Real estate loan: Understanding the concept

Real estate loan is what a lot of people use to buy their home. Real estate loans have been instrumental in bringing joy to people by making that unaffordable house affordable. Some real estate investors too make use of real estate loans for buying properties. However, real estate loan is not free money and anyone who buys real estate or plans to buy real estate using real estate loan must understand the concept of real estate loan very clearly.

Real estate loan (also known as mortgage) is the money that you borrow from someone (a financial institution i.e. a mortgage lender) for the purpose of buying a property. The real estate loan generally covers a part of your purchase price and the remaining portion has to be paid by you upfront i.e. as down payment. The amount (i.e. the percentage of total purchase price) that you have to pay as down payment is dependent on a number of factors and you can generally reduce it to even 5% by going for mortgage insurance. FHA and VA loans (i.e. mortgage insurances through FHA and VA) reduce the down payment requirement on real estate loan even further. Whatever you borrow from the mortgage lender as real estate loan needs to be paid back to the mortgage lender over a period of time (and, of course, you will also need to pay appropriate interest on that real estate loan). The tenure of your real estate loan and the prevailing market rate will determine the amount of interest you pay for your real estate loan. Generally, you are required to pay back the real estate loan in the form of monthly instalments which are composed of both interest and principal portions of your real estate loan. Also, there are various types of real estate loans e.g. fixed interest rate loans and adjustable interest rate loans. So depending on what type of real estate loan you have gone for, your monthly payments might either remain constant (fixed rate) for the full tenure of the loan or keep getting adjusted periodically (adjustable rate) on the basis of a financial index. Besides that, some other costs are also associated with real estate loans e.g. there are closing costs, inspection costs, attorney fee etc. Also, in case the property needs some repairs, there will be costs associated with that too. Again, there is stamp duty and other taxes that you need to pay. So, really, you need to understand the concept of real estate loans and the related costs clearly before you actually go for the real estate loan. And understanding these concepts is really not that tough.

If you’ve been trying to buy a house you may have noticed there are a lot of numbers to consider: the price of the house, your savings, the amounts of the down payment and monthly payments you can afford, as well as a host of other figures and fees. Trying to find a mortgage that meets your needs is another numbers game, but this one can work in your favor.

You may not realize it, but there is great variety available to home buyers shopping around for a suitable mortgage. Different banks, brokers and other lending institutions all offer their own mix of short-term and long-term mortgages, as well as both fixed rate and adjustable rate mortgages.

So how do you know which combination is the best for you? That depends on your circumstances.

Traditional fixed rate mortgages allow you the security and stability of knowing that your mortgage interest rate will not fluctuate with market conditions. This means that if interest rates spike, you will be protected. Conversely, if interest rates drop, you will not be able to take advantage of the potential savings without transferring your mortgage to another institution or making other possibly complicated arrangements.

Adjustable rate mortgages (also known as variable rate mortgages), are different than fixed mortgages in that the interest rate you pay on the outstanding principal of your loan fluctuates according to changes in the posted index rate. There is a certain amount of risk involved with an adjustable rate mortgage in that you may end up paying more money in the long run if interest rates rise and stay high. You also have the potential to take advantage of savings if interest rates fall. An additional bonus to adjustable rate mortgage is the lower initial interest rate. You may be risking higher or unstable payments, but you are rewarded with a lower interest rate when your loan is at its fullest point. Unless interest rates rise dramatically, this advantage is likely to save you more money than if you had chosen a fixed rate mortgage.

There are advantages and disadvantage to securing an adjustable rate mortgage loan. However, you may find an adjustable rate mortgage worthwhile if you intend to pay off a large portion of your outstanding balance early into your loan period. By doing so, you reduce the bulk of your loan while paying the initially lower interest rate. An adjustable rate mortgage may also be the best choice for you if you anticipate greater future income or if you intend to pay off the entire mortgage loan quickly – again due to the lower initial interest rate. Even if rates were to increase early into your mortgage period, the fluctuation would unlikely be so great that it negated the difference in interest rates between a fixed rate plan and a variable rate plan.

You can reduce the financial risks associated with an adjustable rate mortgage by asking your lender about interest rate ceilings or caps that protect mortgage holders from sharp increases in the amount of money they must pay each month (or whatever their payment period is: monthly, weekly, bi-weekly, etc.). The overall ‘ceiling’ restriction is legislated in almost all cases, and it limits the total possible interest rate increases over the period you hold the loan. Periodic caps help control interest rate hikes between adjustment periods.

Your lender may also be willing to consider payment caps, which stabilize your monthly or periodic payments so any interest rate fluctuations are worked into your payment by way of adjusting the ratio of principal to interest each payment covers. This is a great option if you have limited income flexibility, but could result in a negative amortization period over the long haul. This happens when the balance of your mortgage is actually growing rather than shrinking because your regular payments are not large enough to pay all the interest plus a portion of your outstanding principal.

