Fixed-Rate Vs. Adjustable-Rate Mortgages: Which One is Best?

There are so many decisions to be made when buying a home, and the type of mortgage to take out is one of the more important ones. With all the different mortgage products and variations out there, it can be daunting to choose a specific type of mortgage that will help you finance a home purchase while making it easy for you to comfortably make your mortgage payments every month.

Among all the different factors associated with mortgages that borrowers must decide on is fixed rates versus adjustable rates. While one stays the same through the mortgage term, the other fluctuates. One might sound better than the other at face value, but depending on the market and your current financial situation, one might end up being more convenient and even more affordable for you.

So, which one is better: fixed-rate or adjustable-rate mortgages?

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage comes with an interest rate that remains steady throughout the life of the mortgage. During this time period, it never changes, and as such, the mortgage payment never changes, either.

The only things about the mortgage payment that will change from one month to the next are the portions allocated to the principal and the interest. With each payment made, a little bit of the principal is paid down, which reduces the overall loan amount and therefore the amount of interest charged. However, the total payment stays the same.

Many borrowers like the idea of having steady payments, making them more predictable and easier to budget for. Fixed-rate loans are also ideal when interest rates are expected in increase in the near future. In this case, locking in at today’s interest rate with a fixed-rate mortgage protects the borrower from being vulnerable to higher rates should they increase throughout the life of the loan.

While the interest rate may be fixed, the total interest amount that the borrower pays will depend on the length of the mortgage term.

What is an Adjustable-Rate Mortgage?

Whereas fixed-rate mortgages come with interest rates that do not change over the life of the loan, adjustable-rate mortgage (ARM) interest rates do fluctuate from time to time.

These types of mortgages attract borrowers because their advertised rates are usually lower than those of fixed-rate mortgages. These lower rates are usually offered during an initial introductory period, after which the rate often increases.

When the initial introductory period expires, the rate adjusts at a frequency that has been pre-determined. This fixed-rate period can vary from anywhere between a month to as long as 10 years.

That said, shorter adjustment periods typically come with lower interest rates at the onset. Once this initial term is over, the mortgage resets. At this point, a new interest rate is put in place that’s based on current market conditions. Until the rate is reset again, the interest rate on the mortgage will remain the same.

ARMs are written as ratios that dictate how long the interest rate will remain fixed and how frequently after that the rate will change. For instance, a “5/1” ARM is quite popular, which basically means the interest rate will stay fixed for five years and will be adjusted – along with your payments – every year going forward.

It’s certainly possible for the rate to increase at some point throughout the life of the loan, and even surpass the rates associated with fixed-rate mortgages. Adjustable-rate mortgages are better suited in an environment where the rates are expected to decrease in the near future, helping borrowers save money over the long run.

Which is Better: Fixed-Rate or Adjustable-Rate Mortgages?

The answer to this question depends on the current market and your particular situation and comfort zone. Generally speaking, a fixed-rate mortgage might be better suited for borrowers who like the idea of having predictable payments that will not change over the life of the loan.

They make budgeting much easier, especially when there isn’t a lot of wiggle room with finances. Anyone with a low tolerance for risk might appreciate the predictability of fixed-rate mortgages.

Further, fixed-rate mortgages might make more sense if the rates are expected to increase in the near future. In this case, locking in a today’s rate can protect against any increase in rates that are anticipated. This can help save borrowers tens of thousands of dollars over the life of the loan.

Adjustable-rate mortgages, on the other hand, might be better suited in a market where rates are expected to decrease in the near future or remain steady. In this case, borrowers can take advantage of the lower introductory rate compared to fixed-rate mortgages.

Even if rates might increase in the future, adjustable-rate mortgages might still be a great option for those who don’t plan on staying in their home for very long. A buyer who plans to sell their home before the introductory period expires could be saving quite a bit of money, even if rates rise after that introductory period is over.

The Bottom Line

Both fixed-rate and adjustable-rate mortgages can offer borrowers specific advantages. Depending on factors such as the temperature of the market, a borrower’s tolerance for risk, and a borrower’s plans for selling in the near future, the decision could go either way. Speak with a seasoned mortgage broker to help you determine loan product is better suited for you.

