7 Ways to Slay Your Fear of the Stock Market

Confident investor
Photo by Viktoriia Hnatiuk / Shutterstock.com

“No way, son. I worked hard for that money. I’m not about to gamble it away in the stock market.”

That was my dad, a child of the Great Depression and someone who, understandably, was reluctant to do anything with his money that didn’t involve either an insured CD or a T-bill backed by Uncle Sam.

Sound familiar? Maybe you know someone like him. Maybe it’s even you.

Humorist Will Rogers famously said, “I am more concerned with the return of my money than the return on my money.” Good logic, especially as one ages and becomes unable to rebuild a nest egg. But for anyone still working, sticking your neck out — even by a little — can make the difference between living large and barely scraping by when those golden years roll around.

Invest $400 a month for 40 years and earn 2% annually, and you’ll end up with around $300,000. Jack that rate of return to 10%, and you’ll have more than $2 million.

Think those extra dollars will make a difference in how, when and where you retire?

Of course, the only possible way to earn 10% on your savings is to take some risk by investing in things that might not work out.

While these types of earnings comparisons may be compelling, they’re probably old news to those unwilling to consider investing in real estate, stocks or other risk assets. So here’s another approach: a list of rules designed to help anyone minimize the fear of doing just about anything.

From investing in stocks to skydiving to asking someone out on a date, fear is not your friend. Here are seven universal principles that will help you keep it to a minimum.

1. Understand what you’re doing

If you’re going to invest in stocks, invest your time before investing a dime. Talk to people you know who have more experience. Learn what makes markets, and stocks, move up and down. Studying history will help you understand and predict the future.

So will understanding the rules of the game. And one rule of this game is that stocks will go down as well as up.

There’s an inverse relationship between knowledge and fear. The more you have of the former, the less you’ll have of the latter.

2. Understand why you’re doing it

With conviction comes courage.

When it comes to investing, you’ll be most effective when you accept that investing in the shares of great American companies has historically been a very smart thing to do, especially over long periods of time. And investing when others are running for the hills has proven smarter still.

You know the stock market is riskier than insured bank accounts, so it follows that if it didn’t return more than insured bank accounts over time, it wouldn’t exist. Thus, I’m convinced a part of my savings belongs in stocks, not despite the risks involved, but because of the risk involved.

The Standard & Poor’s 500 index, a stock market index designed to mirror the returns of 500 big U.S. companies, has averaged an annual return of about 10% since its inception in 1928.

3. Don’t overdo it

If you want to scare yourself to death:

  • Invest money you’ll soon need.
  • Invest more than makes you comfortable.
  • Or put your money in silly, speculative stocks that are more like gambling than investing.

Staring at the ceiling at night? This is why.

When it comes to investing in risk assets, you must never invest money you’ll need within five years, and never invest everything you have. One rule of thumb I’ve been advocating for decades is to subtract your age from 100, then put the difference as a percentage of your money in stocks. So if you’re 20, you can invest up to 80% in stocks. If you’re 80, 20%. If you’re nervous, invest less. It’s just a rule of thumb.

4. Plan for pain

It would be great if your stock portfolio, your house and every other asset you have went up in value each and every month. Unfortunately, that’s not the way it goes. But if you can accept that the potential upside of bull markets outweighs the potential downside of bear markets, it’s easier to stick with the program when times get tough.

I have a significant proportion of my net worth in stocks, so I know how it feels when things go south. But the decades I’ve spent as an investor taught me to expect the bad with the good. When stocks have been rising for long periods of time and become overvalued — and are thus likely to go down (like now) — I don’t adjust my portfolio, I adjust my expectations. Expecting a decline means that, when it comes, I’ll be prepared instead of panicked.

5. Listen to your voice, not everyone else’s

When it comes to investments, romantic relationships and lots of other decisions in life, develop your own voice and listen to it. If you like short people, date them. If you like stocks, buy them. If you want to live in Ecuador, move there.

People trying to steer you in one direction or another often aren’t as smart as you think they are, don’t know you as well as they think they do and may have personal agendas that don’t align with yours.

6. Consider the risk of not taking a risk

For the first few decades I invested in stocks, I mostly stood on the sidelines when times were bad, too afraid to make a move. Finally, however, experience taught me that when times are bad and everyone’s afraid, it isn’t the time to freeze. Instead, it’s the time to act.

