### How Is The Interest Rate On An ARM Calculated

Adjustable rate mortgages generally operate in a particular way. There is a initial period during which the interest rate is fixed just like it is in the case of a fixed rate mortgage. This interest rate is usually much lower than what you get on a fixed rate mortgage. However the difference is that after this period is over the interest rate does not remain fixed as it does in the case of a fixed rate mortgage but is allowed to fluctuate according to the median index rate.

The initial interest rate period is for a much shorter time as compared to the entire length of the adjustable-rate mortgage. This period can typically range from one month to 7 years. In some cases of adjustable-rate mortgage the fixed interest rate may also be valid for the first 10 years but then the difference between the FRM and the ARM initial rate wil not be too great.

At the end of the initial rate period the rate rate is adjusted. The adjustment rule states that the new rate would equal the most recent value of a specified interest rate index plus a margin. For example if the index rate is 7% when the initial rate period ends and the margin is 2.5% than the new rate will be 9.5%. However this rule is also subject to two conditions.

• The first rule is that the increase cannot exceed any rate adjustment cap that was specified in the adjustable rate for each contract. Usually all adjustable rate mortgages have a clause for a cap as to the maximum amount of increase that can happen in any particular year as well as the maximum amount of interest that can be charged at any point of time during the life of the mortgage loan. An adjustment cap Is usually one or 2% but in some cases can be as high as 5% per year.

• The second condition is that the new rate cannot exceed the contractual maximum rate. As mentioned above in addition to the yearly cap on the interest rate there is also the maximum rate that the lender and charge the borrower at any point of time that the mortgage is in effect. Maximum interest rate are usually 5 to 6% over and above the initial rate that was offered.

After the initial rate period is over the interest rate is adjusted periodically. This period may or may not be the same as initial rate.. An adjustable rate mortgage may adjust the interest rate on annual, bi-annual or a monthly basis after the initial interest has ended.

The Quoted Interest Rate

The interest rate that is initially quoted on an adjustable-rate mortgage by the mortgage lender or in an advertisement is the initial rate and is known as the quoted interest rate.

Regardless of how long a period lasts. A borrower stands to see the maximum benefit if this initial rate lasts for a longer time. ARMs with initial low interest rate period of 3,5 and 7 years are common.

However, if the borrower intends to stay in the home after the quoted interest is over, then he needs to consider other factors like the rate index used by the lender as well as the margin rate used by him.

For example, the only significance of an initial rate on a monthly adjustable rate mortgage is that this rate may be used to calculate the initial payment.

The Fully Indexed Rate

The Index rate plus the margin rate is called the fully indexed rate for an adjustable-rate mortgage. The fully indexed rate based on the most recent of the index at the time that the loan is taken out indicates where the mortgage rate may end up when the initial rate period ends. If there is no change in the Index rate than the fully indexed rate will become the interest rate for the adjustable-rate mortgage till the time that the Index rate fluctuates.

For example, it is assumed that the initial rate on an adjustable-rate market is 5%. The fully indexed rate at that time is 7% and the rate adjustment is subject to a 1% rate increase cap. If the index remains the same the fully indexed rate based at the end of the second  year.

Your loan officer may or may not have the index rate available with him so you may not find out from them what the fully indexed rate is. Mortgage lenders are also not obliged to reveal this information to the borrower. However the most recent value of the index rates can be found on the Internet as long as you know which index rate your mortgage lender is tying up to your adjustable-rate mortgage.

### What Is An ARM (Adjustable Rate Mortgage)

An adjustable rate mortgage refers to a mortgage where the interest rate can be changed by the lender according to certain terms and conditions contained in the mortgage contract.

While the adjustable rate mortgage in many countries abroad allow the rate to change at the lenders discretion, in the United States the rates changes are mechanical. The interest rate of an ARM is connected to an Index over which the lender has no control. There are different indexes, much like there are different stock market indices.

This index changes on global factors much like the stock market does. When the index changes, so does the interest rate on the ARM. However, the fluctuation is not quick and sudden. So do not expect constant changes in the interest rate.

These kind of adjustable-rate mortgages that are dependent upon an index rate in the world economy are called indexed mortgages.

A couple of common indexes used are COFI, six-month LIBOR etc.

### Why It May Be Easier To Qualify For An ARM

It is easy to qualify for an adjustable-rate mortgage rather than a fixed rate mortgage for the simple reason that the qualification is mostly based on the initial payment that the borrower will be required to pay.