What Standards Does a Property Have to Meet in Order to Secure an FHA Loan?

FHA loans are attractive mortgage options for borrowers who may find it challenging to get approved for a conventional mortgage. The criteria required to secure an FHA loan is usually less stringent than that of a conventional loan, including minimum down payment requirements and credit scores.

But not only does the borrower have to qualify for an FHA loan, so does the property itself. Before lenders agree to extend a home loan to mortgage applicants, the property in question that is being purchased must be eligible for this type of government-backed loan.

Why Do Properties Have to Meet Specific Standards For FHA Loans?

Lenders who issue mortgages have the benefit of being able to repossess the home in case the borrower ever defaults on mortgage payments. That’s because the property itself collateralizes the loan. As such, lenders want to make sure that the home meets certain standards in order to allow them to recoup as much as they possibly can in the event of mortgage default.

Both lenders and buyers are protected as a result of specific standards that homes have to meet in order for an FHA loan to be issued.

In terms of lender protection, the home should be worth what it’s being bought for according to the current market and should be able to be sold within a reasonable amount of time in the event of repossession. In terms of the buyer, the standards that homes have to meet in order to qualify for an FHA loan protect the buyer by ensuring that the property is habitable.

In order to be eligible for an FHA loan, the subject property must be:

  • Safe – There should be no health or safety issues with the home.
  • Secure – The property should offer a minimum amount of security for all occupants.
  • Sound – Ther property should be structurally sound without any major issues that could render it inhabitable.

The lender issuing the FHA loan will send out an appraiser to the home to make sure it meets the criteria needed for loan approval. Any issues with the home will be noted appropriately.

So, what specific standards does a home have to meet in order for the buyer to qualify for an FHA home loan?

Minimum Property Standards For FHA Loans

The following are some of the criteria that properties must meet in order for an FHA loan application to be approved:

Crawl space – The crawl space must be properly vented and void of debris, rodents, insects, and moisture issues. It should also provide enough space for adequate plumbing, ductwork, and electrical work if required. 

Foundation – There must be no signs of water damage or oversized cracks. Further, the foundation must be able to withstand normal weight loads.

Attic – The attic of the home should be well-ventilated. Further, no signs of water damage, fire damage, faulty wiring, or rodent infestation can be present in this space.

Roof – The roof material and structure should be able to keep water out of the home and should be expected to have a lifespan of at least two more years. Further, the roof must not have more than three layers, or else a new roof will be required.

Water supply – There must be a public water supply or well connection to the home that provides safe drinking water. If the water does not meet water quality standards, there must be a water purification system servicing the property.

Sewage system – There must be a public, community, or off-site sewer system connection to the home.

HVAC system – The home must be adequately heated and/or cooled by a functional HVAC system.

Electricals – There must be power to all living units within the property. All wiring should be adequately installed and all electrical switches and outlets should be operational.

Plumbing – There should be a functional plumbing system that provides reasonable water pressure, hot water, functioning toilets, sinks, and showers.

Property access – There must be proper and safe access to the property from the street, which also allows for emergency vehicle access in all weather conditions.

Encroachment – There cannot be any intrusion of the subject property onto another property, and vice versa.

Built-in appliances – These must be fully operational.

Termites – There must not be any termite infestation.

Power lines – Any overhead electric lines cannot be extended directly atop the home or any water feature in the premises, such as a pool.

Flood zone – If the home is located in a designated flood zone, adequate insurance must be readily available. 

Pools – Any swimming pools adhere to local regulations.

Hazards – No hazards should be present in the home, including:

  • Lead-based paint
  • Mold
  • Asbestos
  • Contaminated soil
  • Close proximity to a hazardous waste site
  • Oil and gas wells
  • High-pressure petroleum line
  • Close proximity to high-voltage power lines

Noise pollution – Whether from airplanes crossing above, heavy traffic nearby, or any other source, there must not be excessive noise present.

