed Rate loan, the monthly payments will be significantly
higher in comparison. This is an important factor to consider before
committing to a 15-year loan. However, the interest rate on a 15-Year
Fixed Rate loan will be lower for the same reason - financing for 15
years costs much less than financing for 30 years.
If a borrower is 50 years old and would like to be debt-free when
retiring at age 65, then a 15-Year Fixed Rate loan will allow the
borrower to meet that goal as far as their mortgage is concerned.
However, if there is any question as to whether the borrower will be
able to commit to the higher monthly payment, the alternative is to take
a 30-Year Fixed Rate mortgage and make pre-payments with some
consistency. If the borrower has the discipline to make those extra
payments whenever possible, he or she can still attempt to meet the same
goal.
I prefer to educate my borrowers so they can compare the benefits of
each program and have the opportunity to review loan options with their
financial advisors.
While
a short sale may be a last resort for many homeowners facing
foreclosure, it also represents a great opportunity for potential home
buyers and real estate investors. This article is designed to help
answer a few basic questions about the substantial risk and reward
involved in this extremely complex and often drawn out process.
What is a Short Sale?
A short sale is a legally-binding agreement to allow a home to be sold
for less than the amount that is owed. And, while short sales are not by
any means common or easy, because of increasing inventory levels and
foreclosures in some parts of the country, lenders are much more eager
to negotiate with borrowers who are having trouble paying their
mortgages. For potential home buyers and real estate investors, a short
sale also offers a great opportunity to purchase property at a
significant discount.
However, don't expect a lot of help from the lender without first
providing a sales contract from a qualified buyer and all the
information required by the lender's loss mitigation department.
Of course, lenders are not looking to bail out "flippers" or other
borrowers who simply overextended themselves. In most cases, a borrower
must have suffered a serious financial hardship that directly caused him
or her to default on the mortgage: the loss of a job, a serious
illness, or the death of a loved one.
A written declaration and supporting documentation demonstrating
financial hardship will definitely be required by the lender. This may
include pay stubs, tax returns, and liquid asset statements, among other
documentation.
Key Considerations to Keep in Mind
It's important to note that the difference between what is owed on a
mortgage and the final amount the lender collects after the costs of the
sale, including real estate commissions and possibly other charges
don't simply disappear in a short sale. The difference is called a
deficiency, and the lender determines if they will be forgiving this
deficiency, continuing with a payment plan on some portion of the loss,
or pursuing the Seller for the full deficiency. In the past, if this
deficiency was forgiven it was considered taxable income to the
borrower. However, thanks to the Mortgage Forgiveness Act of 2007, the
tax burden for qualifying canceled mortgage debt (as high as 35%) for
primary residences only has been temporarily waived. The federal
timeline has been extended to 2012 although states are not required to
follow it for state income. So while deficiencies
may not be taxable currently, they could be come taxable in the future
and the seller in a short sale could still be liable for the
deficiency
balance.
If there are multiple liens against the property, all lien holders will
have to be involved in the negotiation process, not just the first lien
holder. Therefore, communication and patience are essential components
of any short sale. This is why an experienced real estate agent and
mortgage professional become so valuable to this process.
Interest
rates change constantly, but it is important to know that rates are
cyclical. If rates are currently at historical lows then we know there
is a strong probability rates will go up again, and vice versa. Certain
economic indicators such as unemployment data, consumer price index,
retail sales data, and consumer confidence all have an effect on
mortgage interest rates. But the key factor to watch is the relationship
between stocks and bonds.
When the economy is slow and the stock market is "bearish," many investors move money out
of stocks and into bonds and mortgage-backed securities. This causes
mortgage interest rates to go down. When the economy is doing well, the
stock market rallies and is considered "bullish." Investors then have a
tendency to move their money out of that safe haven of bonds and
mortgage-backed securities and back into stocks. As a result, mortgage interest rates go up.
My team and I keep a close eye on mortgage interest rates at all times
in an effort to alert our clientele of opportunities to obtain lower
financing. Let us know if you have any questions for us.
When
borrowers enter into a contract to make bi-weekly payments on their
mortgage, the amortization schedule is accelerated. For example, with a
30-year amortization schedule, the borrower makes 12 payments per year.
In a bi-weekly arrangement, the borrower makes 26 'half' payments, which
allows the loan to be paid off in 22.8 years instead of 30 years. It's
the same as making 13 monthly payments.
This ultimately saves the borrower thousands of dollars in interest rate
fees. However, bear in mind that bi-weekly programs usually have some
type of setup, transaction, and maintenance fees associated with them. A
custodian manages the bi-weekly payments in a trust account (and also makes a profit
on the interest accrued there). Because the lender really doesn't
accept partial payments, this middle man is still making monthly
payments to the lender on some type of pre-payment schedule.
It is important for the consumer to know that the same results can be
achieved without hiring an outside company to do this. As long as your
loan program carries no pre-payment penalty, pre-payments can be made on
a monthly or annual basis to shorten the loan term to save money on
interest or remove PMI charges on loans that have less than a 20% down
payment. The borrower simply needs to indicate the extra payment is
being made toward the principal balance, and have the discipline to make
these extra payments as scheduled.
