Adjustable Rate Mortgages – The Basics

Related image

An adjustable rate mortgage (ARM) has an interest rate that fluctuates periodically. This is in contrast to a fixed rate mortgage, which always has the same interest rate.

Every ARM has basic components:

  1. An index
  2. A margin
  3. Adjustment Period
  4. An interest rate cap
  5. An initial interest rate

The Index

Image result for cost of funds indexAn ARM’s interest rate is tied to one of many economic indices, some examples of which are the 1-year constant maturity Treasury security, the Cost of Funds Index, or the London Interbank Offered Rate. Different indices move at different rates so know the characteristics of the index used for your ARM.

The Margin

The interest rate for your ARM will be calculated by adding a margin to the interest rate from the index. The margin is basically the markup charged by the lender that allows them to make a profit off of your loan, such as adding 2% to the index, where the 2% is the margin. The margin of your loan usually does not fluctuate.

The Adjustment Period

The Adjustment Period controls when and how often your interest rate changes. For example, if your ARM has an adjustment period of 1 year, your interest rate will be subject to change at the end of each year and your monthly mortgage payment will be recalculated to reflect this change.

The Interest Rate Cap

Interest rate caps are built into the loan to protect the borrower from drastic interest rate fluctuations. The caps limit how much the interest rate or monthly payment can change at the end of each adjustment period. An ARM can also have a cap for the life of the loan. For example, during the life of a loan, the interest rate can only be increased by 5%.

The Initial Interest Rate

The Initial Interest Rate is the interest rate that you start with at the beginning of your loan period. The length of time your loan stays at this rate is built into the loan. For example, you may stay at the initial interest rate for 1 year, 5 years, or another length of time depending on your specific mortgage. This type of ARM is generally referred to as a Hybrid ARM. The initial interest rate for an adjustable rate mortgage is generally lower than that of a fixed rate mortgage.

Image result for adjustable rate mortgage

Advertisements

Home Buying: Building a Plan of Action

Buying a home will probably rank as one of the biggest personal investments one can make. Being organized and in control will contribute significantly to getting the best home deal possible with the least amount of stress. It’s important to anticipate the steps required to successfully achieve your housing goal and to build a plan of action that gets you there.

Before you can build a plan of action, take the time to lay the groundwork for your decision-making process.

Image result for pre approval

First, ask yourself how much you can afford to pay for a home. If you’re not sure on the price range, find a lender and get pre-approved. Pre-approval will let you know how much you can afford, allowing you to look for homes in your price range. Getting pre-approved also helps you to alleviate some of the anxieties that come with home buying. You know exactly what you qualify for and at what rate, you know how large your monthly mortgage payments will be, and you know how much you will have for a down payment. Once you are pre-approved, you avoid the frustration of finding homes that you think are perfect, but are not in your price range.

Second, ask yourself where you want to live and what the best location for you and/or your family is. Things to consider:

  • convenience for all family members
  • proximity to work, school
  • crime rate of neighborhood
  • local transportation
  • types of homes in neighborhood, for example condos, town homes, co-ops, newly constructed homes etc.

We are here for any of your home-buying questions. Don’t hesitate to call our office at (858)-755-4663 for more information!

Becoming A Homeowner As A Millennial

Minneapolis a Top City for Millennial Homeowner Growth

If you are stuck with student debt you may feel like you have a ball and chain attached to your foot and think you may never be able to afford a home.  A study showed that close to 70% of millennials are waiting to become homeowners due to their student debt.

A student loan is only part of your overall financial profile so it is unlikely that will affect your ability to get a mortgage.

You will want to have a handle on the debt you already have so you can see how much more you can reasonably take on.

The biggest impact on your monthly payments will be how much you put up for a down payment and the interest rate on the mortgage.  There are calculators offered by Zillow, Bankrate, and others to calculate mortgage payments and affordability.

Urban San Diego Condos

progression-place-night

For many, an urban lifestyle is very appealing. In a city like San Diego, you can live  Quick access to the trendiest restaurants and bars, shorter commute to work, and the overwhelming excitement that an urban city has to offer. Here’s what to look for if purchasing a condo is in your future!