Does Your Home Qualify?

If the subject property meets the minimum standards in terms of safety, soundness, and security, it should qualify for an FHA loan. If not, the issues in question may be able to be rectified before the loan closes. Speak with your real estate agent and let them know that you plan to apply for an FHA loan, and they’ll help to narrow down properties that will be more likely to qualify.

6 Things to Consider Before Buying a Foreclosure

Homebuyers are always looking for a deal on a home purchase. After all, who doesn’t loves to save some money? That’s precisely why some buyers choose to peruse foreclosure listings with the goal of getting a discount on an otherwise solid piece of property.

But while deals can certainly be had with foreclosures, these transactions aren’t necessarily cut and dry. There are some potential pitfalls associated with buying foreclosures that buyers should be aware of before they pursue this type of purchase.

Here are some important things that buyers should consider before buying a foreclosed property.

1. Have a Home Inspection Conducted

Although a home inspection should always be done on homes being purchased, regardless of whether or not they’ve been foreclosed, home inspections become even more much important when it comes to foreclosures.

It’s not uncommon for foreclosures to have some hidden issues with them, sometimes deliberately caused by the vacating homeowners themselves. For a few hundred dollars, a home inspection can give you a much better idea of exactly what you’re pouring your hard-earned money into.

Sellers are typically required to disclose all known issues with the home before selling, but when a home is being sold by the bank, this entity is not going to have the type of insight on the property that the previous owner may have had. That’s why a home inspection is so important.

2. Have the Title Searched

It’s wise to have a preliminary title report pulled on a foreclosure property that you’re interested in purchasing. This report will identify whether or not there are any liens on title that you could be stuck having to deal with. Be sure that no hidden liens or encumbrances are on the property that could become big issues in the near future.

It’s so important to make sure that title is clear and that the home truly is for sale. While not very common, situations like these can and do happen, without a title search and title insurance, you could be putting yourself at risk.

3. Assess the Surrounding Area

Of course, having the house itself thoroughly inspected and assessed is crucial, but so is examining the surrounding neighborhood that it’s located in. Look at how other homeowners care for their properties.

Are they keeping up with maintenance, or does it look as if most of the owners have let their properties go? Are there a lot of abandoned homes on the block? Are the surrounding businesses transient? Are there many businesses that are boarded up or have “For Lease” or “For Sale” signs?

You want to make sure that not only is the house in good shape, but that the neighborhood is healthy too.

4. Find Out How Many Other Properties in the Area Are in Foreclosure

One house in foreclosure on the block is already too many, but a handful is just too much. Too many foreclosures in one neighborhood could point to weakening prices and could be an indication that there’s a serious problem that needs to be addressed.

Even if you’re getting a good deal on a foreclosure, you could be investing in a dud if the surrounding market that the house is located in is trending downward.

5. Examine Price Trends in the Area

As already mentioned, you don’t want to invest in an area that appears to be experiencing some level of depreciation. As such, you’ll want to look at the trend in prices in the neighborhood.

Are they rising, falling, or have they just been sitting at the same level for a while now? Data like this can give you some insight into where the area is headed. It can also give you a better idea of how much you should be spending on a property in the neighborhood.

6. Have All Locks Changed

If you do decide to pursue a foreclosure purchase, make sure that you change all the locks on all doors. Not only could the previous owners still have their own set of keys, so could other people, including contractors, appraisers, and anyone else who may have been given access to the property. To keep you and your family safe, it’s important that all locks are changed before you even move in.

The Bottom Line

If buying a foreclosure is on your radar, be sure to work with a real estate agent who is well-versed in these types of transactions. Having an expert on your side can help ensure that you’re protected in all aspects of the transaction so you can get yourself a great house at a great price.

7 Must-Do’s When House Hunting

House hunting is an exciting time. When you’re finally ready to buy a home, the next logical step would be to scope out different homes on the market in order to find the one that you fall in love with and meets all your needs. But as fun as it can be to hop from one home to another, it’s also a task that you need to make the most of.

When visiting homes on the market, be sure to keep the following in mind.

