You’ve finally made that fateful decision to buy a home, but your sparkling new dream home is still on paper. In other words, it’s not built yet. Still, in your mind, it’s a done deal. You’ve agreed to the price, and now it’s just a matter of waiting until the last nailed is hammered into place.
Not so fast. These days, with the price of lumber skyrocketing as your house is being built, you may have to pay for more than you bargained for when you signed on the dotted line. Realtor.com reports that more builders are adding escalation clauses to their sales or construction contracts to help protect themselves from ongoing price increases in the lumber market. “The rising and volatile costs of lumber continue to hamper the new-home and remodeling markets. Lumber prices nearly doubled over a four-month period in 2020 and have continued to reach new highs,” says Realtor, who adds that the price and availability of building materials have been cited as one of the top challenges that homebuilders face at a time when the real estate industry is calling for more housing inventory to meet surging buyer demand.
According to the most recent National Association of Home Builders’ Paul Emrath as well as the Wells Fargo Housing Market Index survey, 47% of builders said they were “including price escalation clauses in their sales contracts,” To boot, 10% are including shared price clauses in their contracts — similar to price escalation clauses in that they tie the final house price to the price of building materials. “The difference is that, in the typical shared price clause, the home builder agrees to absorb part of the material price increase, with the home buyer covering the rest,” he writes.
The complication with homebuilders covering their collective bottoms, however, is that price escalation clauses are likely to kick homebuyers in theirs since they may be unable to afford the escalated house prices. The result, according to Emrath? Lost sales. Builders may be betting on the market remaining crazy-strong, with multiple backup buyers lined up to make good on the fallout, but no one has a crystal ball.
While more builders are pre-ordering lumber to help avoid cost increases, a full 22% are obtaining price guarantees from suppliers. Those price guarantees, however, don’t often stretch past two months. It’s anyone’s ball game.
Source: Realtor | TBWS
- If your house is feeling a little cramped with the addition of adult children or aging parents, it might be time to consider a move-up into a multigenerational home that better suits your changing needs.
- With benefits that include a combined homebuying budget and shared caregiving duties, an increasing number of households are discovering the value of a multigenerational home.
- With such high demand for houses today, now is a great time to sell so you can upgrade to a multigenerational home that may better suit your evolving needs.
Home Values in your Neighborhood
Are you interested in finding out about the value of your home? Click on the Home value tool below and get a estimated value
Are You a Math Genius?
With This Little Trick, You’re Going to Sound Like One.
Imagine calculating a principal, interest, tax and insurance payment for that home you’re considering faster than you can find the right app on your phone.
It’s actually pretty simple.
Here’s the formula to use: Sales Price x 1% divided by 2
Example 1: Purchase Price = $250,000, taxes are $2,500, loan amount w/ 20% down is $200,000 at 4.50% on a 30-year fixed rate loan, insurance is $600 per year.
That’s a lot of math to do, but let’s try our formula:
$250,000 x 1% = $2,500, $2,500/2 = $1,250.
What’s the actual payment given the real math in this instance? The answer is $1,272, a mere $22 a month difference.
Example 2: Purchase Price = $300,000, taxes are $3,375, loan amount w/ 20% down is $240,000 at 4.50% on a 30-year fixed rate loan, insurance is $720 per year.
$300,000 x 1% = $3,000, $3,000/2 = $1,500.
What’s the actual payment given the real math in this instance? The answer is $1,557, just a $57 per month difference.
Example 3: Purchase Price = $500,000, taxes are $5,625, loan amount w/ 20% down is $400,000 at 4.50% on a 30-year fixed rate loan, insurance is $1,200 per year.
$500,000 x 1% = $5,000, $5,000/2 = $2,500.
What’s the actual payment given the real math in this instance? The answer is $2,595, just $95 a month difference.
The results will vary a little based on rates, down payment, taxes, mortgage insurance, etc. However, once we’ve shown you the actual math for your situation, you can just add or subtract a little from the formula to compensate for any differences as they apply to you.
Reach out so we can calculate a sample for you. We’re happy to help.
These examples are for educational purposes only, they are not rate quotes or offers to lend. Accordingly, corresponding annual percentage rates are not included.
Most people are surprised to learn what appraisers actually look at when determining the value of a real estate property.
A common misconception homeowners generally have is that the value of their home is determined after the appraiser has completed their physical property inspection.
However, the appraiser actually already has a good idea of the property’s value by the time they have scheduled an appointment to stop by the property.
The good news is that you don’t have to worry so much about pushing back an appointment a few days just to “clean things up” in order to help influence the value of your property.
While a clean house will certainly make it easier for the appraiser to notice improvements, the only time you should be concerned about “clutter” is if it is damaging to the dwelling.
