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How is a home's value determined?
  A home is worth what someone will pay for it. Everything else is an estimate of value. To determine a property's value, most people turn to either an appraisal or a Competitive market analysis.

An appraisal is a professional estimate of a property's market value, based on recent sales of comparable properties, location, amenities, energy efficiency, and the quality of the home at a given point in time. To make their determination, appraisers consider square footage, construction quality, design, floor plan, neighborhood and availability of transportation, shopping and schools. Appraisers also take lot size, topography, view and landscaping into account. This service varies in cost depending on the price of the home. On average, an appraisal costs about $300 for a $250,000 house.

A comparative market analysis is an informal estimate of market value performed by a real estate agent based on similar sales and property attributes. Most agents offer free analyses in the hopes of winning your business. You can do your own cost comparison by looking up recent sales of comparable properties in public records. These records are available at local recorder or assessor offices, through private real estate information companies or on the Internet.
What is the difference between list price and sales price?
  The list price is a seller's advertised price, a figure that usually is only a rough estimate of what the seller wants to get. Sellers can price high, low or close to what they hope to get. To judge whether the list price is a fair one, be sure to consult comparable sales prices in the area.

The sales price is the amount of money you as a buyer would pay for a property.
What is the difference between market value and appraised value?
  The market value is what price the house will bring at a given point in time. A comparative market analysis is an informal estimate of market value, based on sales of comparable properties, performed by a real estate agent or broker. Either an appraisal or a comparative market analysis is the most accurate way to determine what your home is worth.

The appraisal value is a certified appraiser's estimate of the worth of a property, and is based on comparable sales, the condition of the property and numerous other factors. Lenders require appraisals as part of the loan application process; fees range from $200 to $300.
How much can I afford to spend?
  Many experts believe that you can afford to spend up to three times your gross annual household income. The price you can afford to pay for a home typically depends on these key factors:
  • Your income
  • The amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
  • Your outstanding debts
  • Your credit history
  • The type of mortgage you select
  • Current interest rates
Lenders analyze your income relative to your projected cost of home ownership and outstanding debts to determine the size loan you can afford. For a rough estimate of how much you can afford to spend on a home, try our Affordability Calculator.
How do mortgages work?
  A mortgage is basically a long-term loan that you arrange through a bank or other financial institution, or even through the seller of the property. The house and/or property serve as collateral for the loan.

A home mortgage is most likely the largest debt you will assume. You typically pay off that debt in monthly payments over a long period of time, most often 15 to 30 years.
What are the components of a monthly mortgage payment?
  The components of a monthly mortgage payment include principal, interest, taxes and insurance, otherwise known as PITI. Principal refers to the part of the monthly payment that reduces the remaining balance of the mortgage. Interest is the fee charged to borrow money. Taxes and insurance refer to the amounts that are paid into an escrow account each month for property taxes and mortgage and hazard insurance.

The process of paying the principal takes years because mortgages are based on a repayment plan called amortization. During the years of the mortgage, a homeowner pays a lot of money toward interest in order to have manageable monthly payments on the huge house debt. During the first few years, most of the mortgage payments will be applied toward the interest. During the final years of the loan, the payments will be applied primarily to the remaining principal.
What is Private Mortgage Insurance?
  Private Mortgage Insurance, or PMI, gives the lender protection if the homeowner should default on the loan. The mortgage company charges insurance if the down payment is less than 20 percent of the sale price or appraised value. PMI usually can be eliminated once the principal balance of the mortgage reaches 80 percent of the sale price or appraised value, which is known as the loan-to-value (LTV) ratio.
When is private mortgage insurance required?
  It is typically mandatory if you put less than 20 percent down, to protect the lender against loss if you default. Effective for loans written on or after July 29, 1999, lenders must automatically cancel PMI when the mortgage balance is reduced to 78 percent of the home's original purchase price.
What are closing costs?
  They are expenses - over and above the price of a home - incurred by buyers and sellers in transferring ownership of a property and can be substantial. Closing costs vary in different parts of the country and usually include a mortgage origination fee, an attorney's fee, accrued taxes, an amount placed in escrow, and charges for obtaining title insurance and a land survey.