When both the real estate and stock market tanked in the recent Great Recession, I invested a chunk of my savings in quality stocks and also bought a rental house.

Those two decisions, while scary at the time, have substantially increased my net worth today.

While there’s always a risk of losing money by investing in stocks, real estate or anything else that fluctuates in value, there’s also a risk in not doing so. As pointed out above, you’re unlikely to retire rich, or even adequately funded, if you earn an average income and are willing only to invest in guaranteed rates of return.

You can’t get a hit from the dugout.

7. Think long term

If you’re trying to invest short term, you might as well head to Vegas, where you can at least drink for free.

When I bought General Electric, JPMorgan, ConocoPhillips and other signature stocks back in 2009, I didn’t expect them to go up right away. But because these are some of the biggest companies on the planet, I knew they wouldn’t go bankrupt and assumed that sometime before I died they’d come back. In fact, had the market continued to tank and these stocks continued to fall, I was fully prepared to buy more.

If you combine quality with patience, it will almost certainly pay off sooner or later. I have no idea whether the market will go up, down or sideways tomorrow. It’s the flip of a coin. But I’d give 90% odds it will be higher 10 or 20 years from now.

The longer your time horizon, the higher the probability you’ll be successful.

About me

I founded Money Talks News in 1991. I’ve earned a CPA and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you like what you read here, sign up for our free newsletter.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Source: moneytalksnews.com

Should You Refinance?

You may not need a map to find your hidden treasure. It could be, literally, right beneath your feet. Sometimes, the best way to get the most out of owning a home is to refinance your mortgage. Refinancing can be a powerful tool that could help you lower monthly payments, pay off your mortgage faster, or save tens of thousands on interest in the long-run.. Many don’t understand how to refinance and others wonder if it’s the right decision. Here are some factors to consider.

Take Advantage of Low Interest Rates

In the past, interest rates were high and the amount of buyers was low. Today, it’s not uncommon to see rates below 3%. Interest rates are one of the biggest factors to consider when it comes to getting a home loan or a refinance.

The Low Interest Rate Advantage

Let’s say you have an interest rate on a 30-year mortgage for $300,000 at 5%*. Your monthly payment would be around $1,610. If some years have gone by and the amount you owe on the home has dropped to $260,000, a refinance could make your monthly financial picture look a lot prettier. Here’s how:

If your lender offers you a rate of 2.9%* on $260,000, your mortgage plummets to $1,082. Because you were paying $1,610 before, you will be saving $528 every month.
For the sake of simplicity, this example doesn’t take into account taxes and insurance, but if you were paying private mortgage insurance (PMI) before you refinanced, the lower principle and higher home value would free you up from that as well, resulting in additional savings.

Refinancing to Save on Your Mortgage as an Investment Strategy

With the help of some basic investment tools, you can save even more when you refinance. If your budget can sustain your current mortgage payment, you could still refinance for the purpose of using the money you save—to make more money. Here’s are some ways to use your refinancing savings as an investment vehicle:

  • Take the money you save and invest in CDs (certificates of deposit). You can save up and then invest or you can start as soon as you hit the minimum and open several at once.
  • Use the money to contribute to a retirement plan. This is one of the most profitable techniques because the money gains interest over a longer period of time. Eventually, you can have a pretty little nest egg waiting for you when retirement rolls around.
  • Invest in the stock market. Whether you go with traditional stocks, ETFs, or indices, a conservative strategy can still provide handsome rewards.
  • Invest in a business. You can put money into a business idea that’s been spinning in the back of your head for a while.
  • Refinancing for Home Improvement

    Home improvement projects that have been lingering for a while are easy to knock out if you have the cash to do it. Whether you want to take your home to the next level for personal reasons or to add to its value, refinancing can help you get your hands on the cash you need.

    If you want to boost your home’s value, you should first check to make sure the uptick in the appraisal is going to be more than the sum of the cost of the refinance and the improvements. It may be best to consult a realtor or do your own comps to figure out how much value you’ll be adding to your home. Here’s how to do it:

    • Find a graph of home values in your area—for your type of home—over the last 10 to 15 years. Print it out. If there’s an upward or downward trend, use a ruler to extrapolate the approximate selling price of your home when you plan to sell it. Alternatively, you can consult a licensed real estate agent. A local agent will be able to give you a good idea of what is in demand in your area.
    • If you plan on adding a bathroom, bedroom, or other space, find a similar graph for homes with that added feature and do the same thing.
    • Compare the expected value of your house when you may sell to what it would be worth without the remodel.