A final option to consider is arranging to have the ability to convert your adjustable rate mortgage into a fixed rate mortgage at a designated time. You may pay a fee for converting your mortgage, but if you find yourself in a situation where interest rates are rising rapidly, it may be worthwhile to stabilize your payments and balance by switching to a fixed rate plan.

Speak to your financial advisor to find a mortgage plan that fits your budget and your needs.

Your mortgage off early

One niggling question that perhaps gnaws at everyone’s peace of mind at some point of time or other is: Should you pay off your home loan or invest the money? You’ll be amazed by the variety of answers this question can elicit, and from this alone you can realize that there’s no one answer for everyone. Though theoretically, the concept is simple: If you think of extra mortgage payments as an investment and your return as the interest on the loan, you need to now consider if you can get higher returns elsewhere? “Yes?” Then, keep the mortgage and invest the money securely.

Having said that, it’s a matter that requires great thought whether you should pay off your mortgage payments or carry them for longer. It depends on several factors such as your tax bracket, how your cash-flow picture looks and what you think about carrying a big loan on your head. Your decision really depends on your mental make-up and your situation in life.

For instance, if you are at the peak of your career, you should hold on to your mortgage. No, don’t consider paying off an early mortgage just yet. If you are in the high income bracket, it means higher income tax too. The good news is that your mortgage interest is just one more income tax deduction you can claim to pay a lower tax. This is the happy side to your loan and you never realized it, did you?

Now, you can even get the most out of your mortgage-interest deduction if you pay off the greater part of your interest early on in your loan term. You can do this by paying one or two more installments during the year. Now to balance your budget, take care to save for a rainy day, for your children’s education, etc.

If mortgage rates are low, invest your money in schemes that give you better returns. But when mortgage rates are higher, invest it in to your home since this guarantees you a higher rate of interest. If for example, you have a 14% mortgage, you can get a 14% rate of interest if you pay it off. Then, before you know it, you will be loan-free.

If you are reaching retirement age, you perhaps want to expedite the repayment of your loans so that you are debt-free when you hang up your boots. Ensure that paying off your mortgage payments in a rush doesn’t actually become counter-productive.

So suppose you decide to refinance your mortgage so that your term is shortened to 15 years and you have a zero balance on your home loan by the time you’re 65 years old. Due to this, your principal and interest payment stand at $950 a month instead of $750 a month. When you reach pay-off day, you can now invest that $950 in a fund that gives you 9% interest. Give yourself another 15 years and you’ll have a tidy sum of $360,000.

Now let us suppose you’ve been retired for a few years now. Considering this, you’re sure to have been paying off more principal than mortgage interest. If this is so, paying off the mortgage loan becomes your prime interest in life, besides also proving to be a cash flow problem. If you know that post-retirement your cash flow will be largely restricted, it would be wiser for you to concentrate on paying off your mortgage. But if you have a few assets or none, it might be a better idea for you to diversify your investments. You could consider saving in either a savings or money market account which would give you healthier returns than the interest you are paying out on your mortgage.

If you’ve just sold a big house and are cash-rich, taking out a mortgage makes complete sense, just so long as your investment returns are larger than your mortgage interest. If you don’t tie up all your cash in real estate, you can take full advantage of tax deduction, invest in other schemes and have greater liquidity at your command. Not only will your loan be paid off, but you will have peace of mind in your sunset years.

The art of negotiation is the procedure of communicating back and forth in order to come to a mutual agreement. Negotiation is done when two parties have different expectations and must come to a mutual agreement before a contract can be signed. The most experienced negotiators will bring an attitude of high expectations to the negotiation table. They work hard to solve the problems and are easy on the people. It’s more effective to remain cooperative and efficient in order to preserve a civil relationship between the buyer and the seller, so they can work together to solve any problems and to complete the transaction as painlessly as possible.

When negotiating a contract over buying a home you want to get the lowest possible price and close on the house within a reasonable amount of time so you can move in.

1. Let the seller know what you need or expect in a clear and reasonable manner. Sometimes a buyer may submit a letter to a seller depicting why the property is not worth the asking price and pointing out the faults. This is a sure way to start the negotiations off with a defensive seller. It would be best to anchor a reasonable price, while continuing to remain polite and respectful of the sellers’ home.

2. Be prepared to solve any repair, title, survey or loan problems fairly; so there are no future problems to be addressed at closing.

3. Never respond to offers emotionally. This combative style of negotiating can turn the seller angry or defensive and can escalate into negative comments, table pounding and threats to walk out on the offer.

4. Keep your cool. Never argue. Arguing can sometimes make the seller want to work against you instead of working with you.

