5 Mortgage Misconceptions Set Straight

Looking for a home loan? Get your facts straight so you can proceed with confidence.

Getting a mortgage can be a breeze or a slog, depending on what you know about the process. To get organized and set your expectations properly, let’s debunk some common mortgage myths.

1. Lenders use your best credit scores

If you’re applying for a mortgage jointly with a co-borrower, logic suggests that your lender would use the highest credit score between both of you.

However, lenders take the middle of three credit scores (from Equifax, TransUnion and Experian) for each borrower, and then use the lowest score between both borrowers’ “middle scores.”

So, if you had a middle score of 780, and your co-borrower had a middle score of 660, most lenders would qualify and approve you using the 660 credit score.

Rates are tied to credit scores, so in this example, your rate would be based on the 660 credit score, which would push your rate up significantly — or potentially even make you ineligible for the loan.

There are exceptions to this lowest-case-credit-score rule. Most notably, if you have the higher credit score and are also the higher earner, some lenders will allow your higher credit score on the file — but this is mostly for jumbo loans above $417,000.

Ask your lender about exceptions if you have credit score disparity between co-borrowers, but know that these exceptions are rare.

2. The rate you’re quoted is the rate you’ll get

Unless you’re locking in a rate at the moment it’s quoted, that rate quote can change. Rates are tied to daily trading of mortgage bonds, so most lenders’ rates change throughout each day.

Refinancers can often lock a rate when it’s quoted — as long as you’ve given your lender enough information and documentation to determine if you qualify for the quoted rate.

You typically receive a quote when you’re beginning your pre-approval process, but a rate lock runs with a borrower and a property. So until you’ve found a home to buy, you can’t lock your rate. And while you’re home shopping, rates will be changing daily, so you’ll need updated quotes from your lender throughout your home shopping process.

Rate quotes also come with an annual percentage rate (APR), which is a federally required disclosure that shows what your rate would be if all loan fees are incorporated into the rate.

This can make you think that APR is the rate you’ll get, but your loan payment will always be based on your locked rate, and the APR is just a disclosure to help you understand fees.

3. Fixed-rate mortgages are always better than adjustable-rate mortgages

After the 2008 financial crisis, many borrowers started preferring 30-year fixed loans. For good reason too: The rate and payment on a 30-year fixed loan can never change. But the longer the rate is fixed for, the higher the rate.

So before settling on a 30-year fixed, ask yourself this question: How long am I going to own this home (or keep the loan) for?

Suppose the answer is five years. If you got a five-year adjustable rate mortgage (ARM) instead of a 30-year fixed, your rate would be about .875 percent lower. On a $200,000 loan, you’d save $146 per month in interest by taking the five-year ARM. On a $600,000 loan, the monthly interest cost savings is $438.

To optimize your home financing, peg the loan term as closely as you can to your expected time horizon in the home.

4. Real estate agents don’t care which lender you use

A federal law enacted in 1974 called the Real Estate Settlement Procedures Act (RESPA) prohibits lenders and real estate agents from paying each other fees to refer customers to each other. So as a mortgage shopper, you’re always free to use any lender you choose.

But real estate agents who would represent you as a buyer do care which lender you use. They’ll often suggest that you use a local lender who’s experienced with your area’s nuances, such as local taxation rules, settlement procedures and appraisal methodologies.

These areas are all part of the loan process and can delay or kill deals if a nonlocal lender isn’t experienced enough to handle them.

Likewise, real estate agents representing sellers on homes you’re interested in will often prioritize purchase offers based on the quality of loan approvals. Local lenders who are known and respected by listing agents give your purchase offers more credibility.

5. Mortgage insurance is always required if you put less than 20 percent down

Mortgage insurance is a lender-risk premium placed on many home loans when you’re putting less than 20 percent down. In short, it means your total monthly housing cost is higher. But you can buy a home with less than 20 percent down and avoid mortgage insurance.

The most common way to do this is with a combination first and second mortgage — often called a piggyback — where the first mortgage is capped at 80 percent of the home’s value, and the second mortgage is for the balance of what you want to finance.

Related:

Originally published January 12, 2016.

Source: zillow.com

Piggyback Loan Is Another Home Financing Option

Shopping around for a home loan? Then you’re probably trying to figure out how to strike the best balance between your down payment and monthly mortgage expenses. Understanding just how much house you can afford is tricky, which is why it helps to know all of your options in advance.

Piggyback loans are just one more financing option you have at your fingertips for purchasing the home of your dreams — even without that 20% down payment. These loans involve taking out two rather than one mortgage, but can save you thousands of dollars on private mortgage insurance for borrowers who can’t afford a large down payment. Ready to learn more about piggyback home loans and if borrowing one is the right choice for you? Keep reading.

What Is a Piggyback Loan?

A piggyback loan, true to its name, is a set of two loans — with one piggybacking off the other. These loans are also sometimes referred to 80/10/10 loans, where the first loan is equal to 80% of your home’s purchase price, and the second loan is equal to 10% of the purchase price. This type of financing structure assumes you have at least 10% of the home’s purchase price to put toward a down payment.