1. Get Pre-Approved For a Mortgage

How do you know how much you can afford to pay for a home? Are you planning to just arbitrarily visit homes regardless of their price? Not only is this a waste of time it can also set you up for disappointment.

But you can make the most of your time house-hunting by getting pre-approved for a mortgage. While this is not a guarantee that you will definitely get approved, it is a foot in the door.

Your mortgage broker will assess your current finances on a surface level and will pre-approve you for a certain loan amount. From there, you’ll have a better idea of what price range you should focus on when searching for a new home.

2. Hire a Seasoned Real Estate Professional

Once you’ve made a visit to your mortgage broker, the next professional that obviously needs to be recruited is a real estate agent. Hiring a professional with experience in the neighborhoods you’re interested in will give you a leg up in the process.

They’ll make sure you spend your time wisely searching for homes that match your criteria and will help you make sense of potentially complex real estate contracts. Your agent will be sure to include the right contingencies to protect you and will negotiate on your behalf to help get you the best price possible.

3. Don’t Let Minor Repairs Scare You

Most buyers prefer to buy a home that’s in move-in condition, with nothing to do except move their belongings in. But it’s not uncommon for resale homes to have minor little issues here and there that might need some attention.

Don’t let these little issues deter you from potentially landing a great home at a great price. Try to look past things that can be easily rectified, especially if you love the home and the neighborhood it’s in, and the price fits within your budget. Unless you build the home yourself from scratch and it’s brand new, it’s likely that there may be things that might need some tweaking to make the home perfect.

4. Keep a Look-Out For Signs of Major Problems

While little issues might not be such a big deal, more serious problems could cost you a lot more than you’d care to spend. During your showing appointment, be sure to pay attention to any red flags that could be signs of much bigger issues that you may have to deal with, including the following:

  • Musty smells, which could be a sign of water infestation and even mold;
  • Stains on ceilings, floors, and walls, which could also point to water problems;
  • Uneven floors, ‘sticky’ doors and windows, and large cracks in the foundation wall, which could be signs of a faulty foundation;
  • Gnaw marks on trim and other wooden components, which could be a sign of a termite infestation.

Your home inspector will be able to uncover any issues you may not have noticed during your viewings, so be sure to include a home inspection contingency in your real estate agreement.

5. Make a List of Must-Haves

Who wouldn’t love a huge lot, a gorgeous view, 10′ ceilings, granite counters, multiple walk-in closets, and Sub Zero kitchen appliances? While you just might be able to get all of these things, it’s important to be realistic about what your budget can get you. Although there may certainly be things you’d love to have, be sure to differentiate between your “needs” versus your “wants.”

Before you visit your first home, go in armed with a list of absolute must-haves in order for the home to suit your lifestyle. While you may be open to compensating certain traits, others might be ones that you won’t be so open about sacrificing.

6. Scope Out Different Neighborhoods

You might have a good idea of exactly where you’d like to live, but keep an open mind about other communities that you might not have thought about. Your real estate agent may have some neighborhoods in mind for you to check out that they think might be places that would suit your tastes and lifestyle.

The location of the home you buy is even more important than the actual house. The structure itself can be changed, but there’s nothing you can do about the location. Think about important things such as the types of schools in the area, proximity to your place of work, noise pollution, future developments, and businesses in the area before settling on a specific neighborhood and lot.

7. Book Second Showings on Homes That Make the Short List

Don’t put in an offer after only visiting a home once. Even if you believe you’ve found “the one,” it’s still important to check the place out one more time before signing off on an offer. There may be things that you might not have noticed the first time around, and viewing the home a second time around will give you another opportunity to see the place in a different light.

When you do book a second showing, consider going at a different time of day than the first time around. The way a neighborhood seems during the day might be totally different than how the area is at night. Things such as traffic and how neighbors behave could differ at various times of the day.

The Bottom Line

Buying a house is a huge deal and a major expense. The last thing you want is to suffer from the dreaded “buyer’s remorse.” But you don’t have to. With careful planning, sound house-hunting tactics, and a seasoned real estate agent by your side, you can make the most of your house-hunting trips and buy the home of your dreams.