5. Do not be too quick to respond. Do not ignore or respond to the sellers’ arguments or statements immediately. Make it known that you are listening carefully and considerately, but do not reject or accept any offers until you have had time to carefully consider them.

6. Have any unclear portions of the proposals clarified completely.

7. Never discuss personal issues that involve the seller or buyer, such as an urgency to move in or a financial status.

8. Let trust increase the buyers leverage by: listening and understanding what the seller has to say; convey an appreciation or admiration for the sellers home decorating and gardens; and respond to counter offers within a reasonable time frame.

9. Find a common ground with the seller. This can be a very powerful tool used to the buyers’ advantage in the event of multiple offers. Sometimes a seller may select a buyers’ contract for personal reasons, like if the buyers’ family reminded the sellers of themselves when they bought a home with their young children, or just by sharing the same religion.

10. Understanding your leverage as the buyer. The more the buyer can find out about the seller’s needs, the better chance the buyer has to find solutions in negotiation. The buyer must be able to appeal to the seller’s concerns. For instance, if the house has been on the market for over 300 days, the seller will have a lot more leverage than they would have with a brand new listing. If the sellers time frame is forthcoming, then the buyer can meet it with some leverage, unless the seller’s have multiple offers.

Most buyers usually offer less than the listed price of the house. So, how much under the listed price should you offer? That all depends if the house is listed in a strong seller’s market and the market analyses of the recent sales in the neighborhood from where the house is being sold. The buyer should do their homework before submitting an offer so low, they might risk offending the seller and have their offer rejected immediately.

If there are multiple offers on one property, disclosure is favored among all parties. However, the seller or agent representing them will make the final decision as to how the offers will be handled. The seller may disclose the terms of one offer to stimulate another buyer to submit a better offer. Normally the procedure for multiple offers is to notify each party of the multiple offers that have been received. Each of the parties is then given an opportunity to amend their offer and submit it within a certain amount of time. After all offers are on the table, the seller is once again free to review the amended offers and select a buyer to negotiate with. Sellers are in no way obligated to accept the first offer that comes in. Any offer selected may be countered, negotiated, or accepted as is.

The fine print on your mortgage papers is incredibly important to read because if you don’t you may find yourself in a predicament that you really don’t want to be in. You should read every page of the fine print and take as much time as you need to do it. This way you know you are not getting anything more than what you want. In the end it could save you a lot of time and money. Below are some of the things you should look out for while reading the fine print on your mortgage papers.

Balloon payment: you should look for this in your mortgage fine print if your loan isn’t that of a balloon loan. Sometimes the lenders will put this is your fine print when it really isn’t meant to be there. A balloon payment is when you pay only the interest on your loan and nothing off of your actual principal. This keeps the repayments small and most customers are pleased with this, until they discover the need of a balloon payment at the end. Paying off a large balloon payment is often impossible to do and can cause you to lose your home. So when checking the fine print, make sure a balloon payment is not in your fine print so you won’t be caught with any surprises and an incredibly large payment.

Note: You should always be aware for the terms stated in the note. The note is usually where they state if you have not paid your repayment in a certain amount of days the lender has the right to sell your home and you are liable for anything else like extra fees and the banks also has the right to take any of your assets and finances if you do not make your payment.

Notice: you should read this part of your fine print very carefully. This part of the document will tell you how much notice you will receive if you haven’t paid your repayment, sometimes it will tell you that you will receive no notice. Make sure you remember to send your payment if you go on a holiday. Send your payment early so you will not have to worry about your check getting lost in the mail. The best way around this problem is to see if you can send you payment via wire transfer so you know it is going exactly where it is meant to be. Also another thing you should look out for in the notice section is whether or not you have time to make up for the missed payment or whether it will just take action on the preceding of foreclosure.

Acceleration: this clause gives the lender the right to speed up the time when your mortgage loan is due and has the right to ask for the full amount due on your loan straight away if you miss a repayment. Also you should look for what notice they will give you in the event that this happens because sometimes it is said to give no notice.

Extra fees: always look out for any extra fees that you do not recognize when reading your mortgage fine print so you do not get hit with these fees that you are not aware of.

Another thing that you should look out for when reading your mortgage papers fine print is to make sure that everything is as it is agreed upon. Be sure that all of the closing fees, interests and other such terms are the same as first agreed upon.

Reading your mortgage paper’s fine print can be a big job but it is incredibly important one. You need to know what you are signing and agreeing to. While reading, take as long as you like and don’t let anyone pressure you into moving the process along. If you are confused about any of the terms stipulated in the fine print or have any questions then go ahead and ask them. Get a clear definition of what all terms mean and what they are all about. Also don’t be afraid to get another person to look the fine print over, like a trusted friend or your lawyer to see what they think. They may be able to point out something that you missed. It is better to be safe than sorry.