Since many lenders require private mortgage insurance (PMI) on mortgages with less than a 20% down payment, this financing structure can help bridge that gap (for borrowers who don’t have the full 20% saved up) and ensure that you avoid paying extra PMI fees— which definitely don’t come cheap.

Let’s crunch some numbers as an example. Say you want to buy a home for $300k. Using a piggyback loan, your financing plan would look something like this:

1st loan (80%) $240k
2nd loan (10%) $30k
Down payment (10%) $30k

As you can see, using this financing structure will save you roughly half the sum of your down payment, allowing you to focus on saving up $30k rather than a whopping $60k in order to buy your home.

Benefits of piggyback loan

The biggest benefit of a piggyback loan is the savings you get from not having to take out a PMI policy. These insurance policies, which are required by most banks for borrowers putting less than 20% down on their homes, typically cost anywhere from 0.5% to 1% of your total loan amount per year. Some experts claim this number can even go up to 1.86% per year. This might sound insignificant, but let’s crunch some numbers to really see what it might actually cost you.

Using the same example as before, let’s say you were to take out a conventional loan for a house with a $300k listing price, and put 10% as a down payment. This would put your loan amount at roughly $270k. Here’s what various PMI payments might look like on a loan this size.

PMI rate (as % of your loan) Annual payment due Monthly payment due
0.5% $13,500 $1,125
1% $27,000 $2,250
1.86% $50,220 $4,185

As the numbers will show, PMI is clearly nothing to scoff at. In fact, PMI is so expensive that it could easily cost you a monthly mortgage payment many times over— in addition to actually having to pay your mortgage each month as well.

Things To Keep in Mind

Now that you know a bit more about piggyback loans, and all the savings they can provide, let’s talk about some of the downsides. After all, if piggyback mortgages are so convenient, why don’t more people get them?

The biggest downside of piggyback loans (and the reason more people don’t have them) is because they’re actually pretty hard to get. Think about it: Instead of going through the loan approval process once, you have to go through it twice. You’ll also be borrowing two separate loans at once, which is seen as a higher risk to many lenders.

These loans require higher credit scores, and you might even need to apply through a special lender who is accustomed to dealing with these types of financing packages. There’s also repayment to consider. Although refinancing a mortgage is typically seen as a relatively simple move for borrowers interested in securing lower interest rates— refinancing will be a lot harder when you have two loans instead of one. You’ll also be responsible for paying the closing costs on two separate loans (typically 2% to 5% of the loan amount) as well as any loan origination fees the lender may charge.

How To Apply

According to the credit experts at Experian, you’ll need a “very good to exceptional” credit score in order to qualify for a piggyback loan. Meaning, your score will need to be at least 700, although you’re more likely to qualify with a score of 740 or higher.

You should also plan on having enough saved up for as much of a down payment as you can afford, plus some extra funds for closing costs and other fees associated with buying your home. Finally, you’ll want to make sure your debt-to-income ratio is within a reasonable range before approaching lenders. While all of these things are pretty standard for anyone on the market to buy a home, the requirements are even more strict when applying for a piggyback loan— making it that much more important to have your financial ducks in a row.

Final Word

Piggyback loans might not be the most straight-forward financing package out there, but for the right home buyer— they can make all the difference in the world. Sit down and take a good hard look at your finances to decide if borrowing a piggyback loan might be able to help you reach your financial goals. And if the answer is no, don’t worry— there are a lot of other options that can help you afford your dream home.

Contributor Larissa Runkle specializes in finance, real estate and lifestyle topics.

Source: thepennyhoarder.com

Happy Holidays: Your Gift is Record Low Mortgage Rates

Last updated on March 9th, 2018

You guessed it. Just in time for the holidays, mortgage rates fell to yet a new record low. What a nice gift to give existing and prospective homeowners.

Average interest rates on the popular 30-year fixed-rate mortgage slipped to 3.91% during the week ending December 22, down from 3.94% a week earlier, per Freddie Mac data released today.

The loan program had hit a record low a week earlier as well, though it hasn’t displayed much movement for about six months. It has basically hovered around its current level for months now.

In fact, you’d have to go all the way back to July to see any significant movement. Back then it averaged a still absurdly low 4.55%.

However, rates are now nearly a point below the 4.81% average seen a year ago, meaning all those who refinanced recently may have to take another look at their mortgage.

Obviously, this is good news for the mortgage industry, as loan origination volume should receive yet another boost. But it’s a pain for borrowers who have to continually go through the process of refinancing. Or determine when that “right time” is.

Of course, the reward for all that hard work is lower and lower mortgage payments, and greater affordability for those who choose to own homes.

Meanwhile, interest rates on the 15-year fixed held firm at their current record low of 3.21% and are about a point below year-ago levels when they averaged 4.15%.