How to Make the Most of Downsizing

Having plenty of space in a home is a luxury. But what might be enough space for some may be too much for others.

While many buyers are trading up in the word of real estate, many others have reached the point where downsizing makes sense. Whether you’re an empty nester or are simply looking for something more affordable and less work to maintain, downsizing may be the right thing for you to do.

But before you start enjoying cheaper utility bills and less space to clean, having a specific plan in place before you start moving your stuff can help ensure the process is a smooth one. Here are some things you should consider to make the most of downsizing.

Figure Out Your Lifestyle Needs

Before you buy a smaller place, consider a few things first. Figure out what type of lifestyle you’re going for that may be different than the one you’re leading now.

How much smaller should you go? What type of amenities do you want to have within close proximity? Would you prefer something with only one level? Are you open to condo living? Are you looking for a community with a certain age demographic?

The answers to these questions will help you figure out not only how much smaller you want to go, but also what factors will also play a role in helping you live the lifestyle you’re looking to lead.

Make a List of All Your Belongings

No matter what type of dwelling you’re moving to, it’s always important to take inventory of all of your belongings before you even call the moving company. Take the time well in advance of the big move to make note of all of your things and decide what you should keep and what you can toss.

This might seem like a pesky, overwhelming task, but it’s an important one that shouldn’t be skipped. Take your time with it, and go room by room so it doesn’t seem as though you’re taking inventory of the whole house at once, which can certainly be daunting.

While you’re taking inventory, be sure to make a distinction between your wants versus your needs. Quite often we assume that something is a necessity when it’s more of a luxury. And when you’re downsizing to a smaller place, having a distinct list of each can help you wean out things that are just taking up space when you actually don’t need or even use them. 

Sell/Donate/Trash Some of Your Things

After you’ve taken inventory of all of your stuff, decide what to do with them. During your list-taking task, consider placing items in specific columns, including things you should keep, donate, or throw out. Whatever you choose to keep, start boxing them up. Everything else should either be given away or tossed in the trash.

Consider having a yard sale to help you whittle down your belongings. Sell things on online classified sites or on garage sale apps. Whatever you don’t sell, consider donating it to the local charity. Anything that isn’t worth donating should be trashed. And the sooner you do this, the better, as it will help to clear the place out and making moving day much more streamlined.

Consider How Your Furniture Will Fit

The way your furniture may fit in your current home doesn’t necessarily mean that it will fit just as well in your new, smaller home. It’s quite possible that you might not have enough space to fit all of the furniture that you might want to keep. When downsizing, be sure to measure your furniture to see if it will fit well with the dimensions of your new home.

You certainly don’t want to be in a position to have made the effort to move your furniture, only to realize that it doesn’t fit in your new space. Measuring your furniture long before moving day will give you an idea of which pieces you’ll be able to take with you and which ones you might have to leave behind.

Choose Double-Duty Furniture

If you’ve decided that new furniture is the way to go after careful measuring, consider choosing pieces that can serve more than one function. For instance, consoles with shelving, coffee tables with storage space underneath, dressers as bedside tables, and shelving units as room dividers are only a handful of examples of pieces that serve more than one purpose.

If the place you’re moving into is particularly short on square footage, pieces like these can make the perfect choice to help you avoid taking up precious space while offering plenty of function.

Make Good Use of Storage Space

Once you’ve made it to your new place, be sure to make smart use of storage. This will help you keep as many of your precious belongings as you can from your old home. The following are great ways to house your things without having to take up so much space in your closets, attic, or shed:

  • Hanging shelves
  • Storage ottomans
  • Built-in shelving units
  • Drawers under beds
  • Garage shelving

Get creative with your storage space to help you neatly tuck your belongings away and avoiding clutter that typically comes with inadequate storage solutions.

The Bottom Line

Downsizing is a rather common phenomenon among people who no longer have use for so much space in their current homes. Rather than spending so much extra time, cleaning and maintaining larger homes and paying more in utility bills and property taxes, homeowners with no more use for extra space choose to downsize. If you fit into this category, consider keeping the above-mentioned tips in mind to help make your downsizing process a success.