Amenities:

A  perk of owning a condo  is that the community often offers amenities that may be out of reach for most people. Look for a condo that offers residents a pool or fitness center to get the most out of your purchase!

Maintenance

While living in a condo, other people handle the maintenance for you. This is great news for anyone who works, travels, or just doesn’t feel like dealing with the work.

Homeowners Association Fees:

HOA fees vary widely depending on location and the quality of your condo. These fees cover the costs of amenities such as a gym, pool, and maintenance, as well as upkeep of the property.

Privacy:

A big benefit of owning a home is the privacy it gives you to do what you please. Some condominiums lack privacy due to the fact that walls, parking, and other common areas are shared with your neighbors. Consider factors such as noise and the number of residents in your building  to ensure peace and quiet around you.

Parking:

Most condo complexes offer residents at least 1 or 2 parking spaces, but it is important to consider your social life. Explore the area surrounding your complex so you can get a good idea if your friends and family will have easy access to on-street or off-street parking.

Commuting:

Living in an urban city can be a huge time saver on your commute to work. If you work downtown, there is the option of walking, or taking public transit. If you work in the suburbs, the odds are high that you will reach your destination quickly due to “reverse commute.”

 

 

 

An Insider’s Guide On Navigating Adjustable Rate Mortgages.

If you know what a Adjustable Rate Mortgage is, you also may be wondering what the advantages and disadvantages are. So let’s explore that issue.

Offering adjustable rates allows lenders to transfer part of the interest rate risk from themselves to the borrower. If you get a fixed rate mortgage and the interest rate then goes up, it costs the lender money. However, if you have an adjustable rate mortgage, as the interest rate goes up, so does your payment, thus compensating the lender. Adjustable rate mortgages are particularly useful when unpredictable interest rates make fixed rate loans hard to get.

Image result for adjustable rate mortgage

One of the main advantages of an adjustable rate mortgage is that the initial interest rate is lower than that of a fixed rate mortgage. A lower rate means lower payments, which may help you qualify for a larger loan. This is an important detail if you expect your future earnings to rise. In this case, the ARM will allow you to qualify for a larger loan amount earlier rather than later.

However, this information should only be used with care. If you use an ARM to qualify for a larger loan amount than a fixed rate would allow you and the interest rate then rises drastically or your income doesn’t rise, you may not be able to afford the larger monthly payments, thus causing you to default on your loan.

A situation in which an adjustable rate mortgage makes sense would be if you are only going to keep the house for a short period of time. If you are only planning to own your house for only a few years, the risk of the interest rate rising goes down. This means that you will get a better rate with an ARM, making it a good choice. However, if you plan on staying in your home for a long period of time, a fixed rate may be a better option.

Image result for adjustable rate mortgage

The lesson here is to have a plan. Know what your goals are in purchasing a home and plan for all eventualities. Do your research when shopping for an ARM and consider the worst-case scenario.

First Time Home Buyer Guide

1531-07_PL2_Front_TheEdge_SheaHomes_EricFiggePhotos

Making the big move of owning your own home rather than renting can be both extremely exciting and extremely daunting. Having your own yard, enough space to actually feel comfortable, being able to decorate however you please, no shared walls, this list goes on. However, many first time home buyers quickly realize that the process is less navigable than they imagined. That is why we have crafted this guide — to help people not just get through the process, but to do so confidently!

A year before moving

Check your credit score:  Get a copy of your credit report. There are a multitude of ways to do this, some of which are even free! Many people find errors in their credit report upon review, and some of these errors can result in higher loan rates. This is something that is easily avoidable and should be taken care of in beginning of the process.

Determine how much you can afford:  The first step to buying a property is determining what you can afford to buy. It’s a good idea to meet with a qualified lender to determine what you can afford. Lenders look for a debt-to-income ratio of 43% or less or your total income. This includes your future mortgage, car loans, student loans, credit cards, etc. If you’re not quite able to afford the type of property you want to buy, you can start to make a plan.  Create a budget to see what you’re spending your money on every month and start to tailor it towards what your future lifestyle as a homeowner will look like.