[30-year fixed vs. 15-year fixed]

Interest rates on adjustable-rate mortgages didn’t display much movement week to week. The 5/1 ARM dipped to 2.85% from 2.86%, and the one-year ARM slipped to 2.77% from 2.81%.

Both are significantly lower than they were a year ago, at 3.75% and 3.40%, respectively.

Mortgage Rates Tend to Be Low When the Economy Is in Bad Shape

So we know mortgage rates keep dipping lower, and while it’s good news for those who own homes, and those who aspire to own homes, it’s not good news for the economy as a whole.

When interest rates are low, it’s a signal that not all is well in the economy. Of course, you don’t need to know where interest rates are at to recognize that these days.

It’s pretty clear that the economy is in the dumps, and it’d be hard to imagine things turning around very quickly.

In other words, even though mortgage financing is historically cheaper than it has ever been, it’s not necessarily the greatest time to buy a home.

The forecasts are still grim, and home prices may continue to fall for the foreseeable future.

[How do interest rates affect home prices?]

There’s plenty of uncertainty in the air, and so it’s difficult to determine if buying now is a bargain or if you’ll simply be catching a falling knife.

Again, if you buy and hold for the long run, it doesn’t seem like a terrible time to buy real estate.

After all, there are many millions of existing homeowners who are in worse (home equity) positions than you will be, so you’ll have a pretty good head start. And a super low interest rate to boot!

The big question is how long it’ll take for things to turn around? Something to ponder…

Happy Holidays!

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Competing Against Multiple Offers on a House

For every piece of property on the real estate market, there could be anywhere from zero to infinite buyers who are hoping to call it home. OK, “infinite” is a stretch, but multiple-offer scenarios can be common when the race is on to purchase a new home.

Which house hunter comes out with keys in hand, however, depends on many circumstances.

Whether it’s a hot seller’s market or a slowly simmering buyer’s market, knowing how to handle a multiple-offer situation can help homebuyers beat out the competition.

Multiple Offers in a Seller’s Market

A seller’s market means the demand for houses is greater than the supply for sale, causing home prices to increase and often giving sellers a serious advantage.

It can get pretty competitive for those who need to buy a house, and multiple offers on a house become the new norm.

Seller’s markets and their state of multiple offers can happen for a few reasons:

•   More houses typically go up for sale during peak homebuying season in the summer, so seller’s markets are more common in the winter when inventory is low.
•   Cities that see steady population growth and increased job opportunities often experience a higher demand for housing, leading to multiple interested buyers making offers on limited inventory.
•   A decrease in interest rates could mean more people are able to qualify for mortgages, causing an uptick in homebuyers that might work to the seller’s advantage. More interested parties can mean more negotiation power.

Multiple Offers in a Buyer’s Market

In a buyer’s market, there’s a greater number of houses than buyers demanding them. In this case, homebuyers can be more selective about their terms, and sellers might have to compete with one another to be the most sought-after house on the block.

In a buyer’s market, house hunters typically have more negotiating power. The number of offers on the table is usually lower than in a seller’s market, and the winning bid is often lower than the listing price.

Are Buyers’ Agents Aware of Other Offers?

Unless house hunters are buying a house without an agent, there are certain cases where the buyer’s agent could be tipped off to other offers on the house.

A lot of it depends on the strategy of the sellers’ agent and whether it’s designed to stir up a bidding war with obscurity or transparency. Either way, the sellers and their agent could choose to:

•   Not disclose whether or not other buyers have made offers on the property.
•   Disclose the fact that there are other offers, but give no further transparency about how many or how much they’re offering.
•   Disclose the number of competing offers and their exact terms and/or amounts.

It’s up to the sellers and their agent to decide which strategy works best for their situation and, according to the National Association of Realtors® 2020 Code of Ethics & Standards of Practice, only with seller approval can an agent disclose the existence of other offers to potential buyers.

How Do Multiple Offers Affect a Home Appraisal?

After all that energy is expended trying to beat out other buyers, what happens in the event of an all-out bidding war? Some buyers may be tempted to keep increasing their offer to one-up the competition. Unfortunately, this could lead to drastically overpaying for the house.

In these cases, buyers can add an appraisal contingency to their offer, asserting that the appraised value of the property must meet or exceed the price they agreed to pay for it or they can walk away from the deal without losing their deposit.

But what about in competitive seller’s markets when making contingencies could mean losing the deal? In those cases, buyers might have to put down extra money to bridge the gap between what their lender is willing to give and what they offered.

How Can Buyers Beat Other Offers on a House?

There are a few things homebuyers can do to improve their odds of winning when there are multiple offers on a house, though certain tactics may vary based on the local real estate market or specific circumstances.

A Sizable Earnest Money Deposit

Earnest money is a deposit made to the sellers that serves as the buyers’ good faith gesture to purchase the house, typically while they work on getting their full financing in order.

The amount of the earnest money deposit generally ranges between 1% and 2% of the purchase price, but in hot housing markets, it could go up to 5% to 10% of the home’s sale price.

