APR is an acronym for Annual Percentage Rate. It's a government-mandated calculation meant to simplify the comparison of mortgage options.
A loan's APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure.
Because APR is expressed as a percentage, many people confuse it for the loan's interest rate. It's not. APR represents the total cost of borrowing over the life of a loan. 'Interest rate' is the basis for monthly mortgage repayments.
The main advantage of APR is that it allows an 'apples-to-apples' comparison between loan products.
As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees. In this sense, APR can help a borrower determine which loan is least costly long-term.
However, APR is not without its shortcomings.
An escrow account is a designated savings account into which funds get deposited for a specific purpose.
With respect to real estate and home loans, escrow accounts are used to pay real estate tax bills and homeowners insurance payments.
Escrow accounts are managed and disbursed by lenders.
When a homeowner 'escrows' his mortgage, along with his scheduled monthly mortgage payment, he must also send an additional payment to the lender equal to 1/12 of the home's annual real estate tax bill plus 1/12 of the annual homeowners insurance bill.
By sending a pro rata portion of the tax and insurance bill each month,...
The basis of most mortgage lending is credit scoring. In general, the higher a person's credit score, the lower his offered mortgage interest rate. Despite the many credit scoring models in use today, however, just 3 are relevant to American homeowners:
- The Equifax BEACON® score
- The Experian Fair Isaac Risk Model
- The TransUnion EMPIRICA®
Generically, these scoring models generate what are commonly known as 'FICO' scores. FICO scores are measurements of probability.
The higher a person's credit score, by definition, the less likely a person is to default on his home loan.
This is one reason why credit scoring has added importance lately -- mortgage lenders are very careful about what they're lending and to whom. Notably, minimum FICO thresholds have been added to all types of mortgage loans. FICO scoring has 5 main components as listed above.
A mortgage is a contract between a lender and borrower, defining the terms by which a home loan must be repaid. The paperwork, signed by both parties, includes provisions for things like:
- The interest rate
- The length of the loan
- The amount of money to be borrowed
But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an 'early payoff' by securing a new loan that pays off the old one.
This process is most commonly known as a refinance.
A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender's loan is paid in full using the money from the new lender's loan and the former's relationship is officially terminated.
There's no rule against how many times a person...
Distressed homes for sale tend to get lumped tgether, but there are some distinct diefferences between these type of sales. Most are simply called foreclosed homes. These are the terms used by our local Board of Realtor listing service to describe distressed properties, as well as the definition of each.
Bank Owned - This is a home which has been foreclosed on and is now owned by the bank. This is also often referred to as REO or Real Estate Owned, which simply means it is real estate owned by the bank.
HUD Owned - Also a foreclosed home which is now owned by Housing and Urban Development. This is not owned by a bank. The bank foreclosed and HUD was the mortgage insurer, so HUD owns the home.
VA Owned - A foreclosed home now owned by the Veterans Administration.The Veterans Administration guarantees the mortgage for 25% of the loan value in the case of default. They then become the owners of the property after foreclosure.
A home inspection is a complete, top-to-bottom, visual check-up of the structure and systems of a house. It is meant to be an objective determination of a home's condition. A home inspection usually takes 2-6 hours to complete, depending on the size of the home. During the inspection process, the inspector will examine all of the following components of a home:
- Home exterior including doors, decks, and vegetation
- Heating and cooling systems for leaks and efficiency
- Electrical systems for safety and soundness of design
- Plumbing systems for venting, distribution, and drainage
In addition, the inspector will review the roofing system, the home's interior, and several other parts of the property. A home inspection may be ordered by a home owner or by a home buyer. For a home owner, an inspection can detail a home's shortcomings and provide a roadmap for repairs. This can help a person prepare his home for sale because...
BPO is short for Broker Price Opinion. A BPO is most commonly used by banks and investors when determining the property value of a home which is in the pre-foreclosure process.
In place of a full appraisal, the bank or investor will hire a broker or agent to evaluate the property and provide a written opinion of value. We use our market knowledge and listing data to assist the bank in determining fair market value based on variables within the area of the subject property.
Most homeowners make four housing-related payments each month:
- Principal on a mortgage
- Interest on a mortgage
- Taxes on the real estate owned
- Insurance for the real estate owned
Collectively, these payments are known by the acronym PITI but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply. For example, a homeowner with an interest only mortgage does not pay principal each month.
Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead. But regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home.
PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses. Although you won’t hear...
More commonly called 'points', discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.
The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.
As a general guideline, each point paid lowers a mortgage lender's offered interest rate by 0.250%.
For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).
Discount points can be an effective sales strategy for home sellers. In some areas of Indianapolis, where there is a lot of competition in the resale real estate market, sellers offering to pay discount points can help the buyer get a lower loan cost. It is generally less than price reductions, saving both the seller and the buyer money.
Loan-to-value is a math formula that represents the relationship between how much a home is 'worth' and how much money is borrowed against it.
Loan-to-value is often abbreviated as 'LTV' and is one of the many factors that lenders consider when underwriting a mortgage application. The math formula is straightforward:
In the LTV equation, Loan Size is the amount of money borrowed from the bank and Home Value is the lower of the home's purchase price or appraised value.
Home loans with low loan-to-value ratios are usually less risky for banks. This is one reason why mortgage rates tend to be more favorable for home buyers and homeowners when their respective LTVs are low.
Typically, a 'low' LTV loan is one in which the loan-to-value is 80 percent or less. In some instances, however, 70 percent is considered 'low'. The cut-off point depends on the mortgage lender and the mortgage product.
On a home purchase,...
In the world of real estate, Days On Market is the number of days between when a home lists for sale and when it goes under contract.
It is often abbreviated as DOM.
Average Days on Market is a similar statistic but instead of applying to one home in particular, it applies to all homes in a given neighborhood, ZIP code, or city. Average DOM are most often different when broken down by price range within a city and zip code.
Average DOM is calculated by adding the number of days for which every listed home in an area was available for sale, and then dividing that number by the total number of listings.
In a buyer's market, Average Days On Market is often elevated. This is because homes don't sell as fast as during a seller's market when the Average DOM can be quite low.
For buyers and sellers of real estate, Average Days On Market can be a strong indicator of home prices. When Average DOM falls, home prices tend to increase.
When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account.
This up-front deposit is more commonly known as 'earnest money'.
A sales contract's earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.
Some factors that can influence earnest money amounts include:
- Market conditions: Stronger markets often call for more earnest money
- Buyer economics: First-time buyers often give less earnest money
- Seller psychology: Skeptical sellers often ask for more earnest money
No matter how large or how small, however, earnest money is supposed to give the seller a sign...
Absorption rate isn't a topic of interest to most people, as it relates to Indianapolis Real Estate. Unless, of course, you are buying or selling a home or are a Realtor who studies the market. Then, it becomes a very interesting topic. While it may be a bit boring, I hope to simplify the information, as well as help you understand the importance of knowing the absorption rate of your Indianapolis home.
The absorption rate is a number which represents a particular market's ability to sell the current inventory based on supply and demand. In real estate, this number is determined by dividing the current amount of homes available by the amount sold in the previous month. If the available inventory or currently listed homes on the market is 600 and the sales in the past month were 65, the absorption rate would be 9.2 months. This indicates it would take a little over...