Lenders generally estimate 3 percent to 6 percent of the loan amount in closing costs. On a $100,000 mortgage that would be $3,000 to $6,000. But since real estate closing practices vary widely from area to area, where you live will determine exactly what you will have to pay. Even if you are not required to escrow money for taxes, you may want to set aside this amount to assure that you will be able to pay those tax bills when they fall due. You can get a good idea of what applies where you are buying by checking with a few real estate agents and lenders or title agents.
What are the types of fixed rate mortgages?
  Most lenders offer several types of mortgages; the most common are the fixed-rate mortgages for 30 years or 15 years.

30-year fixed rate
This mortgage is an industry standard, as total payments are spread over so many years that your monthly payments are lower than they would be on a shorter-term loan. The interest rate, which is set, or locked in, at the time of obtaining the mortgage, remains the same throughout the life of the loan. On a 30-year loan, you end up paying thousands of dollars more in interest compared with a shorter-term obligation, but this interest is 100-percent tax deductible, which reduces your after-tax cost.

15-year fixed rate
This mortgage also is becoming a common loan because borrowers pay a lower interest rate in exchange for larger monthly payments. Note, however, that a smaller portion of your monthly payment goes for interest and therefore the tax deduction is smaller.
What are the types of adjustable rate mortgages?
  With a 15-year mortgage you could get an interest rate that is typically one-quarter to one-half percent lower than a 30-year mortgage. The shorter the term, generally the lower the interest. Yet, the main advantage is the fortune in interest you will be saving during the life of the loan.

Adjustable-rate mortgages, known as ARMs, differ from fixed-rate mortgages in that the interest rate moves up or down. ARMs are tied to a number of indexes, which usually are published interest rates. The margin is the amount a lender adds to the index , usually two percentage points or four percentage points, to set the actual interest rate of the ARM.

The most common index for ARM adjustments is the one-year U.S. Treasury bill. The one-year bill has a yield very near that offered by the 30-year Treasury bond, which is used to set rates on 30-year fixed mortgages.

The initial ARM rate is generally lower than the fixed mortgage rate, though in the current economy the one-year ARM rate has been only slightly lower, about one-quarter to one-third of a percentage point. Check out the latest bankrate.com survey of ARM interest rates.

Some ARMs adjust the interest rate every year, while others have an initial fixed rate period of 3, 5, 7 or even 10 years, after which the rate adjusts on an annual basis. The more short term the index that your ARM is tied to, the more volatile your payments will be. That's good if interest rates fall, but it can cause trouble if interest rates rise.

Most ARMS offer built-in caps to protect against enormous increases in payments:

Lifetime cap - Limits how much the interest rate can rise during the life of the loan.
Periodic rate cap - Limits how much your payments can rise at one time.
Payment cap - Offered in some ARMs, it limits the amount the payment can rise over the life of the loan. So if the underlying index rises, your payment would increase only to the limit of the payment cap.
Keep in mind that rate caps work when the rates rise and when they fall.
How do you choose between fixed and adjustable rate mortgages?
  Risk is involved in selecting an adjustable rate mortgage, or ARM, because rates may go up. In contrast, a fixed-rate loan offers good protection against rising interest rates, but you are locked into the initial rate if interest rates fall.

Choosing between a fixed or adjustable rate mortgage is a matter of personal choice. The former offers stable payments while the latter offers lower initial payments. Consider, too, the length of time you plan to own the home. If you plan to move within three or four years, the ARM is preferable even if rates rise through the whole period.
When is the best time to buy?
  Because many buyers prefer to move in the spring or summer, the market starts to heat up as early as February. Families with children are anxious to buy so they can move during summer vacation, before the new school year begins.

The market slows down in late summer before picking up again briefly in the fall. November and December have traditionally been slow months, although some astute buyers look for bargains during this period.
How long does it take to buy a house?
  Buying a house can take from a few days to a few years. In most cases, the process will take several months of diligent effort.
How long should I look before buying a home?
  You should look until you find the home that is right for you. This could take a week or a year depending on your personal needs and the state of the real estate market. Ideally, you would like to find a home after you have looked long enough to know what you like and what you do not like. You need time to educate yourself about the housing inventory.
How many times should I look at a house before I make an offer?
  You will no doubt want to take a second or third look at a house that interests you. Your agent can arrange this; you should not call the sellers directly for access. But you should drive or walk by the house to get a better feel for the neighborhood. Return several times, at least once during rush hour, to see if the street is busy or congested. Drive a few blocks away from the house to see if the neighborhood holds up to your expectations. A map is a handy house-hunting aid.
How do I figure out what to offer?
  Learn as much about market values as you can. Look at comparable properties. Ask your agent to prepare a comparative market evaluation of the property that will tell you recent selling prices of comparable properties. When market values are rising, there is a bit of guesswork involved in pricing. You may need to be a trendsetter and pay a bit more than recent comparable sales to be the successful bidder. Find out all you can about the property before writing an offer.
What are the standard contingencies of a purchase offer?
  Most purchase offers include two standard contingencies: a financing contingency, which makes the sale dependent on the buyers' ability to obtain a loan commitment from a lender, and an inspection contingency, which allows buyers to have professionals inspect the property to their satisfaction.