By offering on the higher end of the spectrum, homebuyers can beat out contenders who offer less attractive earnest money deposits.

Best and Final Offer

Going into a multiple-offer situation and expecting a negotiation can be tricky. It’s typically suggested that buyers go in with their strongest offer, one they can still live with if they lose to a contender—aka they know they gave it their all.

In some cases, sellers deliberately list the home for less than comparable sales in the area in an attempt to stir up a bidding war. By going in with their highest offers, buyers could end up paying what the house is actually worth while still winning the deal.

All-Cash Offer

By offering to pay cash upfront for the property, homebuyers effectively eliminate the need for third party (lender) involvement in the transaction.

This can be appealing to sellers who are looking to streamline the sale.

Waived Contingencies

Whether it’s offering the sellers extra time to move out, waiving the home inspection, or ensuring that their current residence is sold before making an offer, potential homebuyers can gain wiggle room when they start to waive contingencies.

Contingencies are conditions that must be met in order to close on a house. If they’re not met, the buyers can back out of the deal without losing their earnest money deposit.

By waiving certain contingencies, buyers show that they’re willing to take on a level of risk to close the deal. This can be appealing to some sellers.

Signs of Sincerity and Respect

Because many sellers have nostalgia for their home, buyers who show sincerity, respect, and sentiment may score extra points.

By writing a letter that lays out what they love about the home and engaging in positive interactions with the sellers and their agent, buyers can put themselves in a more favorable light that could lead to winning in a multiple-offer situation.

An Offer of Extra Time to Move

In some cases, sellers might appreciate (or even require) a bit of a buffer between the closing date and when they formally move out of the house.

By offering them a few extra days post-closing without asking for compensation, flexible buyers can get ahead of contenders who might have stricter buyer possession policies.

A Mortgage Pre-Approval Letter

Most offers are submitted with a lender-drafted letter that indicates the purchasers are pre-qualified for a loan.

A pre-approval letter can take it a step further by showing that the buyers are able to procure borrowed funds after deep financial, background, and credit history screening.

Pre-approval signifies to some sellers that the buyers can put their money where their mouth is, lessening the possibility of future financing falling through.

Kick-Starting the Homebuying Process

One way for house hunters to get a leg up in the homebuying process is by ensuring that their home loans are secured in advance.

With competitive rates, exclusive discounts, and help when you need it, SoFi mortgage loans make the first part of competing against multiple offers a whole lot easier.

Get a leg up and find your rate in two minutes.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Source: sofi.com

Living Large in a Small Space

Squeezing your life into a tiny apartment, home, or condo can be a challenge, but you don’t have to sacrifice style or live knee-high in a sea of clutter. No matter how small, a space can be enjoyable and feel spacious with just the right touch. Here are some ways five tips on how to maximize your space, making it feel like home:

Downsize

You don’t have to get rid of everything but going through the process of downsizing can ease the clutter by getting rid of things you don’t really need. You probably did this before moving into your new space, but if you’ve had some time to accumulate more stuff, you may need to revisit it.

Brighten the atmosphere

Choose a crisp, light color scheme for things like curtains, sofa, and throw rugs to make the room feel bigger, brighter and comfy. Avoid darker tones that make a space appear uninviting and small.

Lots of natural light in a space can make it seem larger, too. Changing window treatments, if possible, or simply opening blinds and curtains during the day can make any room more pleasant.

Mirror appeal

Take a page out of restaurant strategy and try hanging up a few mirrors. It gives the illusion of feeling like you’re in a much larger and lighter space, and sometimes the illusion is all you need to feel better.

Style with function

With little space, you can’t give over space to something with just one function. A table with storage underneath or a desk that pulls out from the wall gives you effectively more space to work with. If you’re in a one-bedroom apartment, or even a studio, opting for a sofa bed can be a smart choice if you host guests from out of town. This takes away the need for an extra room and bed, while still being practical for everyday use.

Curtain call

Hang your curtains higher (the higher the better) to give the appearance of higher ceilings. You can also let in more light and make windows look wider by extending a curtain rod by four inches or more on either side of the windows. This will not only give the illusion of more square footage, but allows more light to enter too!

Shelve it

Getting clutter off of the floor can make any space seem bigger. If you’re letting items collect, trying various shelving. For a sleek, modern look, try floating shelves — this helps reduce the mess and keeps things simple. Hang them on your walls for a fashionable look that also leaves you plenty of floor real estate.

Curtain call

Getting clutter off the floor can make any space seem bigger. For a sleek, modern look, try floating shelves — this helps reduce the mess and keeps things simple. Hang them on your walls for a fashionable look that also leaves you plenty of floor real estate. If that’s enough, you might need to get more creative.

