Appreciation
Appreciation
is the
increase
in value
of an
asset
due to
increasing
demand
for that
particular
asset. Appreciation
adds
to existing
equity. People
often
think
that
working
on a
home
(home
improvements,
painting,
new carpet)
will
build
appreciation. This
is not
always
the case. Home
improvements
may increase
the marketability
of the
home,
but they
do not
always
increase
the value
of a
home. The
best
way to
add to
the value
of a
home
is to
increase
its square
footage;
ie.,
finish
an unfinished
basement,
attic
or room.
Closing
costs
These
are the
fees
charged
by lenders,
appraisers,
title
companies,
brokers
and any
other
third
party
that
may work
on your
loan.
It is
important
to differentiate
between “hard
costs”,”soft
costs
and “escrow
costs”.
Hard
costs
are the
fees
you pay
in addition
to what
the lender
charges.
These
include
appraisal,
underwriting
fee,
escrow/closing
fee,
title
insurance,
recording
fee,
etc.
These
costs
generally
do not
vary
materially
by the
lender
you choose. So
if you
use Mortgage
Cc. A
or B,
it does
not matter-these
costs
will
be virtually
the same. Soft
costs
refer
to the
fees
you pay
to the
broker/originator. These
costs
include
odd days’ interest
(interest
pro-rated
through
the end
of the
month)
and the
amounts
added
for hazard
insurance
and property
taxes. The
main
thing
to remember
about
these
items
is that
they
are refunded
back
to you
in a
refinance
transaction. They
are not
actual
charges
incurred.
Debt-to-income
ratio
(DTI
or DR)
DTI
is a
percentage
calculated
by dividing
the total
monthly
debt
obligations
by the
total
gross
income
(before
income
taxes). The
higher
the DTI,
the greater
the risk
for the
lender. This
is because
the higher
the DTI,
the less
disposable
income
a borrower
has.
Equity
Equity
is the
difference
between
the fair
market
value
(FMV)
of real
estate
and the
combined
amount
of mortgage
balances
owed
on the
property. Contrary
to popular
belief,
equity
has no
bearing
on appreciation. Homes
that
are fully
mortgaged
appreciate
at the
same
rate
as homes
that
are owned
free
and clear. Equity
also
has a
0 percent
rate
of return.
Escrows
Escrows
are amounts
set aside
through
monthly
mortgage
payments
that
are put
into
a designated
(escrow)
account
by the
servicer
of mortgage
loans. Escrow
accounts
are used
to pay
property
taxes
and/or
hazard
insurance. Escrow
funds
are collected
on a
monthly
basis
and the
escrow
balances
increase. When
taxes
and/or
insurance
bills
come
due,
these
are paid
by the
loan
servicer
if an
escrow
account
is set
up at
the time
of obtaining
a loan. Sometimes
these
escrow
accounts
do not
have
sufficient
funds
to pay
taxes
and insurance
premiums
when
due. This
is referred
to as
an escrow
shortage. When
this
occurs,
the amount
of monthly
escrow
payment
may be
increased
to make
up for
deficiences
in the
accounts
(see
impounds,
reserves).
Fair
market
value
(FMV)
FMV
is the
value
of real
estate
as assed
by a
certified
appraiser. It
is the
estimated
value
given
to a
property
if the
property
were
to be
listed
on the
market
and sells
as of
a given
day. For
a purchase
transaction,
a lender
will
generally
base
the mortgage
amount
on the
lower
of the
purchase
price
and the
FMV. In
the past,
a borrower
had to
wait
at least
one year
to refinance
a loan
and use
the higher
of purchase
price
and the
FMV in
the LTV
calculation(seasoning). Now,
innovative
mortgage
products
allow
refinances
w/out
the 12
month
waiting
period.
Hazard
insurance
Insurance
coverage
for a
home
that
insures
the structure
in case
the home
is destroyed. The
insurance
company
will
reimburse
the borrower/lender
for the
replacement
cost
(the
cost
to rebuild
the home). Hazard
insurance
is not
all the
same. It
can offer
coverage
for for
many
different
things
(natural
disasters). It
is recommended
that
an insurance
professional
be consulted
about
coverages.
