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Key Mortgage Education - All

Important Questions to Ask your Home Inspector

HOME INSPECTION

A good home inspection is crucial to a comfortable home ownership and financial security. This is especially true when buying pre-existing homes. As the house becomes older, the need for home inspection grows. This is because as the house ages so does the materials used to build it. A home inspection is also necessary when buying a new house, even if you built the house yourself to avoid future pit falls.

When thinking about getting a home inspection consider this African proverb of the Edo peoples of Nigeria. “The monkey said she will only trust her unborn child and not a child on her back no matter how young”. According to the monkey, since she has no eyes on her back she has no way of knowing what her baby is doing with her hands behind her. As the saying also goes, do not be penny smart and pound foolish. Think about it.

Do you specialize in residential inspection?

Like in law and medicine, inspectors often have their areas of expertise. Being experienced in home construction or engineering while helpful should never be a substitute for training and experience in the specialized area of home inspection. If your request is for a commercial property inspection then you need an inspector with specialization in that area.

What is covered in the inspection?

A complete inspection report is an inspection report that meets all applicable state requirements and complies with a well-known standard of practice and code of industry ethics. A good inspector should be able to provide to you at your request a copy of these items for your review before the time of inspection and answer any relevant questions you may have. If there are any areas of the property of concern to you that you want inspected, do not hesitate to inform or point them out to the inspector.

Are you a member of any home inspector association?

Home inspectors usually belong to state and national inspectors associations. Request to see the inspector’s membership ID and check them out as you wish before offering them a the inspection contract.

Are you allowed to bid on the repairs after inspection?

This should be an issue of personal judgment for you, the contractor. Some state regulations and inspector associations allow the inspector to bid for and perform repair work on problems they discovered during their inspection. Other regulations and associations see this practice as a conflict of interest and strictly forbid it.

What experience and how many inspections have you done?

This is important and the inspector should be able to provide you with his/her history in the profession along with some names of references for recommendations regarding their works and ethics. However, being a new inspector should not be seen as a disqualification as many new inspectors often work with a partner or have access to more experienced inspectors to assist them with the inspection in time of needs.

How long will the inspection take?

A typical on-site inspection time for an individual (alone) inspector is 2 - 3 hours for a single family house. Thorough inspections may not be done for much less time. Bigger properties or buildings usually require many inspectors and more hours or visits to get done.

Do you participate in regular continuing education?

With changes in all trades so rapid in today's age of internet, an inspector who spends time and money on continuing education shows a good commitment to his/her profession and a dedication of excellent service to his/her consumers. This is especially important when the house is much older or includes unique elements that require additional and frequent training and improvements.

How much do you charge?

The costs of an inspection varies widely, depending on the type of services required, the region of the country, rural versus urban properties, distance from the nearest inspector, the age and size of the house, etc. A typical price range might be $275-$500, usually tax deductible but a necessary investment to prevent unnecessary future costs. HUD does not regulate home inspection fees because the cost of an inspection does not necessarily equate quality. Inspection cost for a commercial property come much higher.

Can I attend the inspection?

If you have the time this could be a very valuable educational opportunity, and the inspector should be able to accommodate your request. An inspector's refusal to allow this request should call their ethic and judgment into question with you. Never pass up an opportunity to see your potential home through the eyes of the inspector if you can.

What type and how long does it take to get the report?

This is very important for those who want to know what their report will contain, to see if they can understand the contents and for those who are anxious to close on a property as soon as possible. Ask to review previous copies of the inspector’s works to see if you can understand his/her report and also if the time elements meet your needs. Most inspectors provide their full report within 24 hours from the time of inspection.

Know Your Fixed Rate Mortgages

Fixed Rate Mortgages

A fixed rate mortgage is a mortgage in which the interest rate and term remains the same throughout the life of the loan
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The traditional fixed rate mortgage is the most common type of mortgage loan programs, where monthly principal and interest payments never change during the life of the loan. About 75% of all home loans applicants or refinancers seek fixed rate mortgages annually. Fixed rate mortgages are usually in 10, 15, to 30 year terms and can be paid off at any time without penalty. Fixed Rate mortgages are structured, or "amortized" so that it will be completely paid off by the end of the loan term. There are also "bi-weekly" mortgages, which can shorten the loan term because half the monthly payment is made every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Although you have a fixed rate mortgage, your monthly payment may vary if you have an "impound/escrow account". In addition to the monthly loan payment, some lenders collect additional money each month (from borrowers with less than 20% cash down when they purchased their home for the prorated monthly cost of property taxes and homeowners insurance. The extra money is put in an impound/escrow account by the lender who uses it to pay the borrowers' property taxes and homeowners insurance premium when they are due. If either the property tax or the insurance happens to change, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.

Advantages of Fixed Rate Mortgages 1) - The homeowner knows the interest rate and monthly payment of their mortgage.
2) - The homeowner knows when their loan will be paid in full since the term (time span) of their mortgage is fixed.
3) - It is easier to manage your money when you have a fixed rate mortgage.
4) - If a home applicant get a fixed or ARM rate mortgage when rates are high, they can refinance the mortgage when rates becomes low, although some closing costs may have to be included.
5) - However, most of the closing costs can be included in the loan and may be tax deductible for you.
6) - The interest rate of a fixed rate mortgage usually start a little higher than an adjustable rate mortgage, which has a potential for the rate to increase.

Know Your Adjustable Rate Mortgages

Adjustable Rate Mortgages (ARM) A mortgage loan in which the interest rate changes after a fixed period of time from loan initiation is called an adjustable rate mortgage or ARM. ARM are consider riskier mortgages because a rate change may negatively impact the homeowner that walks away due to inability to handle the new payment.