Be clever about storage

You still need places to stick your stuff, and a little creativity can get you a lot more space. If your bed frame is off the ground, you can put some boxes and other storage containers underneath it – the same goes for any other furniture with space under it. When you run out of that space, look to hooks and racks that go on the back of your doors. These are especially helpful in closets, where you can get shoe hangers to held more than just shoes, or bathrooms, where you can store what doesn’t fit in your drawers or cabinets. Still not enough space? Some cleverly placed peg boards can convert wall space to storage space, as well as keeping commonly used things in easy reach.

With these tips, take a look around your space and see how you can update! Have more tips to share based on your personal experience? Share in the comments below!

Photo by Stephen Crowley on Unsplash

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Source: apartmentguide.com

5 Reasons to Buy a Home This Fall

The days may be getting shorter, but the list of home-shopping benefits is getting longer.

Real estate markets ebb and flow, just like the seasons. The spring market blooms right along with the flowers, but the fall market often dwindles with the leaves — and this slower pace could be good for buyers.

If you’re in the market for a home, here are five reasons why fall can be a great time to buy.

1. Old inventory may mean deals

Sellers tend to put their homes on the market in the spring, often listing their homes too high right out of the gate. This could result in price reductions throughout the spring and summer months.

These sellers have fewer chances to capture buyers after Labor Day. By October, you are likely to find desperate sellers and prices below a home’s market value.

2. Fewer buyers are competing

Families who want to be in a new home by the beginning of the school season are no longer shopping at this point. That translates into less competition and more opportunities for buyers.

You’ll likely notice fewer buyers at open houses, which could signal a great opportunity to make an offer.

3. Sellers want to close by the end of the year

While a home is where an owner lives and makes memories, it is also an investment — one with tax consequences.

A home seller may want to take advantage of a gain or loss during this tax year, so you might find homeowners looking to make deals so they can close before December 31.

Ask why the seller is selling, and look for listings that offer incentives to close before the end of the year.

4. The holidays motivate sellers

As the holidays approach, sellers are eager to close so they can move on to planning their parties and events.

If a home has not sold by November, the seller is likely motivated to be done with the disruptions caused by listing a home for sale.

5. Harsher weather shows more flaws

The dreary fall and winter months tend to reveal flaws, making them a great time to see a home’s true colors.

It’s better to see the home’s flaws before making the offer, instead of being surprised months after you close. In fact, the best time to do a property inspection is in the rain and snow, because any major issues are more likely to be exposed.

Top photo from Shutterstock.

Related:

Originally published October 2015.

Source: zillow.com

In the Market? Here’s What You Should Know About Contingencies

Home contingencies are aspects of home purchase contracts that protect buyers or sellers by establishing conditions that must be met before the purchase can be completed. There are a variety of contingencies that can be included in a contract; some required by third parties, and others potentially created by the buyer. While sellers in the current market prefer to have little to no contingencies, the vast majority of purchase contracts do include them, so here’s a primer to help you navigate any that come your way!

Financing Contingency

The most common type of contingency in a real estate contract is the financing contingency. While the number of homes that sold for cash more than doubled over the last 10 years, the majority of home purchases — 87% of them, in fact— are still financed through mortgage loans.

Why is this important? Because most real estate contracts provide a contingency clause that states the contract is binding only if the buyer is approved for the loan. If a contract is written as cash, in most cases, the financing contingency is removed.

contingenciescontingencies

Why Does The Financing Contingency Exist?

This contingency exists to protect the buyer. If a buyer submits a winning offer, but can’t get approved for a loan to follow through with the purchase, this clause can protect the buyer from potential legal or financial ramifications.

Tip: Homeowners can, and should, request to see a buyer’s prequalification letter before accepting their offer.

Home Sale Contingency

For many repeat homebuyers, they must sell a property in order to afford a new home. Whether they’re relocating for work, moving to a larger home, or moving to a more rural area, 38% of home buyers in a recent survey reported using funds from a previous home to purchase a new one. This is where a home sale contingency comes into play; this clause states that the buyer must first sell their current home before they can proceed with purchasing a new one.

Why Does This Contingency Exist?

This is another contingency that exists to protect the buyer. If their current home sale doesn’t close, this clause can protect the buyer from being forced to purchase the new home. In other words, they can back out of the new home contract without consequence. Keep in mind that in a seller’s market, this type of contingency offer is less desirable to sellers; in fact,  they may rule out your offer completely if this is included.

TIP: In many situations, homeowners can negotiate escape clauses for the home sale which would allow them to solicit other offers and potentially bump the current buyer out of the picture.

Home Inspection Contingency

Not only is it common, it’s also wise to include a home inspection contingency in any offer. Whether it’s a new home or an existing home, there is no such thing as a flawless house. Home inspections can uncover hidden problems, detect deferred maintenance issues that may be costly down the road, or make the home less desirable to purchase completely. A home inspection contingency essentially states that the purchase of a home is dependent on the results from the home inspection.

contingenciescontingencies

Why Does This Contingency Exist?

Whether it’s a roof in need of replacement or an unsafe fireplace, homebuyers need to know the maintenance and safety issues of the properties they’re interested in purchasing. If a home inspection report reveals significant (or scary!) findings, this protects the buyer from the financial burden that repairs would require. This is why agents will tell you it’s never a good idea for a home to be purchased without a home inspection contingency.