(not
to be
confused
with
MI).
Loan
application
(1003)
The
US department
if Housing
and Urban
Development
(HUD)
has a
uniform
loan
application
form
used
by many
lenders. The
form
is called
a 1003.
Loan
to value
ratio(LTV)
LTV
is a
percentage
calculated
by dividing
the loan
(mortgage)
amount
by the
fair
market
value
of the
property
being
financed. The
higher
the LTV,
the greater
the risk
of a
loan
from
a lenders
perspective. Generally
speaking,
the lower
the LTV
%, the
more
exceptions
are given
for mortgage
loans
and the
easier
the loan
is to
obtain.
Negative
amortization
(deferred
interest)
A feature
that
increases
your
mortgage
balance
each
month
when
only
the minimum
payment
is made. This
feature
allows
a borrower
to have
max cash
flow
and the
lowest
possible
payment.
In times
when
houses
are appreciating,
the negative
amortization
feature
is a
good
way to
free
up cash. The
prudent
investor
should
invest
the savings
wisely.
Prime
interest
rate
The
Prime
interest
rate
rises
and falls
depending
on whether
the federal
reserve
is trying
to stimulate
the economy
to encourage
growth
or shrink
it to
curb
inflation. Inflation
exists
in times
of an
accelerating
economy
and deflation
exists
when
the economy
is shrinking. When
prices
go down
the prime
interest
rate
goes
down.
(it is
simply
supply
and demand),
the prime
rate
is lowered
to stimulate
economic
growth
and raised
to shrink
a growing
economy
and curb
inflation.
Pros-the
prime
rate
is not
driven
by profit
, the
stock
market,
or the
bond
market
like
other
variable
interest
rates.The
prime
rate
is economy
driven
not profit
driven. Mortgage
loans
that
are tied
to the
prime
rate
are gaining
popularity
because
the interst
rate
rises
as peoples
income
rises
and vice
versa.
Cons-the
prime
rate
is variable
and needs
to be
monitered.
Private
mortgageinsurance(PMI)
An insurance
policy
that
is paid
by the
borrower
to reimburse
the lender
if the
borrower
defaults
on a
payment. However
with
modern
mortgage
premiums
it is
not necessary
to pay
this
insurance
premium.
When
an FHA
loan
is paid
off,
the PMI
is charged
up front
is pro
rated
and refunded
back
to the
borrower
w/in
30 days
of the
loan
being
paid
off.
Return
on equity
(ROE)
ROE
is a
percentage. It
represents
the amount
of investment
return
received
on the
equity
of a
home. It
is not
to be
confused
w/appreciation.
ROE is
ALWAYS
0 %.
(equity
itself
cannot
grow
but it
can be
added
to.
Return
on investment
(ROI)
ROI
is an
percentage
calculated
by dividing
the amount
earned
on an
investment
by the
amount
of the
original
investment.
Seasoning
Seasoning
is a
time
requirement
(usually
12 months
) that
is imposed
by a
lender.This
time
requirement
prohibits
a borrower
from
refinancing
a loan
and taking
the higher
of the
purchase
price
and the
FMV in
calculating
the LTV. New
mortgage
products
allows
homeowners
to refinance
immediately
and take
cash
out of
their
homes
from
the equity
acquired
at the
time
of purchase.
Stated
income
Stated
income
is a
term
that
usually
means
an ability
to state
the amount
of income
used
on a
loan
application
versus
verifying
income
w/ pay
stubs,
w-2’s
or tax
returns. Stated
income
loans
are popular
with
self-employed
borrowers
or borrowers
thatr
cannot
verify
their
income.
Uniform
residential
appraisal
report
(URAR)
A report
completed
by a
certified
appraiser
that
gives
the estimated
value(selling
price)
of a
property.
There
are many
different
forms
required
by lenders
that
may include
Photos,
maps,
detailed
descriptions,etc. The
URAR
typically
involves
a property
inspection
by the
appraiser,
the reports
are generally
good
for 90-120
days. |