The Key Components Addressed In An Appraisal
Location, view, topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features…
Quality of construction, finish work, fixed appliances and any defining features
Age, deterioration, renovations, upgrades, added features
Health & Safety:
Structural integrity, code compliance
Above grade and below grade improvements
Is the property conforming to the neighborhood?
Is the property functional as built – style and use?
Garages, Carports, Shops, etc..
Curb appeal, lot size, & conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood pull up in front of your home.
When entering your home, they are going to look at the overall design, condition, finish work, upgrades, any defining features, functional utility, square footage, number of rooms and health and safety items.
Be sure to have all carbon monoxide and smoke detectors in working condition.
Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.
If you’re interested in what specifically appraisers are looking for, here is a copy of the blank 1040 URAR form that is used by every appraiser in the country.
Related Update on HVCC:
Appraisers hired for a mortgage transaction on a conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.
This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans originated on or after May 1, 2009.
Related Appraisal Articles:
Hey, I gave my real estate agent a $5000 Earnest Money Deposit check… Where does that money go?
According to Wikipedia:
Earnest Money – an earnest payment (sometimes called earnest money or simply earnest, or alternatively a good-faith deposit) is a deposit towards the purchase of real estate or publicly tendered government contract made by a buyer or registered contractor to demonstrate that he/she is serious (earnest) about wanting to complete the purchase.
When a buyer makes an offer to buy residential real estate, he/she generally signs a contract and pays a sum acceptable to the seller by way of earnest money. The amount varies enormously, depending upon local custom and the state of the local market at the time of contract negotiations.
An Earnest Money Deposit (EMD) is simply held by a third-party escrow company according to the terms of the executed purchase contract.
*It’s important to keep in mind that the EMD may actually be cashed at the time escrow is opened, so make sure your funds are from the proper sources.
- Earnest Money is submitted to an escrow company with the accepted purchase contract
- At the close of escrow, the EMD is credited towards the down payment and / or closing costs
- If there are no closing costs or down payment, the EMD is refunded back to the buyer
Who Doesn’t Get Your Earnest Money:
- Selling Real Estate Agent – A conflict of interest
- Sellers – Too risky
- Buying Agent – They shouldn’t have your money in their account
Related Articles – Closing Process / Costs
By including title insurance when purchasing property, your title insurer takes on accountability for legal expenses to defend your property title, should it ever be challenged.
Many different occurrences can come into play to warrant the need for title insurance.
The title company responsible will then take on the legal expenses to defend the property for as long as you are in possession of an interest in the property under the title.
If the defense is not successful, you will be reimbursed for any loss of value of the property.
Common Things Title Insurance Covers:
1. UNDISCLOSED HEIRS, FORGED DEEDS, MORTGAGE, WILLS, RELEASES AND OTHER DOCUMENTS
2. FALSE IMPRISONMENT OF THE TRUE LAND OWNER
3. DEEDS BY MINORS
4. DOCUMENTS EXECUTED BY A REVOKED OR EXPIRED POWER OF ATTORNEY
5. PROBATE MATTERS
7. DEEDS AND WILLS BY PERSON OF UNSOUND MIND
8. CONVEYANCES BY UNDISCLOSED DIVORCED SPOUSES
9. RIGHTS OF DIVORCED PARTIES
10. ADVERSE POSSESSION
11. DEFECTIVE ACKNOWLEDGEMENTS DUE TO IMPROPER OR EXPIRED NOTARIZATION
12. FORFEITURES OF REAL PROPERTY DUE TO CRIMINAL ACTS
13. MISTAKES AND OMISSIONS RESULTING IN IMPROPER ABSTRACTING
14. ERRORS IN TAX RECORDS
Related Articles – Closing Process / Costs
* Disclaimer – all information in this article is accurate as of the date this article was written *
The FHA Mortgage Insurance Premium is an important part of every FHA loan.
There are actually two types of Mortgage Insurance Premiums associated with FHA loans:
1. Up Front Mortgage Insurance Premium (UFMIP) – financed into the total loan amount at the initial time of funding
2. Monthly Mortgage Insurance Premium – paid monthly along with Principal, Interest, Taxes and Insurance
Mortgage Insurance is a very important part of every FHA loan since a loan that only requires a 3.5% down payment is generally viewed by lenders as a risky proposition.
Without FHA around to insure the lender against a loss if a default occurs, high LTV loan programs such as FHA would not exist.
Calculating FHA Mortgage Insurance Premiums:
Up Front Mortgage Insurance Premium (UFMIP)
UFMIP varies based on the term of the loan and Loan-to-Value.
For most FHA loans, the UFMIP is equal to 2.25% of the Base FHA Loan amount (effective April 5, 2010).