TIP: The findings from the report can usually be used to negotiate repairs or financial concessions from the seller.

Sight-Unseen Contingency

Especially during sellers markets, it’s not uncommon for a home to have dozens of showings within the first couple of days of listing. This breakneck pace can create a scenario in which homebuyers may not be able to coordinate their schedules to get a timely showing appointment. To help prevent missing out on the chance to buy a home, buyers in this situation will sometimes make offers on the home, sight unseen.

contingenciescontingencies

There’s no sugarcoating it…this is a high-risk strategy with ample opportunity for negative consequences. However, if this strategy is used, many real estate agents will add a sight- unseen contingency to their offer. This contingency states that the offer for purchase is dependent on the buyer’s viewing of, and satisfaction with, the property.

Why Does This Contingency Exist?

In a market with shrinking inventory, desperate buyers want a fighting chance at a hot property; in some cases, that can only exist by submitting an offer before they can see it in person.

TIP: Sight unseen offers are also high risk to the seller. If you include this contingency in your offer, try to keep other seller requests to a minimum. 

Why Contingencies Can Be Positive

In a seller’s market, buyers may feel the pressure to remove as many contingencies as possible in order to compete. But, it’s important to remember that contingencies are actually safeguards in place to prevent buyer remorse, expensive future repairs, or financial calamity. It’s always crucial for buyers to hire a seasoned real estate agent who can advocate for their best interests, negotiate and strategize in safe and competitive ways, and advises them of the risks of each decision.

Looking to Buy? Don’t Go it Alone!

The homebuying process is a complex one, but that doesn’t mean you’re left with all the heavy lifting. Find your dream home and a local agent on Homes.com, then visit our “How to Buy” section for all the step-by-step insights for a smooth process.


Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

ETFs vs. Mutual Funds: Why Investors Who Hate Fees Should Love ETFs

While the mutual fund universe is much larger than that for exchange-traded funds, more and more investors are discovering that they can save huge amounts in both fees and taxes and put more money in their pocket by switching to ETFs.

An ETF is a collection of usually hundreds, or sometimes thousands, of stocks or bonds held in a single fund similar to a mutual fund.  But there are also a number of significant differences between the two.

When Comparing Fees ETFs Come Out Clear Winners

Numerous studies show that over the long term, managed mutual funds cannot beat an index fund, such as an ETF.

For example, according to the SPIVA scorecard, 75% of large cap funds “underperformed” the S&P 500 over five years through Dec. 31, 2020.  Almost 70% underperformed over three years, and 60% over one year.  And this is just the tip of the iceberg, with most other managed mutual funds — both domestic and international — underperforming their applicable index.

This is partly explained by the higher fees of managed mutual funds, which cut into the investor’s return. According to Morningstar, the average expense ratio for a managed mutual fund in 2019 was 0.66%. Compare this to a well-diversified portfolio of ETFs, which can be put together with an average blended fee of 0.09%, according to ETF.com. Try getting a fee that low with mutual funds.

What makes the gap in fees even greater are the invisible transaction costs for trading securities inside a mutual fund. Due to the difficulty in calculating these invisible trading costs, the SEC gives mutual fund companies a pass in disclosing them to the consumer.

But University of California finance professor Roger Edelen and his team gave us a pretty good idea when they analyzed 1,800 mutual funds to determine the average invisible trading costs.  According to their research, these costs averaged 1.44%.  Keep in mind this is “in addition” to the average mutual fund expense ratio of 0.66% mentioned above.

An ETF, on the other hand, is cloning an unmanaged index, which generally has very little trading going on, and therefore these hidden trading costs are little to nothing.

Between the expense ratio and the invisible trading costs of a managed mutual fund, the total average expense is easily over 2% for mutual funds, which is over 20 times more than the typical expense of an ETF.

Tax Savings Are Another Win for ETFs

ETFs can also save the consumer money by avoiding taxable capital gains distributions that are declared by the mutual fund even when the investor has not sold any of their mutual fund shares. Mutual funds are required by law to make capital gains distributions to shareholders. They represent the net gains from the sale of the stock or other investments throughout the year that go on inside the fund.

Keep in mind this capital gain distribution is not a share of the fund’s profit, and you can actually have a taxable capital gains distribution in a year that the mutual fund lost money.

ETFs, on the other hand, do not typically trigger this sort of taxable capital gain distribution.  The only time you have a taxable capital gain is when the investor actually sells his or her shares of the ETF for a profit.

They’re More Nimble Then Mutual Funds, Too

An ETF trades in real time, which means you get the price at the time the trade is placed.  This can be a real advantage for an investor who wants to have better control over their price. However, with a mutual fund no matter what time of the day you place the trade you get the price when the market closes.