Since adjustable-rate mortgages offer a much lower initial interest rate than a fixed rate mortgage borrowers work with smaller income may qualify for this kind of mortgage even though the payments are slated to rise when the initial rate period is over.

For this reason you may find that adjustable rate mortgages become more common when the interest rate in the mortgage industry are on the rise.

Also with the underwriting becoming more stringent for mortgage loans people who would’ve qualified for a fixed-rate mortgage the past may need to go for an adjustable-rate mortgage in order to qualify.

However, if you are certain that you require fixed rate mortgage but find that you are only getting a qualification for an adjustable-rate mortgage you should know that you can probably qualify for a fixed-rate mortgage if you work a little harder on your application and do a little more research.

It also became common practice after the financial crisis that came about in 2007 to qualify borrowers using the fully indexed rate rather than the initial rate. If this practice would continue it would reduce the cyclical sensitivity in the market share of adjustable-rate mortgages relative to the fixed rate mortgages.

### Reasons For Choosing An ARM

Taking an ARM when a fixed-rate mortgage is available is always a gamble. But it is a gamble that could be profitable in the long run. People typically choose an ARM over fixed-rate mortgage when they reasonably expect that the interest cost in total will be lower on the adjustable-rate mortgage than a fixed-rate mortgage.

The present ARM contracts have a cap on how high your interest rate and the mortgage payments can go. So in other words, you know what the worst case scenario could be. People take this into account and figure out whether they can meet this change comfortably if it happens.

People usually take ARMs for a couple of reasons. If the interest rates are high right now, they will gain when it comes back down. This does not happen with an FRM.

They are also willing to take on the gamble that in the long run, or for as long as they hope to posses the house, an ARM will give them better results.

It is highly recommended that you speak to her financial professional before choosing a adjustable rate mortgage to purchase your home.

• An adjustable-rate mortgage has an initial low payment. The length of this period depends on the agreement between you and the lender.
• If you want to sell the house in the near future, you can take advantage of the fact that an ARM usually has a lower rate of interest than any other mortgage, as decided upon between you and the lender.
• The borrower expects to pay a lesser amount of money over the entire life of the adjustable rate mortgage. The only home loan where you can actually expect to pay lesser than what you signed up for, is the ARM. If the current home loans interest rate is high, it makes sense to go with an ARM. When the interest rates adjust in the future, you mortgage payment will go down along with it.

### What Is Rate Index and Margin Rate

The rate index and the margin rate are two factors that determine the total interest rate on an adjustable rate mortgage. These are the two variables that control how the interest rate payable on the ARM fluctuates in the future, within the rate caps as per your loan contract.

#### ARM Index Rate

The index rate is an interest rate trends that lender uses to calculate the interest on the mortgages interest rate. Several rate indexes exist such as the six-month bank certificate of deposit. This is nothing but the interest rate on a savings certificate of deposit.

This index theoretically indicates how much it costs the bank to taking money. For example this is the amount that the bank has to pay back people who are investing money with it.

Lenders cannot control any of these indexes that we are going to discuss. Some of the common rate indexes are treasury bills, certificate of deposit, The 11th District Cost of Funds Index (COFI) and the London Interbank Offered Rate Index (LIBOR).

Some of these indexes are more volatile than others which means they are more sensitive to the fluctuations in the market. Generally more stable indexes are preferred by both the lenders as well as the borrowers.

#### ARM Margin Rate

The margin rate is also known as the lenders profit on the adjustable-rate mortgage. It is the markup he puts on the Index rate which is typically about 2.5%. However this amount will depend upon your lender.

If you’re comparing different mortgage lenders who use the same index, then the margin rate will be the deciding factor as to which mortgage lender is cheaper.

The total interest rate on your ARM is, Margin Rate + Index Rate.

This interest rate that includes the index as well as the margin is called the fully indexed rate and makes for a fully amortized payment on your mortgage. A fully amortized payment means that, if the rate remains constant, making that payment for the entire duration of the mortgage will pay off the home loan completely by the end of the term.

The interest rate on a mortgage can adjust on a monthly basis as well although most are just every 6 or 12 months. You should understand all terms and conditions from your lender. The less frequently your interest rate adjusts, the more stable your loan is.

### Other ARM features you should know about

Recasting

Recasting is the recalculation and readjustment of your payments and interest-rate which a lender might do every five years.  When the five years are up the lender might add up your unpaid interest and add it to the principal amount of alone.  Based on this new amount your interest-rate or amortisation period may be recalculated.  If you have made large payments towards the principal amount of your loan recasting of a variable interest mortgage will result in lower future monthly payments.