As a buyer, you could forfeit your deposit under certain circumstances, such as backing out of the deal for a reason not stipulated in the contract.

The purchase contract must include the seller's responsibilities, such things as passing clear title, maintaining the property in its present condition until closing and making any agreed-upon repairs to the property.
Are there any rules to negotiation?
  There are several cardinal rules to negotiating effectively. One is do your homework, and learn as much about the seller or the buyer as you can. Another is to play your cards close to your vest and not reveal too much information to the other party or their agent. Don't let yourself get rushed into any decision, no matter how tempting it may be. Finally, if you have doubts about your negotiating skill, hire someone to help.

The more you know about a seller's motivation, the stronger a negotiating position you are in. For example, seller who must move quickly due to a job transfer may be amenable to a lower price with a speedy escrow. Other so-called "motivated sellers" include people going through a divorce or who have already purchased another home.

Remember, that the listing price is what the seller would like to receive but is not necessarily what they will settle for. Before making an offer, check the recent sales prices of comparable homes in the neighborhood to see how the seller's asking price stacks up.

Some experts discourage making deliberate low-ball offers. While such an offer can be presented, it can also sour the sale and discourage the seller from negotiating at all.
What is a 'low-ball' offer and is it ever a good idea?
  A low-ball offer is a term used to describe an offer on a house that is substantially less than the asking price. While any offer can be presented, a low-ball offer can sour a prospective sale and discourage the seller from negotiating at all. Unless the house is very overpriced, the offer will probably be rejected.

While your low offer in a normal market might be rejected immediately, in a buyer's market a motivated seller will either accept or make a counteroffer.

Full-price offers or above are more likely to be accepted by the seller. But there are other considerations involved:
  • Is the offer contingent upon anything, such as the sale of the buyer's current house? If so, a low offer, even at full price, may not be as attractive as an offer without that condition.
  • Is the offer made on the house as is, or does the buyer want the seller to make some repairs or lower the price instead?
  • Is the offer all cash, meaning the buyer has waived the financing contingency? If so, then an offer at less than the asking price may be more attractive to the seller than a full-price offer with a financing contingency.
You should always do your homework about comparable prices in the neighborhood before making any offer. It also pays to know something about the seller's motivation. A lower price with a speedy escrow, for example, may motivate a seller who must move, has another house under contract or must sell quickly for other reasons.
How can I be sure that the home I purchase is in good condition?
  One of the standard contingencies that should be put into an offer is an inspection contingency, which allows you to have professionals inspect the property to your satisfaction. Typically scheduled within a certain five-to-eight day window after the contract is signed, a home inspection is a thorough examination of the physical structure of a home - including, but not limited to, foundation, attic, basement, windows and doors, heating and cooling systems, electrical wiring and plumbing. A positive home inspection should increase your confidence that you are making a solid investment, and your agent can advise you about which inspections are recommended or required. Please note: The home inspection is a buyer's cost.
What's the difference between being pre-approved or pre-qualified for a mortgage?
  You can easily get a pre-qualification letter by calling a mortgage broker or lender and providing some basic financial information. Similarly, getting pre-qualified on the Internet is quick and easy. In contrast, a pre-approval letter involves verification of the information, which means that the lender will ask for documentation to confirm your employment, the source of your down payment and other aspects of your financial condition.

Indeed, getting a pre-approval may be more time consuming than getting a pre-qualification but carries far more weight. Sellers often prefer to negotiate with pre-approved buyers because they know that these buyers are financially qualified to get the financing they need to close the transaction. Moreover, a pre-approval letter lets your real estate agent know that you're a well-qualified buyer who is serious about purchasing a home. These factors notwithstanding, pre-approval letters aren't binding on the lender, are subject to an appraisal of the home you want to buy and are time sensitive.
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