    If the difference is higher than the cost of your refinancing and remodeling, you will be making a profit.

    When to Think Twice About Refinancing

    If you have a low interest rate already, refinancing may not be worth the cost, especially if you recently purchased your home. If you owe close to what you paid for the home and the refinancing interest rate isn’t much lower than what you currently have, it may not be worth it.

    In addition to that, you should compare the monthly savings to the amount of time you plan to spend in the home, weighed against closing costs. If this is your forever home, a refi might be worth it if everything else is right.

    Consult Homie Loans™***

    Refinancing can be a powerful financial tool. If you’re ready to crack open the treasure chest by refinancing your home, Homie Loans is here to help. Homie Loans has quick turnaround on refinances, so you’re not left hanging. If you find a better rate, we can give you $500 back**. Learn more about Homie Loans today.

    *For illustrative purposes only. Rates Vary. Contact Homie Loans for a quote today.
    **Terms and conditions apply. Click here to learn more.
    ***Homie Loans, NMLS# 1016597, UT MB#8533383, AZ MB# 0945972

    Source: homie.com

    Is Now the Time to Pull Cash Out of Your Home and Buy Stocks?

    Last updated on March 24th, 2020

    There’s been lots of chatter around Wall Street that this could be an unprecedented time to buy stocks on the cheap, given the market carnage related to the coronavirus.

    One asset manager, Ricky Sandler of Eminence Capital, has even gone as far as to recommend that you refinance your mortgage and use the proceeds to purchase stocks.

    Is this a good idea, a bad idea, or a reckless idea? Well, that depends.

    The Dow Is Now Sub-20K

    A month ago, the Dow was looking like it was about hit 30,000, which would have been cause for celebration, and the unveiling of new baseball caps with “Dow 30,000” emblazoned on the front.

    Instead, we’re now below 20,000 as of the time of this writing, thanks to another massive drop this morning. Does anyone have those old hats lying around?

    For reference, the Dow first surpassed 20,000 in January 2017, so we’ve basically just erased three years of gains in the matter of a month.

    For the contrarians, this is an exciting development. An opportunity to buy equities at 2017 prices.

    But who knows what the future has in store. Are stocks going to crumble even more in the short-term?

    While some are calling the selloff overdone, we are living in extraordinary times. When was the last time you remember the world effectively shutting down?

    The last time nations across the globe closed their borders? The last time the NBA, NHL, MLB, world soccer, and virtually all movies, concerts, and restaurants came to a halt?

    Simply put, this is a big deal, and the economic ramifications are going to be tremendous. We are in uncharted territory.

    Extreme Fear Is Ruling the Moment

    fear greed index

    Currently, we are living in Extreme Fear, based on the Fear & Greed Index. That’s as bad as it gets for stocks.

    It was previously just a “Fear” rating back on February 27th, before things got even worse.

    CNN defines Extreme Fear as a time when the number of stocks hitting 52-week lows exceeds those hitting highs and is at the lower end of its range.

    Again, for contrarians, this probably sounds pretty appetizing. If everyone is selling, there’s probably an opportunity to buck the trend and buy some quality stocks at a discount.

    But there’s also the fear of catching a falling knife.

    Ultimately, these market movements can take a long time to play out, much longer than we anticipate.

    Just think about the longest bull run in history, which began in early 2009 and abruptly ended with the coronavirus last week.

    No one expected it to go on as long as it did, yet the market kept chugging higher and higher until something unforeseen stopped it in its tracks.

    Market Corrections Don’t Tend to Last Very Long


    Now some good news and an argument to apply for a cash out refinance so you can get in on the action.

    Most stock market corrections, defined as a drop of 10% or more, only last for a short period of time. And the market always goes higher over time.

    So one could argue that it’s virtually a no-brainer to invest when the Dow is at 20k if it was previously close to 30k.

    Per Yardeni Research, there have been 36 corrections in the S&P 500 since 1950, with the worst being a 57% drop during the Great Recession.