The lifetime floor rate in an ARM loan is quite opposite to the lifetime cap  it represents the minimum amount of interest below which your interest rate will never fall.  Even if the index rate in the market dips beyond a certain point the lender might set a limit on the interest rate beyond which your interest rate will not decrease even if the falling index rate in the market dictates it.

A Lifetime Cap is the maximum interests that the lender can charge the borrower on an adjustable rate mortgage.  If this amount is set to 10% in the interest-rate of your mortgage can never increase that amount in any particular month.  The lifetime cap Gives the consumer a certain amount of security and provides predictability against inflation in the future.  It makes consumers more inclined towards an adjustable rate mortgage as it gives them some idea of what to expect in the future.  It also helps the borrower decide whether or not he can afford to stay in the mortgage in the eventuality that the interest-rate might rise in the future.  A lifetime cap On the interest prevents the lender from charging unpredictable and wildly fluctuating rates on the mortgage in the future.

ARM Payment Cap

The payment cap Refers to the maximum amount that your monthly payment can increased to in the case of a adjustable rate mortgage.  This is usually represented by a certain percentage amounts that is added to the minimum payment.  If you have a payment cap of 5% and your minimum payment is \$949.07 your payments cannot increase to more than \$1020.2 a month in the following year.  Payment Cap is one of the safeguards that is implemented on an adjustable rate mortgage.  It is to safeguard the consumer from unprecedented and uncomfortably high payments being set in the future by the lender.  It is also a check on the lender that guarantees that he will not charge unreasonably high rates in the future once the customer has signed a contract.

### What Is Negative Amortisation

Negative amortization is a typical feature of an adjustable rate mortgage.  Negative amortization happens when a variable-rate interest allows minimum payment options.  A minimum payment option stands for making a payment on your mortgage in a particular month that is less than the interest owed.  Since you are not even meeting the interest amount due on your mortgage in a month the lender adds the difference between your minimum payment and the full payment to the balance of your loan.  The more minimum payments you make the more balance you add to your loan amount.

The minimum payment is usually set according to the start rate of the variable-rate mortgage.  The start rate of a variable-rate mortgage is usually extremely low and can be as low as three to four per cent.  This means that on a \$200,000 loan at the start rate of 3.95 per cent the minimum option payment would be \$949.07 per month.  The full payment on the same amount at the rate of six per cent will be about \$1199 per month.  This creates a difference of \$250 between the minimum payment and the fully indexed payment every month.  For each month that you make a minimum payment lender will add \$250 to the loan amount balance.

It is an equally obvious result that increasing the balance of your loan will increase the duration of the mortgage.  If you could pay off the mortgage in about 30 years earlier, additional balance to the loan amount will require you to stay in the mortgage for a longer time.  Since a regular and normal payments on a mortgage reduced the total term of the mortgage ( amortization period), the increase in the amortization period due to making minimum payments is called negative amortization.

### You might not always get what you see

It often happens that many prospective homebuyers who go to see the housing being constructed by a certain builder are shown beautifully decorated and furnished homes. It is common for builders to spend thousands of dollars in decorating a model home in order to lure potential homebuyers to purchase.

You find modern appliances, beautiful furniture, window coverings, fireplace finishes, landscaping and many other features that you might desire in your home. Most importantly, all these extras make the place look like your dream home.

At this point of time you should get a very clear statement from the salesperson regarding which of the amenities and features that you are seeing in the model home are included in the sales price of the home.This is extremely important because many homeowners end up spending several thousands of dollars more off to having purchased the home in trying to make it look like the model home that they saw.

### Prices are less negotiable

For upcoming homes that are being newly built, the builders are usually much more frigid wind comes to negotiating over the sales price. This becomes even more difficult if the housing happens to be in an area that is highly in demand or being built by builder who is popular.

The builders do not negotiate over the sale price of the homes that are coming up in order to maintain the integrity of the project. If they cut the prices for one customer, pretty soon that can have a rippling effect.

Other buyers will ask for a similar discount and before you know it the value of the homes in that project have come down. In fact, a builder slashing the prices for the homes for sale is a warning sign that may point out that the project is in jeopardy. These builders also may offer to throw in extras such as upgrade on furnishings, better kitchen appliances and a superior finish to your interiors.

Some builders also attract potential homebuyers by selling the home close to the actual building cost and pulling in a huge profit by selling extras and upgrades.