>> If John purchases a home for $100,000 with 3.5% down, his base FHA loan amount would be $96,500
>> The UFMIP of 2.25% is multiplied by $96,500, equaling $2,171
>> This amount is added to the base loan, for a total FHA loan of $98,671
Monthly Mortgage Insurance (MMI):
- Equal to .55% of the loan amount divided by 12 – when the Loan-to-Value is greater than 95% and the term is greater than 15 years
- Equal to .50% of the loan amount divided by 12 – when the Loan-to-Value is less than or equal to 95%, and the term is greater than 15 years
- Equal to .25% of the loan amount divided by 12 – when the Loan-to-Value is between 80% – 90%, and the term is greater than 15 years
- No MMI when the loan to value is less than 90% on a 15 year term
The Monthly Mortgage Insurance Premium is not a permanent part of the loan, and it will drop off over time.
For mortgages with terms greater than 15 years, the MMI will be canceled when the Loan-to-Value reaches 78%, as long as the borrower has been making payments for at least 5 years.
For mortgages with terms 15 years or less and a Loan -to-Value loan to value ratios 90% or greater, the MMI will be canceled when the loan to value reaches 78%. *There is not a 5 year requirement like there is for longer term loans.
Related Articles – Mortgage Approval Process:
- Basic Mortgage Terms
- How Much Can I Afford?
- Common Documents Required For A Mortgage Pre-Approval
- Top 8 Questions To Ask Your Lender During Application Process
- What’s The Difference Between An Investment Property, Second Home and Primary Residence?
- Seven Items Real Estate Agents Need To Know About Your Mortgage Approval
For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit (HELOC), or do a cash-out refinance.
According To Wikipedia:
A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card.
HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years). Repayment is of the amount drawn plus interest.
A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding).
Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay.
A Home Equity Loan is similar to the Line of Credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed. Both a Line of Credit and Home Equity Loan hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage”. Since second mortgages are paid after the first lien holder in the event of default foreclosure or short sale, interest rates are higher in order to justify the risk and attract investors.
Measuring The Different Between HELOC vs Cash-Out Refinance:
There are three variables to consider when answering this question:
2. Costs or Fees to obtain the loan
3. Interest Rate
1. Timeline –
This is a key factor to look at first, and arguably the most important. Before you look at the interest rates, you need to consider your time line or the length of time you’ll be keeping your home. This will determine how long of a period you’ll need in order to pay back the borrowed money.
Are you looking to finally make those dreaded deferred home improvements in order to sell at top dollar? Or, are you adding that bedroom and family room addition that will finally turn your cozy bungalow into your glorious palace?
This is a very important question to ask because the two types of loans will achieve the same result – CASH — but they each serve different and distinct purposes.
A home equity line of credit, commonly called a HELOC, is better suited for short term goals and typically involves adjustable rates that can change monthly. The HELOC will often come with a tempting feature of interest only on the monthly payment resulting in a temporary lower payment. But, perhaps the largest risk of a HELOC can be the varying interest rate from month to month. You may have a low payment today, but can you afford a higher one tomorrow?
Alternatively, a cash-out refinance of your mortgage may be better suited for securing long term financing, especially if the new payment is lower than the new first and second mortgage, should you choose a HELOC. Refinancing into one new low rate can lower your risk of payment fluctuation over time.
What are the closing costs for each loan? This also goes hand-in-hand with the above time line considerations. Both loans have charges associated with them, however, a HELOC will typically cost less than a full refinance.
It’s important to compare the short-term closing costs with the long-term total of monthly payments. Keep in mind the risk factors associated with an adjustable rate line of credit.
The first thing most borrowers look at is the interest rate. Everyone wants to feel that they’ve locked in the lowest rate possible. The reality is, for home improvements, the interest rate may not be as important as the consideration of the risk level that you are accepting.
If your current loan is at 4.875%, and you only need the money for 4-6 months until you get your bonus, it’s not as important if the HELOC rate is 5%, 8%, or even 10%. This is because the majority of your mortgage debt is still fixed at 4.875%.
Conversely, if you need the money for long term and your current loan is at 4.875%, it may not make financial sense to pass up an offer on a blended rate of 5.75% with a new 30-year fixed mortgage. There would be a considerable savings over several years if variable interest rates went up for a long period of time.
Choosing between a full refinance and a HELOC basically depends on the level of risk you are willing to accept over the period of time that you need money.
A simple spreadsheet comparing all of the costs and payments associated with both options will help highlight the total net benefit.
Related Article – Refinance Process:
- Refinance Process Overview
- Mortgage Approval Process
- Four Possible Reasons To Refinance
- Calculating The Net Benefit Of A Refinance
- What Do Appraisers Look For When Determining A Property’s Value?
- Understanding The Difference Between Appraised Value vs Neighborhood Listing Comps
- Five Myths About Home Values