The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford a better home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years.

All ARM loans have a "margin" plus an "index." Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).

When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year. However, there are factors limiting how much the rates can adjust. These factors are called "caps". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%. Some ARM loans have a conversion feature that would allow the borrower to convert the loan from an adjustable rate to a slightly higher fixed rate than the market rate with a minimal charge to convert by refinancing.

Components of an Adjustable Rate Mortgages

To understand an ARM, you must have a working knowledge of its components. Those components are:

Index: A financial indicator that rises and falls, based primarily on economic (market) fluctuations. Index is usually an indicator and is therefore the basis of all future interest adjustments on the loan. Mortgage lenders currently use a variety of indexes.

Margin: A lender's loan cost plus profit. The margin is added to the index to determine the interest rate because the index is the cost of funds and the margin in the lender's cost of doing business plus profit.

Initial Interest: The rate during the initial period of the loan, which is sometimes lower than the note rate. This initial interest may be a teaser rate, an unusually low rate to entice buyers and allow them to more readily qualify for the loan.

Note Rate: The actual interest rate charged for a particular loan program.

Adjustment Period: The interval at which the interest is scheduled to change during the life of the loan (e.g. annually).

Interest Rate Caps: Limit placed on the up-and-down movement of the interest rate, specified per period adjustment and lifetime adjustment (e.g. a cap of 2 and 6 means 2% interest increase maximum per adjustment with a 6% interest increase maximum over the life of the loan).

Negative Amortization: Occurs when a payment is insufficient to cover the interest on a loan. The shortfall amount is added back onto the principal balance.

Convertibility: The option to change from an ARM to a fixed-rate loan. A conversion fee may be charged.

Carryover: Interest rate increases in excess of the amount allowed by the caps that can be applied at later interest rate adjustments (a component that most newer ARMs are deleting).

Advantages of Adjustable Rate Mortgages 1) - The beginning rate of an ARM mortgage is usually lower than those associated with fixed rate mortgages.
2) - It is easier to afford when interest rates are high.
3) - It is a very good loan for people (e.g. doctors, lawyers, etc) expecting improvement in their income

Know Your Commonly Used ARM Indexes

Commonly Used Indexes for ARMs

6-Month CD Rate

This index is the weekly average of secondary market interest rates on 6-month negotiable Certificates of Deposit. The interest rate on 6 month CD indexed ARM loans are usually adjusted every 6 months. Index changes on a weekly basis and can be volatile.

1-year T-Bill

This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 1 year. This index is used on the majority of ARM loans. With the traditional one year adjustable rate mortgage loan, the interest rate is subject to change once each year. There are additional ARM loan programs available (Hybrid ARMs) for those that would like to take advantage of a low interest rate but would like a longer introductory period. The 3/1, 5/1, 7/1 and 10/1 ARM loans offer a fixed interest rate for a specified time (3,5,7,10 years) before they begin yearly adjustments. These programs will typically not have introductory rates as low as the one year ARM loan, however their rates are lower than the 30-year fixed mortgage. This index changes on a weekly basis and can be volatile.

3-year T-Note

This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 3 years. This index is used on 3/3 ARM loans. The interest rate is adjusted every 3 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. The index changes on a weekly basis and can be volatile.

5-year T-Note

This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 5 years. This index is used on 5/5 ARM loans. The interest rate is adjusted every 5 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. This index changes on a weekly basis and can be volatile.

Prime

The prime rate is the rate that banks charge their most credit-worthy customers for loans. The Prime Rate, as reported by the Federal Reserve, is the prime rate charged by the majority of large banks. When applying for a home equity loan, be sure to ask if the lender will be using its own prime rate, or the prime rate published by the Federal Reserve or the Wall Street Journal. This index usually changes in response to changes that the Federal Reserve makes to the Federal Funds and Discount Rates. Depending on economic conditions, this index can be volatile or not move for months at a time.

12 Moving Average of 1-year T-Bill

Twelve month moving average of the average monthly yield on U.S. Treasury securities (adjusted to a constant maturity of one year.). This index is sometimes used for ARM loans in lieu of the 1 year TCM rate. Since this index is a 12 month moving average, it is less volatile than the 1 year TCM rate. This index changes on a monthly basis and is not very volatile.

Cost of Funds Index (COFI) - National

This Index is the monthly median cost of funds: interest (dividends) paid or accrued on deposits, FHLB (Federal Home Loan Bank) advances and on other borrowed money during a month as a percent of balances of deposits and borrowings at month end. The interest rate on Cost of Funds (COFI) indexed ARM loans is usually adjusted every 6 months. Index changes on a monthly basis and it not very volatile.

Cost of Funds Index (COFI) - 11th District

This index is the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada. Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good for you if rates are falling.

LIBOR

L.I.B.O.R stands for the London Interbank Offered Rate, the interest rates that banks charge each other for overseas deposits of U.S. dollars. These rates are available in 1,3,6 and 12 month terms. The index used and the source of the index will vary by lender. Common sources used are the Wall Street Journal and Fannie Mae. The interest rate on many LIBOR indexed ARM loans is adjusted every 6 months. This index changes on a daily/weekly basis and can be extremely volatile.

National Average Contract Mortgage Rate (NACR)

This index is the national average contract mortgage rate for the purchase of previously occupied homes by combined lenders. This index changes on a monthly basis and it not very volatile.

Know Your Interest Only Mortgages

Interest Only Mortgages

A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.

You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.

Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.

As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income would have jumped accordingly to support the higher payments or you have refinanced your loan by that time.

Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.

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