You should carefully look at the expense of buying items for the home from the builder himself even though it might seem like the easiest and the most convenient thing to do because you don’t have to go shopping for those later on separately. You might be able to save some money if you can get a better deal on home appliances, furnishings and other interior embellishments from elsewhere.

### New homes might be more expensive than older ones

This is no surprise since the cost of construction, raw material, labor and professional expertise has gone up over the past several years. many builders will also look to charging a premium for providing a modern and new housing set up as they know that it will be preferable to older homes to many potential home buyers

### Newer homes might not be built in as prime locations as older homes

It is an obvious fact that builders are running out of prime locations in popular cities and towns as the years go by. The land that was available in the prime and budding locations of the city 10 years back has long since run out. The newer homes that are built are either built further away from the main city or in certain undesirable locations such as landfills, steep hillsides etc.

If you want to locate yourself in an extremely prime location in your city, you might not have an option other than to buy an older existing home or apartment. As time goes by however, the location that is not considered to be prime and worthy now might become more in demand as the land needed to build for the homes become lesser in the future.

### New homes may have hidden operating costs

1st of all, you should consider the various amenities and features that your new home has that might require higher maintenance costs in the future. It is nice to have a swimming pool and tennis court in your home but you should figure in the amount you would have to spend to maintain the same as well.

If your home happens to be a part of a housing society, there are probably going to be a society maintenance charges as well for maintaining the overall society, clubhouse, swimming pools, gymnasium etc. Some housing societies keep their monthly charges for the home owners low but then slap them with a special valuation of the repairs required for repainting the clubhouse or some such expenditure.

If your house happens to be a part of the housing society, take a careful look at the format they used to charge the society maintenance fee and whether there is a clause for paying a higher sum of money sometime in the future when additional expense is required.

Second thing to watch our for when living is a housing society is that there might be certain amount of restrictions as to the kind of modifications you can think about in your home. For example, the society might not permit certain kind of colors that you can use to paint the exterior of your home in order to maintain the overall look, feel, standard and overall value of the homes in the society.

You might not be allowed to use your own house broker

Builders usually have their own sales staff to handle potential homebuyers. They have their own contracts and sometimes also require you to deal with their agents and brokers rather than have one of your own. This is usually not never see able and if you are not comfortable with this then your only option is to walk away from the deal.

However, an alternative to this is that you at least use an independent appraiser to appraise the value of your home and have your contract reviewed by a real estate attorney of your own choosing. This will offset some of the disadvantage of not being able to use your own broker and safeguard you against the commonest pitfalls that a a person can make when buying a home.

It is always good to look at a certain situation from all perspectives. While buying a new home has its advantages, it is obvious that it has its disadvantages and potential for pitfalls as well. Just because a home is new does not mean that it is going to be without flaws.

Homes are built by people and human error is always possible. The intention of the builder is also very important. He should not be the kind of person who is tempted to cut corners to maximize their profit. On the other hand, there are good builders and those who are simply just not as good at their jobs.

Therefore if nothing else, even a brand-new home should be thoroughly inspected by a professional property inspector to discover these possible human errors before you purchase it. Believe us when we tell you that this is important and only a professional and a competent property inspector might be able to point out certain flaws that might be a deal breaker in purchasing the home.

These flaws in the property will probably never become obvious to you even if you make a great effort in inspecting the property yourself until it’s too late.

We are now going to talk about choosing different kinds of home to buy when it comes to making the choice. The three common kinds of housing that you can pick up to stay in:

• A detached family home,
• a condominium
• and a cooperative apartment.

Different people might have different definition of what kind of a structure they associate with what they think of a home. If you have always stayed in busy metropolitan city, the odds are that you have stayed in an apartment in high-rise multi-story building.

However, if you have been raised in a suburb or in a smaller town, then your idea of a home might be the kind of place where you have a garden all around the home, windows looking out on a lush green patio or the backyard.

These kind of residences are known as a detached single-family home. This is because these kind of homes are not attached to any other home and are located on separate pieces of property and land. In this post we are going to discuss the advantages of choosing a new detached single-family home to buy over other kinds of property.

Detached single-family homes come in two basic types:

• new homes and
• used and previously lived in homes.

Detached single-family home come with their own set of advantages. They are as follows.

#### A newly constructed home is more suitable to modern day needs

A home that has been recently built is likely to have the modern amenities as well as features that the modern consumer desires. There is likely to be ample lighting, electrical outlets, provisions to put all modern appliances as well as modern furniture.