Make a downpayment plan: There are various types of mortgages. Typically the more money you can put down for your downpayment, the less you pay in loan costs, including insurance, and you’ll have a lower interest rate. However, with an FHA loan (exclusive to first-time homebuyers) you can put down as little as 3.5% in some cases. As you save, you should note that banks prefer it if you season your money before getting a loan. This means that they like to see stable funds in your accounts for 60-90 days or so before applying for your loan. However you can still use financial gifts or bonuses closer to when you buy.

9 months before moving

Prioritize what you want most in your new home: Unfortunately when buying a home, you usually don’t get every single thing you want. That is why it is very important to pick the things you’d most like to get out of your new home. Maybe you want to be close to work. Or maybe you want a large backyard, a luxurious master bedroom, or even a quiet street. If you’re making this decision with someone else, it is recommended that you figure this stuff out beforehand, to get it out of the way and avoid any surprises down the line. Make sure to know which trade-offs you’re most willing to make.

Research neighborhoods and start visiting open houses: There are many websites you can utilize, such as Trulia and Zillow, to find houses for sale and to see what different areas are like.

Also make sure to go and visit open houses. As useful as online tools may be, they are not a substitute for seeing the real thing. You actually have to go to different areas and look at different houses to get a better idea of what you want and what is in your range. If you see some things that you really like, this may help motivate you even more to reduce debt and save for your down payment!

Budget for miscellaneous homebuying expenses: Buying a new home entails paying for more than just the house itself. A home inspection, title search, property survey, and home insurance are a few examples, and they can really add up. So start saving now.

Start a home maintenance account: Get in the habit of setting aside a little bit of money each month for things like maintenance, repairs, and emergencies. Problems happen, so it’s best if you’re ready for them rather than scrambling at the last moment.

awesome-home-interior-design-in-open-plan-layout-over-laminate-light-grain-wooden-flooring-plan-and-sectional-sofa

6 months before moving

Collect your loan paperwork: Banks are very particular when it comes to mortgage loans and they demand a lot of paperwork. Some of the things they’ll want include:

  • W-2 forms – usually for the last two to three years
  • Personal tax returns for the past two to three years
  • Your most recent pay stubs
  • Credit card and all loan statements
  • Your bank statements
  • Every place you’ve lived for the past five to seven years
  • Brokerage account statements for the most recent two to four months
  • Most recent retirement account statements, i.e. 401(k)

If you begin to collect these documents early, it’ll ease the stress when it’s finally time to get your loan. Reminder: check your loan documents and keep remembering to save and budget accordingly.

3 months before moving

Find the Right Agent: Now is the time to sit down with agents you are interested in working with. Your agent will work in your best interest to assist in finding you the right property, negotiating with the seller’s agent, and guide you through the closing process. It is important to keep interviewing Realtors until you find someone you are happy with. This person will be helping you negotiate what could be your biggest financial decision. Chose someone who you not only trust, but is knowledgeable, responsive, and you know will be looking out for you at the closing table. Read agent reviews online and ask for a reference list of their past clients. No one knows an agent better than the people who have worked with them!

At Coastal Premier Properties, we have over one hundred agents and we will match you with an agent that is your perfect fit!

Research Lenders: Your agent can also help you greatly in finding the right lender. Just like agents, talk to a few lenders until you find one you like. You will want to make sure your lender has experience representing people just like you! You can also look for a mortgage broker, who will help you find compare loan rates from multiple lenders, whereas a bank can only offer you their own in-house products.

2 months before moving

Get pre-approved for your loan: If you’ve been following this guide for the past 9 months, then your credit score, paperwork, and down payment should all be on track. You’ve done all your research on lenders and buyers’ agents. Now it’s finally time to start working with them. First of all, you’ll need to get pre-approved for a mortgage.

Make an appointment with your lender or mortgage broker and make sure to bring all of your paperwork. They will run a credit check on you and tell you the amount of the loan you are approved for. Usually people borrow less than the maximum allowed for standard of living purposes. Create a new budget that accounts for your projected mortgage payments, insurance, maintenance, and whatever else you currently have going on in your life.