    And the average correction time, which is peak to trough, is roughly 196 calendar days. The longest was 929 days in 2000-2002, and the shortest 13 days in 2018.

    The Great Recession correction lasted 517 days, which while long, doesn’t seem too bad given the circumstances.

    The current correction has the S&P down around 30%, and there’s no sign it’s going to turn around at the moment.

    Given the large decline, with more possibly to come, it could take quite a bit of time for stocks to bottom.

    But they will eventually bottom and reverse course, it’s just a matter of when.

    Best Not to Time the Market

    Instead of selling all your stocks in a panic, it’s generally best not to do anything. The old adage about timing the market is true, it’s basically impossible.

    And if you don’t touch anything, you haven’t really lost anything. It’s all a paper loss (or gain) until you actually sell.

    However, you can add to your position(s) when you feel there’s an opportunity.

    It’s just difficult to do so when you don’t have a lot of cash on hand, or if you need to deploy that cash toward your monthly mortgage payment and everyday bills instead.

    That’s where a cash out refinance could come in handy, though the major caveat here is you’d be borrowing against your home.

    So first you need to be able to afford the higher mortgage payment associated with a larger loan balance, and second, you’d have to be comfortable making such a move in the face of Extreme Fear.

    For those thinking a HELOC could work, there are two issues that come to mind.

    First, they are tied to the prime rate, which is adjustable and will likely increase over time as the stock market rises.

    Secondly, in times of crisis, it’s not unheard of for mortgage lenders to freeze credit lines, so if you attempt to open a line and save it for a rainy day, it might get frozen along the way.

    The cash-out argument makes sense though – with mortgage rates close to all-time lows, and stocks currently well off their all-time highs, it could be a recipe for some big gains.

    Just imagine if those magical 0% mortgage rates were actually real!

    But as the chart above shows, it may take some time for things to turn around, especially now with the world facing its most unique crisis in modern history.

    Read more: Two Reasons Not to Refinance Your Mortgage Right Now

    Source: thetruthaboutmortgage.com

    The Federal Reserve Has Swooped In to Save Mortgage Rates

    Last updated on March 24th, 2020

    In light of the ongoing coronavirus outbreak, which were the Federal Reserve’s very own words, the Committee took bold action to lower the target range for the federal funds rate to 0% to 0.25%.

    That’s a full percentage point lower than the 1% to 1.25% it had been previously. And comes on top of the half-point cut executed just over two weeks ago.

    As such, the prime rate has fallen from 4.75% to 3.25%. The prime rate directly affects consumers via things like credit card interest rates and home equity lines of credit (HELOC)s because they’re typically tied to that index.

    For homeowners with HELOCs, their interest rates will adjust down 1.50%, which will provide meaningful monthly payment relief.

    But what about first-lien mortgage rates, which hit record lows a couple weeks ago, then shot back higher once the market was flooded with mortgage-backed securities (MBS).

    Well, the Fed also addressed that issue by effectively starting a new round of quantitative easing, which will probably be known as “QE4.”

    Fed Pledges to Buy Agency MBS to Lower Mortgage Rates (QE4)

    • Fed said coronavirus outbreak has hurt communities and disrupted economic activity in the United States
    • To promote maximum employment and price stability it has lowered federal funds rate to 0% to 0.25% range
    • Also announced it will increase its holdings of Treasury securities by at least $500 billion and holdings of agency mortgage-backed securities by at least $200 billion
    • This will lead to lower mortgage rates for homeowners

    The federal funds rate doesn’t directly affect consumer mortgage rates, you aren’t getting a 0% mortgage rate.

    However, the Fed’s emergency announcement to buy agency MBS does.

    First, here’s what they’re doing to combat a recession and ease global markets:

    “To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion,” the FOMC statement read.

    “The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

    In short, the Fed has come to the rescue of the mortgage market, which didn’t seem like it needed rescuing until excessive mortgage demand worked against consumers.

    Because there was a flood of mortgage applications, and not enough demand from investors of mortgage-backed securities, lenders were basically forced to raise mortgage rates to limit supply.

    But now that the Fed has pledged to purchase at least $200 billion in agency MBS, and reinvest payments into agency MBS, lenders shouldn’t have trouble fetching a higher price for the home loans they sell.