The kitchen will probably have the kind of set up where you can put in a dishwasher, microwave and fit in a refrigerator as well. The bathroom will have adequate lighting and multiple outlets to plug in your electric shaver’s etc.

The living room and the bedroom again will be able to accommodate all your modern gadgets such as your Internet connection, your laptops, DVD players, wall mounted televisions etc. You will also find it more convenient and easier to rig up your phone connection, fax machines and so on.

Since a certain amount of planning is going to go into building a new home to accommodate the needs of the modern homeowner, the entire setup will end up being much more neater. You will not have to deal with making cable modifications, using extension cords etc. to accommodate all your gadgets.

#### Compliance with Federal Safety and Environmental Standards

The newer built homes and are more likely to comply with the latest federal guidelines of safety regulations regarding fire hazards, electricity connection, plumbing extra. There is also going to be the least likely chance of use of hazardous materials that has been banned such as asbestos, lead based paints and other toxics substances.

The house is also more likely to be built according to other safety and environmental codes and safeguarded against natural calamities like earthquakes, floods, heavy rainfall, snowstorms etc. It is likely to be better insulated and offer you more savings on power consumption.

#### Cheaper to operate and maintain than an older home.

Just like new car, a new home is also likely to cost you less to operate and maintain at least for the first few years since everything is newly built, you will not have problems with plumbing and fixtures as you might with an older house that requires these things to be either repaired, replaced or maintained.

Also, the new home is more likely to have energy efficient systems in place such as more efficient heating and cooling, modern plumbing and electricity supply. You’re likely to have energy efficient appliances with proper insulation in the house that save your money on the power consumption bill.

The one thing to keep in mind is that the quality and the overall standard of a newly built home is greatly dependent upon who has built it. If the builder is reputable and has a record of building good-quality houses that do not cause homeowners problem for years, then it is a good buy.

However, if you find out that homeowners staying in old developments by that same builder are having problems, then you might want to reconsider. You should inquire into the reputation and the user experience of other home owners of the same builder before you close on the purchase.

You should find out if the builder finishes the construction on time, honors all contractual obligations including the completion of any unfinished construction and whether he cooperates with fixing any defects that occur later on. Find out if any previous homeowners had to take legal action to get the problems corrected. Another good sign of the popularity of the builder is how quickly the housing built by him gets sold and how much that property appreciates over time.

### You might not always get what you see

It often happens that many prospective homebuyers who go to see the housing being constructed by a certain builder are shown beautifully decorated and furnished homes. It is common for builders to spend thousands of dollars in decorating a model home in order to lure potential homebuyers to purchase.

You find modern appliances, beautiful furniture, window coverings, fireplace finishes, landscaping and many other features that you might desire in your home. Most importantly, all these extras make the place look like your dream home.

At this point of time you should get a very clear statement from the salesperson regarding which of the amenities and features that you are seeing in the model home are included in the sales price of the home.This is extremely important because many homeowners end up spending several thousands of dollars more off to having purchased the home in trying to make it look like the model home that they saw.

### Prices are less negotiable

For upcoming homes that are being newly built, the builders are usually much more frigid wind comes to negotiating over the sales price. This becomes even more difficult if the housing happens to be in an area that is highly in demand or being built by builder who is popular.

The builders do not negotiate over the sale price of the homes that are coming up in order to maintain the integrity of the project. If they cut the prices for one customer, pretty soon that can have a rippling effect.

Other buyers will ask for a similar discount and before you know it the value of the homes in that project have come down. In fact, a builder slashing the prices for the homes for sale is a warning sign that may point out that the project is in jeopardy. These builders also may offer to throw in extras such as upgrade on furnishings, better kitchen appliances and a superior finish to your interiors.

Some builders also attract potential homebuyers by selling the home close to the actual building cost and pulling in a huge profit by selling extras and upgrades.

You should carefully look at the expense of buying items for the home from the builder himself even though it might seem like the easiest and the most convenient thing to do because you don’t have to go shopping for those later on separately. You might be able to save some money if you can get a better deal on home appliances, furnishings and other interior embellishments from elsewhere.

### New homes might be more expensive than older ones

This is no surprise since the cost of construction, raw material, labor and professional expertise has gone up over the past several years. many builders will also look to charging a premium for providing a modern and new housing set up as they know that it will be preferable to older homes to many potential home buyers

### Newer homes might not be built in as prime locations as older homes

It is an obvious fact that builders are running out of prime locations in popular cities and towns as the years go by. The land that was available in the prime and budding locations of the city 10 years back has long since run out. The newer homes that are built are either built further away from the main city or in certain undesirable locations such as landfills, steep hillsides etc.