A Sticking Point to Consider: The Bid and Ask Elements of ETFs

While ETFs have many attractive advantages, a potential problem to look out for has to do with their bid-ask price structure. The “ask” is the price the investor pays for the ETF and the “bid,” which is normally lower than the asking price, is the price the investor can sell the ETF for. 

Highly traded ETFs have a very narrow spread between the bid and ask price, often as little as a single penny. But a thinly traded ETF can have a much larger spread, which under the wrong circumstances could cause the investor to sell the ETF for as much as 4% or 5% less than they paid for it.

Mutual funds on the other hand, set their prices at the close of the market and investors pay the same price to buy and sell, so this risk is eliminated.

Another Point to Ponder: Premium or Discount

ETFs can trade at a premium or discount to its net asset value, or NAV.  Simply stated, this occurs when it trades at what is usually a slightly higher price or a slightly lower price than the value of the ETF’s underlying holdings.

While most ETFs exhibit very small discounts and premiums, some, especially those that are more thinly traded, can stray further away from the true value of the underlying holdings.  For example, if an investor bought an ETF that was trading at a premium well above its NAV, he or she could be subject to a potential loss if the price of the ETF moved closer to its NAV price and the investor needed to sell.

You never have to deal with this issue on a mutual fund because the shares are always priced at the NAV.

The Bottom Line

In spite of these potential disadvantages, for the cost-conscious investor who plans on holding his investments for a while, ETFs may be one way to reduce their fees, allow for more nimble trading and reduce their taxes compared with their mutual fund cousins.

President, Piershale Financial Group

Mike Piershale, ChFC, is president of Piershale Financial Group in Barrington, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.

Source: kiplinger.com

Understand the Type of Homeowners Insurance You Need

Home is where the heart is. Often, it is also where the heartache is when disaster strikes. Long before something goes wrong, you need to ask “How much homeowners insurance do I need?”

Homeowners insurance protects your home and possessions against a variety of perils including damage or theft, and also natural disasters such as flood, hurricanes, fires and earthquakes.

“Homeowner’s coverage provides financial protection, that’s really what it’s all about,” said Mark Friedlander, director of corporate communications at Insurance Information Institute in New York.

Mortgage companies require a certain amount of coverage, but unlike car insurance, there aren’t any state mandates requiring people to have it.

“If you don’t have a mortgage, you are not obligated to buy homeowners coverage and we think that’s a critical error that people make because unless you have a lot of money set aside, you’re going to have financial hit and you’re not going to be protected,” Friedlander explained.

Even if you do the minimum to satisfy your mortgage company, it often isn’t enough. Friedlander said most people make the mistake of not having enough insurance to adequately protect themselves and their families.

So how much homeowners insurance do you need?

Home Insurance Basics

If you’re doing the smart thing and asking yourself, how much homeowners insurance do I need, it’s best if you understand some of the basics of the policies.

Policies generally cover:

  • Damage to the interior or exterior of your house from a covered disaster. The types of disasters are listed in the policy. Usually if the specific event is not listed, it is probably not covered.
  • Contents of your home if damaged or destroyed in a covered event or if they are stolen.
  • Personal liability for damage or injuries caused by you, a family member, or pet.
  • Housing and other expenses while your home is repaired or rebuilt after a covered event.

Within each policy, there are basically three levels of coverage. This becomes important after a covered event when you begin to repair or rebuild.

  • Actual Cash Value: This covers the house (structure) plus the value of belongings inside with a deduction for depreciation. You will get paid for what the items are currently worth, not necessarily what you paid for them. This is the least expensive coverage.
  • Replacement Cost: This covers the house plus the value of belongings without depreciation. This coverage would allow you to rebuild or repair up to the original value of the home and policy coverage limits.
  • Guaranteed or Extended Replacement Value/Cost: This is the most expensive but most comprehensive of coverages and provides the best financial protection for you. It covers the cost to repair or rebuild even if more than the policy limit, usually with a ceiling of 20 to 25%. In addition to this, many policies have additional coverage you can buy that will cover the cost to comply with current building codes that may not have been around when the house was initially built.

“A lot of times, actual cash value policies are for homes that don’t qualify for replacement cost policies. They are not in as good of shape or have an older roof or something like that,” said Craig Peterson, an agency owner for American Family Insurance in Overland Park, Kansas. He usually recommends no less than replacement cost policies to his clients.

As important as it is to know what types of coverage you have and what situations are covered, it is as important to know what is not covered at all or may be covered with additional restrictions or different deductibles.

Different policies cover different perils for different types of structures like a condo, renter’s policy, etc. The policies have designinations from HO-0 to HO-8.

There are also differences when it comes to paying things like additional living expenses, hotels, meals, etc., if your home is uninhabitable.

For more information about the basics of home insurance polices and what they cover, What Home Insurance Actually Covers (and Where You’re on Your Own) can answer many of your questions.

How Much Homeowners Insurance Do I Need?

So how much home insurance coverage do you need to buy? There are many factors to consider.