    As such, they’ll be able to decrease mortgage rates and perhaps we’ll see those record lows again.

    How Low Will Mortgage Rates Go with QE4 in Place?

    • 30-year fixed mortgage rates were averaging around 3.75%-4% before the news hit
    • When the Fed launched QE3 in September 2012 it led to record low mortgage rates
    • At that time the 30-year fixed fell from around 3.55% to 3.31%
    • Expect mortgage rates to return to the low 3s and perhaps to new all-time lows over time

    So we know mortgage lenders (and homeowners) are going to see some relief from QE4. The next logical question is how much will mortgage rates actually fall.

    As noted, interest rates were suppressed by an oversupply, but now that a whale of a buyer has pledged to buy hundreds of billions in MBS, we should see interest rates fall again.

    That’s great news for consumers, namely those looking to refinance mortgages or purchase a new home.

    The bad news is mortgage rates jumped more than half a percentage point last week as a result of the oversupply, and thus might not hit those all-time lows again. And even if they do, it could take some time to do so.

    When the Fed launched QE3 back in September 2012, the 30-year fixed averaged roughly 3.55%. During the weeks and months that followed, rates fell about 25 basis points.

    In fact, the prior record low for the 30-year fixed was 3.31%, recorded during the week ended November 21st, 2012.

    We’re in similar territory now, with mortgage rates pretty close to those September 2012 levels.

    So we might see rates move in familiar fashion, from around 3.75% to 3.375% and on down to 3.25% if all goes according to plan.

    Whether they hit 3% or even dip into the high 2s remains to be seen, but given the Fed’s pledge to buy billions in MBS, coupled with the 10-year bond yield below 1%, it’s certainly possible.

    I just wouldn’t expect lenders to go too crazy in lowering rates at the moment, given they still have a ton of demand and lots of applications in their pipelines to process.

    Still, it’s huge news because it means lenders have certainty now to originate ultra-cheap mortgages without fear of being stuck holding the bag.

    But it might take some time for rates to trickle down and reach record lows again. Again, hang tight here, as I mentioned before.

    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 nearly 15 years.

    Source: thetruthaboutmortgage.com

    What Can Go Wrong on Closing Day – and How to Prevent It

    Some surprises are great. An unexpected bonus or a hotel upgrade can make your day. But when it comes to closing on a home, a surprise is almost never a good thing.

    Paperwork tedium will give way to terror if there’s an unexpected delay in financing or error in a title document. But you can avoid closing problems and delays, or at lease minimize them, by understanding what might go wrong and monitoring it well ahead of your closing date.

    What happens at closing is the culmination of more than a month of gathering and preparing documents. For closing to go off without a glitch, your closing officer, your lender or loan officer and your real estate agent have to work together to get everything in order and processed correctly. These folks are professionals and they absolutely should know what they are doing. But they are also human beings working on a lot of files, not just yours.

    If your closing gets pushed back a day, that just means they do it on Tuesday instead of Monday. It really isn’t an emergency in their world. You, however, have a moving truck scheduled and deadline to vacate your current home. Your loan commitment has an expiration date and so does your escrow. All of this means it’s more critical to you than it is to anyone else to get the deal completed on time, so it’s wise for you to stay on top of things.

    With that in mind, here are a few common closing problems as well as ways to prevent them.

    Problem: Errors in documents

    One of the most common closing problems is an error in documents. It could be as simple as a misspelled name or transposed address number or as serious as an incorrect loan amount or missing pages. Either way, it could cause a delay of hours or even days.

    Prevention: Preview everything
    Go ahead and ask to see every piece of paperwork as far in advance as possible. Pay special attention to loan documents. By law, you will get your Loan Estimate and Closing Disclosure forms three days before closing. Look at them carefully and immediately. The sooner you spot a problem the faster you can get it fixed and keep your closing on track. If something seems odd or you just don’t understand it, this is the time to ask questions. Double-check the loan and down payment amounts, interest rates, spellings and all personal information.

