Can you give me some help with understanding financing terms?

Books Sure! Here are some basic financing terms all home buyers should know.

  • Adjustable Rate Mortgage (ARM): Financing with, typically, a lower initial interest rate for a preset time. The rate and payments adjust at predetermined periods according to an agreed-upon index.
  • Contingency: A condition on the sale put into the contract by either the buyer or seller to protect against specific eventualities. Common contingencies are that the buyer obtain financing or sell the current home, or that the seller has a home inspection done or repair certain items. Contingencies can be removed by an addendum to the contract, or they can expire if a time limit is specified in the contract.
  • Fixed-Rate Mortgage: Financing with a stable interest rate for the life of the loan, typically a 15-year or 30-year term.
  • VA: The Department of Veteran Affairs, which guarantees loans, available exclusively to veterans, for approved lenders to limit losses.
  • Earnest Money: A cash deposit buyers make when they sign a contract to buy a house. It makes the contract binding and signifies the intention of the buyer to complete the purchase. At closing, the earnest money becomes part of the down payment. If the buyer defaults without a good reason, as spelled out in the contract, the earnest money becomes payment for damages suffered by sellers and their agents. The deposit is typically several thousand dollars, but usually less than 10% of the purchase price. If the buyer's contract is not accepted by the seller, the money is returned to the buyer.
  • FHA: The Federal Housing Administration, which insures home mortgage loans made by private lenders.
  • PITI: An abbreviation of Principal, Interest, Taxes and Insurance – the typical components of a buyer's monthly payment. Condominium or homeowner association fees are not included.
  • Points (also called Discount Points): Part of the cost of a mortgage loan and a portion of the loan interest paid up front in exchange for a lower interest rate. One point is equal to 1% of the loan. Often, the origination fee is 1% of the loan and is counted as one point.
  • Two-Step Mortgage: A fixed-payment loan with a guaranteed low interest rate for a period shorter than 30 years, typically 3 to 10 years, and a conditional right to refinance at a higher rate for the remainder of the term.

For more answers to questions about real estate terms and procedures, call or e-mail us. We can help you get through the home buying experience with a clear head.

Are FHA loans really assumable these days?

Pennies Assumable loans can be an excellent opportunity for home buyers as they offer buyers a chance to obtain a loan, often at an attractive interest rate without the red tape of credit checks, etc.

Many people have FHA (Federal Housing Administration) loans. that are fully assumable, but they may not know it. Over the years, the FHA has changed its assumption criteria. Here’s a rundown:

  • Loans obtained before December 1, 1986 are freely assumable.
  • Loans obtained between December 1, 1986 and December 14, 1989 are assumable if the buyer qualifies. In addition, the seller remains liable for any loan default unless the lender signs a release.
  • Loans settled after December 15, 1989 are fully assumable if the buyer qualifies and has a satisfactory credit check. The seller is not held liable for any loan default.

When unmarried people buy a home together, what is the best way to hold title?

  • As tenants-in-common, each owner has a stated percentage of interest in a home (50/50, 80/20, etc.). If either owner dies, the percentage of homeownership goes to the estate of the deceased.
  • As joint tenants, both owners own the home in its entirety, without a division of interest. If either owner dies, the other owns the whole home.

Therefore, it depends on each individual situation which ownership plan is better. If an unmarried couple has wedding plans, a joint tenancy would protect each partner’s interest in case of the other partner’s death. On the other hand, if no marriage is in the picture, tenancy-in-common might be the preferred route – accompanied by wills stating to whom the property will go in case of death.

It’s essential that partners-in-purchase iron out all details of such arrangements between themselves before choosing a mode of ownership. It’s also advisable to discuss any agreement with lawyers representing both parties.

What can you tell me about equity-sharing?

2 Guys With Sofa More and more, it’s taking two salaries to buy a home. That’s why equity-sharing is becoming a popular financing tool – usually on a 3-year to 5-year basis. Partners may, of course, be related or unrelated. Typically, an investor puts up the down payment (10% to 20% of the purchase price); the partner pays closing costs and takes up residence. The resident partner makes the mortgage payments, pays for maintenance and gets the tax advantages. Upon sale of the property, both partners share in the equity.

Here are some advantages and disadvantages of equity-sharing for you to consider:

For The Home Buyer.

  • Advantage: Down payment help, tax advantages, an agreed-upon share in the equity.
  • Disadvantage: At the end of the 3-year to 5-year term, the home buyer may have to refinance or sell.

For The Investor.

  • Advantage: A low-risk, potentially high-return investment secured by real estate, with no landlord duties attached.
  • Disadvantage: Tax on gain is due in full the year the home is sold. This typical equity-sharing arrangement can have many variations. To avoid possible problems, a real estate attorney should draw up a contract, even between members of the same family.