8 Questions to Ask Your New Roommate Before Moving in

Let’s face it: even the best of friends can get under each other’s skin when they live together, so cohabiting with a complete stranger and adapting to each other’s habits can be tough. But that’s the challenge of having a roommate.

That said, finding the right roommate and living together in harmony doesn’t have to be impossible. Much like landlords screen for a good tenant, you’ll want to do the same when finding a roommate to share your apartment – and the rent.

To make sure life with a roommate is pleasant, asking a lot of important questions is warranted. Here are some questions you might want to ask.

1. Do You Smoke?

There doesn’t seem to be as many smokers these days compared to yesteryear, but there are still plenty of people who smoke. You’ll certainly want to ask a potential roommate if they smoke or not. And if they do, find out what their habits are, such as whether they like to smoke inside or if they’re in the habit of puffing outdoors.

If you have a real problem with smoking, this could be a dealbreaker. Even if the person smokes outside, they’ll track smoke back in with them on their clothing and breath. Use your discretion when it comes to smokers.

2. Do You Have Pets?

If you love animals and maybe even have a pet of your own, bringing someone on board who also has a pet may not be a big deal. But if you are not a fan of having pets in your home, or may even have an allergy, this could be something that could deter you from choosing a particular individual as a roommate.

3. Do You Like to Enjoy Late Night Parties?

Depending on how you like to spend your evenings, your response to the answer to this question can vary. For instance, if you enjoy having get-togethers that last until the wee hours of the morning, having a roommate that equally enjoys such festivities might make a good match. But if you’re a morning person and prefer to have quiet evenings, then bunking with someone who’s a bit of a party animal could cause some issues.

4. Do You Have a Significant Other?

If your roomie has a boyfriend or girlfriend, odds are that person is going to spend quite a bit of time at your place. While that may be fine, there should probably be some ground rules before you even make your roommate relationship official.

Are you OK with your roommate’s significant other spending a lot of time at your place, and even overnight? Will that person be at your place every day? A couple of days a week? Make sure you speak to your roommate about these potential scenarios before they occur.

5. Have You Had Problems With Making Rent?

Landlords typically like to check into a prospective tenant’s past when it comes to how diligent they were with paying their rent. Well, you should probably do the same.

The whole reason why you chose to get a roommate in the first place was most likely to share the rent. If your new roommate gives you trouble with rent every month, you’ll end up having no choice but to cover the entire rent on your own, which defeats the purpose of having a roommate.

6. How Will Household Chores Be Divided?

You both live in the same place, and you both make a mess. So it’s only fair that you both pitch in to keep the place clean and tidy. It can be incredibly frustrating to be the diligent type when it comes to keeping up with chores when your roommate has a horrible habit of leaving dirty clothes on the floor, filthy dishes piled up on the sink, and bathrooms that can make you queasy.

Talking about chores and general up-keeping of the unit is important, so make sure you have this discussion right from the get-go. And don’t just talk about who does what chores, but also discuss how often you each think they should be done.

7. What is Your Work Schedule?

Having work schedules that jive well with each other can make life easier for both of you. This is especially true if the unit is on the small side or you’ve only got one bathroom to share.

If you both have to get out of the place at the same time every morning, you could be fighting for precious space to get ready, for instance. You don’t want to have to wait forever for your turn in the loo or have to get up much earlier just to get the first crack at it.

8. Do You Have Any Pet Peeves?

It’s not uncommon to annoy each other with petty little things when you’re living in close quarters. But asking what your roommate’s pet peeves are upfront can help you gauge how well you two will work together in the same unit, especially if the place is limited in square footage with little options to escape on your own.

The Bottom Line

Living with a person is a big commitment. And even though rent leases aren’t necessarily forever, it’s still important to pick someone who you’ll get along with, have certain things in common with, and someone who’s responsible enough to take care of the place and make rent on time. And the best way to choose the best person is to ask all the right questions.