Basically, you need to look at what your house would cost to rebuild, the likelihood of certain types of disasters in your area, the value of your possessions and your liability exposure.

“You are preparing for the worst case scenario, not for a minor claim. You need to be prepared for a catastrophic loss,” Friedlander said. “That’s possible whether it’s hurricanes, tornadoes, wildfires. In virtually any part of the country you are living somewhere where you could sustain a catastrophic loss and lose your entire home.”

A village is flooded from a hurricane in this aerial photo.
Getty Images

Rebuilding Cost

After a disaster, you want to make sure you can cover the costs of repairs or rebuilding.

The cost to rebuild your house is not the same as your home’s market value. In most cases, the land your house sits on will still be there after a catastrophe, so you do not need to insure that value.

“What we typically see is a majority of homeowners are underinsured,” Friedlander said. “Unfortunately, many of the homeowners purchase insurance protection to satisfy their mortgage lender but they confuse the real estate value of their home with what it would cost to rebuild it.”

So don’t focus on what you paid for the house, it’s market value, how much you owe on your mortgage or the property tax assessment.

“Most companies use a replacement cost calculator where we plug in the square footage, bedrooms, bathrooms, all the features we can about the house,” Peterson explained. “It gives us a valuation based on the cost to rebuild and we base the coverage on that.”

Consider what type of coverage you want (actual cost, replacement cost, or guaranteed replacement cost) when you are shopping for policies.

Friedlander said actual cash value saves some money on premiums, but warns you will get less in the event of a major loss. Replacement cost coverage is about 10% more in premiums but you will get about 30 to 50% more when you file a claim.

Peterson said it is important to make sure when you’re shopping for insurance that unique things that happen in your area are covered. Depending where you live, you  might need additional coverage for earthquakes, hurricanes, tornadoes, wildfires, sinkholes, etc., that are not generally part of coverage.

Value of Possessions

To know how much coverage you need, you need to know what you own. Placing a value on your possessions is important.

“The important thing is to do a home inventory and kind of assess what your valuables are and determine what the value of everything is so that you’re at the right level of protection.” Friedlander said.

Go room by room and consider taking photos or videos. Make sure to include things like:

  • Kitchenware
  • Furniture
  • Clothing
  • Electronics
  • Expensive valuables
  • Camping and sports equipment

You do not need to include your cars in this property inventory because vehicles are not covered by homeowners policies even if they are parked in the garage.

“Most of the time the personal property coverage is a straight percentage of the dwelling coverage, typically, 70 to 75%,” Peterson said, adding that is usually enough to cover contents.

On most policies, there is often a limit on pricier items like jewelry, art, furs, silver, or electronics. So if a fire destroys your house and you lose $10,000 worth of jewelry, your policy might only cover $1,000 of that.

To make sure all of your items are covered, Peterson recommended a separate personal articles policy to protect those pricey items.

Liability Coverage

The liability section of your homeowners policy covers bodily injury or damage that policyholders or their family members (including pets) cause to others.

If your dog bites your neighbor and sues you for medical care, this part of policy could cover you. If your child throws a ball and it accidentally breaks the neighbor’s window, this part of the policy could cover you. If your friend falls at your house on a chipped floor and sues you, this part of the policy could cover you.

Liability coverage will also pay for the cost of defending yourself in court and any court awards up to the limit of the policy.

“The risk of not having enough liability coverage is that you’re going to be on the hook for anything beyond your coverage,” Peterson warned.

He said dog bites are his most common liability claims and he sees people all the time who do not believe they need it because they think nobody would ever sue them.

“We find that a lot with insurance. People don’t want to pay for things until they have a problem and then they wish they had. People are nice until something happens.”

The Insurance Information Institute recommends at least $300,000 in coverage but many policies only include $100,000. The more assets you have, the more coverage you need.

If you have more in assets than you have liability coverage for in your homeowners policy, you might consider an umbrella policy which extends your coverage to an amount you decide.

To determine how much liability coverage you need, add up the value of your assets, including your home. Make sure to include the following assets when figuring liability:

  • Vehicles
  • Investments
  • Future wages
  • Personal belongings
  • Money in bank accounts
  • Real estate besides primary residence

Peterson said if you have something that could pose a risk to others like a pool or trampoline on your property, you need to be especially aware of the amount of liability coverage you have.

You don’t need to figure out everything alone. A good insurance agent should be able guide you through the process of answering the question of how much homeowners insurance do I need.

“We always recommend meeting with your insurance professional once a year. We call it an insurance checkup,” Friedlander said. “Review all your coverages and make sure you are protected.”

Not having enough coverage can be a big mistake.

“People think that things can never happen to them and then they wish after the fact that they had taken a little more time and maybe gone for some of the coverages that they decided not to take,” Peterson said. “The biggest mistake people make is they try to save money on their policy iInstead of making sure that they’re covered properly.”

Tiffani Sherman is a Florida-based freelance reporter with more than 25 years of experience writing about finance, health, travel and other topics.

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Source: thepennyhoarder.com