    Problem: Mortgage delays and last-minute requests

    When you set a closing date and communicate that with your lender, you probably assume they will let you know in plenty of time if there are problems with meeting that deadline. You would be wrong. Understand that in a hot real estate buying or refinancing market, lenders can be inundated. Without periodic calls from you and your real estate agent, who also has a vested interest in closing the deal on time, your file could easily fall to the bottom of the pile while the loan officer deals with more urgent loans. By the time your loan is at the top of the priority list, it might be too late to get that missing document in time. Lenders sometimes ask for more information at the last minute – copies of a rental agreement, a canceled deposit check, the original hazard insurance payment – that can leave you scrambling and lead to closing delays.

    Prevention: Check in with everyone
    Early on, find out exactly what documents the lender needs to complete your file and write you loan. Between bank statements, tax returns and other documents, there are ample opportunities for items to go missing or be forgotten about until the last minute. Once you know what they need to write your loan, call or email periodically to make sure they have everything. (Your real estate agent may also be doing this so check with them as well.) How often? That depends on how much is missing from your file. But a weekly check-in isn’t out of hand until they confirm your file is complete. If there are problems or several missing documents, check in more often. Always make sure they are aware of your anticipated closing date.

    Several days before closing, check in with your closing agent to make sure they are in communication with your lender and that they have everything they need. If there is something you think they might possibly need but no one has mentioned it, bring it to the closing meeting.

    Problem: Cash flow

    You go to the bank the day before closing and arrange to have your down payment transferred directly to the closing agent. You’re good to go. Unless the transfer falls through due to some bug in the bank’s system and the money either doesn’t get there in time or what comes through is less than the amount you need.

    Prevention: Bring it

    You can avoid this issue entirely by bringing your down payment in the form of a certified or cashier’s check. (You can’t use a personal check, so don’t even try that.) Or, simply arrange the wire or bank transfer of funds so it reaches the closing agent a couple of days early. If you don’t yet know the exact amount needed at closing, have more than enough money transferred. You’ll get a refund later.

    Problem: Title isn’t exactly clear

    Maybe the title company discovers that the seller never paid the contractor for the backyard fence or hasn’t paid property taxes for five years and there is a lien on the property. Or perhaps the home is the subject of a lawsuit between bickering relatives. Interesting as that may be, the bottom line is that you, the buyer, have a problem. You need to insist on a clear, unclouded, problem-free title before closing. Your lender will insist on it, too.

    Prevention: Read the title report

    Shortly after escrow opened, the title company completed a preliminary title report. That often goes directly to your lender, but you can get a copy either from the title company or your lender. Get it as soon as possible and read it carefully. At closing you’ll buy title insurance to protect yourself in case the title company missed anything in its search, but that policy is only effective from the day of closing forward.

    Problem: Something’s amiss at your walk-through

    It’s the day before closing and you’re doing a final walk-through of what is almost your home. The seller has punched a hole in the wall and ripped down the fixtures they were supposed to leave.

    Prevention: Jump on it right now

    Your agent should work with the seller’s agent to solve the problems. First, figure out what’s acceptable, how much it might cost and how to make the seller pay. One way would be to negotiate a credit on your closing fees, meaning the seller pays more at closing. Another would be to have the appropriate amount from the seller’s proceeds placed in escrow until the problems are fixed.

    The point is, don’t wait until closing to bring up any issues. Get them resolved beforehand. If you can’t, you’ll have to postpone the closing while you work it out. In some cases, you may prefer to just accept responsibility for the problems rather than delay closing, but that’s up to you.

    Source: zillow.com

    7 Myths About Buying a Foreclosure Home That’ll Surprise Deal Seekers

    Considering buying a foreclosed home? Any home buyer looking to pay below market value should be paying attention to foreclosure listings. But the process of buying a repossessed home is full of misconceptions—and we’re here to help separate the false stereotypes from the reality.

    These are some common myths that need to be set straight.

    Myth 1: The house must be bought in cash

    That all depends on what stage a foreclosure property is in, says Bill Gassett with Re/Max Executive Realty in Hopkinton, MA. If the home is in pre-foreclosure or “short sale,” the buyer does not need to shell out an all-cash offer.

    “They can procure a mortgage just like any traditional sale,” Gassett says.

    If the bank sells a property at public auction, the mortgage holder usually does require that the home is bought with cash and mortgage contingencies are not allowed in the sale.

    If you don’t have a lot of cash on hand but know you’d like to buy a home in foreclosure, Bobbi Dempsey, author of “Idiot’s Guide to Buying Foreclosures,” suggests drawing from a line of credit obtained using current property.