Start shopping for your new home: When you get pre-approved, the buyer’s agent you’ve been working with will be able to better target homes that meet your goals and that are in your price range. This way you can narrow down your options to what is most realistic.

Get a home inspection: Once the offer is accepted, one of the first things you need to do is have a home inspector go and look at the property. The home inspector ensures that everything is good with the home and that nothing requires repair, which is something that can delay closing.

In the last month

Check to make sure that all of your financial documents are in order and review all lending documents before closing (AGAIN!): You’re almost there! If you’ve been following all of these steps, then the final stretch should be very easy compared to the rest of the process. Make sure your agent helps guide you through the mortgage documents, as that can be one of the most confusing aspects of the process.

Get insurance for your new home: Make sure to get insurance before closing. You must have proof of insurance before closing time.

Do a final walk-through: Do one last walk-through of your soon to be new home, usually a couple days before closing, just to make sure that everything is in the order that you and the seller have agreed upon in the deal.

Get a cashier’s check or bank wire for cash needed at closing: Make sure that you get the exact amount of cash needed for closing. You’ll receive that number a few days before closing. Regular checks are not accepted.

That’s it! You’re finally done, enjoy your new home!

couple-with-new-house

Deadly Homebuying Pitfalls

Buying a home is a huge deal for everyone. Unfortunately, there are many big mistakes and pitfalls that buyers often make. These mistakes complicate the home buying process and can cost you tons of money and time correcting the mistakes.

Many buyers get caught up in the excitement of purchasing a home and let their emotions make decisions, only to find out they missed an important step. This post will explore some of the biggest pitfalls buyers make when looking to purchase a home.

Deadly home buying pitfalls:

1 – Not Getting Proper and Professional Help

It’s important to remember that while you may be able to learn a lot about purchasing a home on the internet, it is impossible to learn everything. Real estate is a constantly evolving market and something you read just last year could now be useless.

There are many aspects of purchasing a house that buyers don’t even know exist. From the buyers and sellers agent, to appraisers,to inspectors, to attorneys and mortgage bankers. Each one of those jobs have professionals that perform those tasks 8 hours a day, every day of the year, and have perfected the profession. Trying to save a few hundred dollars by skipping out on an inspection or attorneys is foolish and almost always returns to haunt you.

2 – Not Getting Pre-Qualified Before Looking at Homes

Most people enjoy looking at new homes, but do not enjoy talking about the money aspect. Obtaining a proper pre-approval will save you tons of stress later in the process.

Getting a proper pre-approval allows you to know exactly how much money you are capable of spending on a house and helps you narrow down the market to what you can afford. Additionally, some buyers are able to use their pre-approval as a negotiating tool to help get the price down.

3 – Thinking Too Short Term And Ignoring The Long Term

When looking to purchase a home people tend to think about the next 4-5 years of their life, instead of the next 8-10, which is where they should be thinking. Yes, 5 years is a long time and a lot can change from job and marital status to children, but selling your home does have a cost. If the market does not appreciate quick enough you can stand to not get your moneys worth from the original purchase.

Obviously there are many circumstances that no body is able to predict, but spending time thinking through just some of the basic scenarios can save you a lot of trouble in the long run.

4 – Not Understanding The Full Costs Involved

There are many costs involved with purchasing a home that many buyers don’t realize. It is not just pay the listing price and it is yours. There is inspection costs, moving costs, closing costs, escrows, and more. Professionals can explain and walk you through all these extra costs, ensuring there are no surprises at the very end.

5 – Not Understanding Fair Market Value

One of the biggest issues when buying a house is buyers not understanding the market price of a home. People get caught up with what their parents think it should cost, or what you can afford in total, or with personal opinions about the price of a home which often is far different than the market value. There is a very organized process to determine the market price of a home that involves reviewing similar comparable homes that sold within the nearby vicinity.

It is important to know what the market value is because a house can be listed over, under, or exactly at market price. Being able to recognize the difference between the listing price and the market price can save you lots of stress and money and help you formulate a concrete offer.