    When the foreclosure is a bank-owned property, Gassett says the bank is usually actively looking for an end buyer.

    “The purchaser of a bank-owned property is almost always able to procure a mortgage as part of the contract with the bank,” he says.

    Myth 2: Buyers forfeit their right to have a home inspection

    Definitely not true! Buyers have the right to do a home inspection and ask for repairs, but banks or sellers aren’t required to make them, says Rob Jensen, broker and president of Rob Jensen Co., in Las Vegas. But home inspections are actually encouraged since nearly all banks sell their foreclosed homes in as-is condition, and want to avoid liability down the line.

    “It is common for structural, electrical, and plumbing issues that pertain to the safety and integrity of the home to be repaired, but there’s no guarantee,” says Jensen. “Every bank and every deal is different.” However, don’t count on the bank to fix those cosmetic issues.

    Jensen says paint, carpet stains, and other minor blemishes are not likely to be addressed.

    Buyers considering a foreclosure should make sure the sales contract has a contingency clause that requires a passing home inspection. This way, buyers can either choose to accept any issues with the home or back out of the contract.

    With courthouse sales, however, homes are sold as they are, with no inspection.

    Myth 3: Foreclosure homes require huge overhauls

    It’s incorrect to assume that all homes in foreclosure are in shoddy condition. A large percentage of foreclosures are the result of job loss, illness, death, divorce, or even fluctuations in the real estate market, which means many of these homes were well maintained and may need only minor touch-ups.

    “It quite often depends on the attitude of who last owned the property and whether or not they went out of their way to destroy the place,” says Jensen.

    Myth 4: Foreclosures sell at heavy discounts

    A common belief is that a foreclosure home will sell for at least half of its original value. But remember, the bank still wants to make a profit. Buying a foreclosure home can save you green, but the seller will hold out for the maximum price possible.

    Home buyers often make a beeline to foreclosures because they think they can get a home for pennies on the dollar. But, Jensen says, by the time they factor in the time and renovation costs, they may reconsider.

    “Foreclosures can provide opportunity to save, but you usually need time and extra cash to take advantage of it,” he says.

    Myth 5: Foreclosure homes carry hidden costs

    The fear of hidden costs may send would-be buyers running, but it’s not necessarily a worthwhile concern.

    “A lot of the costs involved are typical for any real estate purchase—things like inspections, appraisals, transfer fees, etc.,” says Dempsey.

    Yes, repairs or liens on a foreclosure can prove costly, but a home inspection will reveal any potential problems during escrow (this is where that inspection contingency comes in handy).

    Also, the property deed can be researched on a foreclosed home. And, buying a HUD home or REO (or real estate–owned property) means the Department of Housing and Urban Development is required to clear the title of liens before it resells the home. Lenders will usually clear them, too, but buyers should make sure of that before they purchase.

    “Generally speaking, there are not any more hidden expenses in purchasing a foreclosed home than there would be in a traditional sale,” says Gassett.

    Myth 6: Foreclosures lose value faster than regular homes

    Foreclosed homes actually tend to rise quickly in value. With any home, there’s no guarantee it will deliver increases, but buying a foreclosure sold below market value can provide instant equity. And any extra work done to the home can only increase the value.

    “There are a variety of factors that influence home values, including economic conditions, local market conditions, and the overall condition of the property,” says Andrew Leff, senior vice president and head of strategic alliance programs at Wells Fargo in New York City.

    Myth 7: Buying a foreclosure is risky

    Let’s be honest. Any real estate purchase comes with risk. Gassett says the only scenario where there’s some extreme risk is when buying at auction, since you are buying the property as is. Buyers are not able to conduct a professional home inspection and often not even able to see the inside of the property. Plus, they will be inheriting whatever came with the home.

    “For example, if there is a lien on the property, you could become responsible for it. When buying a home at auction, it is essential to do a title search first,” says Gassett.

    Leff says buyers should be informed before entering into any type of real estate transaction. This means aligning themselves with resources that can help them navigate the purchase and financing process with confidence.

    “A knowledgeable real estate agent and lender can help ensure that a buyer is making an educated decision so that the property and any resulting financing is the right fit for them,” says Leff.

    Source: realtor.com