If you want to locate yourself in an extremely prime location in your city, you might not have an option other than to buy an older existing home or apartment. As time goes by however, the location that is not considered to be prime and worthy now might become more in demand as the land needed to build for the homes become lesser in the future.

### New homes may have hidden operating costs

1st of all, you should consider the various amenities and features that your new home has that might require higher maintenance costs in the future. It is nice to have a swimming pool and tennis court in your home but you should figure in the amount you would have to spend to maintain the same as well.

If your home happens to be a part of a housing society, there are probably going to be a society maintenance charges as well for maintaining the overall society, clubhouse, swimming pools, gymnasium etc. Some housing societies keep their monthly charges for the home owners low but then slap them with a special valuation of the repairs required for repainting the clubhouse or some such expenditure.

If your house happens to be a part of the housing society, take a careful look at the format they used to charge the society maintenance fee and whether there is a clause for paying a higher sum of money sometime in the future when additional expense is required.

Second thing to watch our for when living is a housing society is that there might be certain amount of restrictions as to the kind of modifications you can think about in your home. For example, the society might not permit certain kind of colors that you can use to paint the exterior of your home in order to maintain the overall look, feel, standard and overall value of the homes in the society.

You might not be allowed to use your own house broker

Builders usually have their own sales staff to handle potential homebuyers. They have their own contracts and sometimes also require you to deal with their agents and brokers rather than have one of your own. This is usually not never see able and if you are not comfortable with this then your only option is to walk away from the deal.

However, an alternative to this is that you at least use an independent appraiser to appraise the value of your home and have your contract reviewed by a real estate attorney of your own choosing. This will offset some of the disadvantage of not being able to use your own broker and safeguard you against the commonest pitfalls that a a person can make when buying a home.

It is always good to look at a certain situation from all perspectives. While buying a new home has its advantages, it is obvious that it has its disadvantages and potential for pitfalls as well. Just because a home is new does not mean that it is going to be without flaws.

Homes are built by people and human error is always possible. The intention of the builder is also very important. He should not be the kind of person who is tempted to cut corners to maximize their profit. On the other hand, there are good builders and those who are simply just not as good at their jobs.

Therefore if nothing else, even a brand-new home should be thoroughly inspected by a professional property inspector to discover these possible human errors before you purchase it. Believe us when we tell you that this is important and only a professional and a competent property inspector might be able to point out certain flaws that might be a deal breaker in purchasing the home.

These flaws in the property will probably never become obvious to you even if you make a great effort in inspecting the property yourself until it’s too late.

### 3 Golden And Simple Rules For Buying The Right House

Three fundamental principles for selecting your home.

There are three fundamental rules that one should try and adhere to when selecting a home to purchase. These are not hard and fast rules and exceptions do exist.

### The principle of progression: Buy one of the cheaper homes on the block

You will be advised by certain professionals such as real estate agent or the property appraiser that it makes more sense to buy the cheaper homes on a certain block. This means that if you are getting a home in a certain area where all the rest of the other houses are priced much higher than what you are getting your home for, then it is likely to be a good and profitable buy.

For example although the homes in that neighborhood are in the range of \$200,000-\$225,000, you are getting to purchase a home in the same neighborhood for \$165,000. This usually means a good deal for you because anytime that you want to sell in the future, you are likely to get a much better price.

In a nutshell, the value of the homes and properties around your house which are more highly priced tend to pull up the price of your property as well. However, things may not be exactly as they seem to be. There might be a good reason why the home you are getting is valued at a lower price. So before you pull out the checkbook and make the payment, look at the property carefully and have it deftly appraised.

It is possible that the property is going for a cheaper price because it has certain defects.

• Curable defects. When a property has defects that are mostly cosmetic and minor in nature, they are known as curable defects. This means that even though you have to put in extra money to bring the property up to a certain mark and standard, it will still be a deal and cost less as compared to the prices of the property existing in the same neighborhood.

Let’s say that the property only needs a good paint job or a little bit of landscaping to make it livable. Perhaps it means repairs like replacing of the floorboards or addition of certain facilities like lighting fixtures. If you have to put an additional \$20,000 in a curable defects for a home that you are getting for \$165,000, the purchase of the home still costs you \$185,000 which is a deal as compared to the price of the home’s existing close by which range between \$200,000-\$225,000.

Problems in the property such as small deficiencies you can cure by upgrading, repairing or replacing in an inexpensive manner are known as curable defects. These include painting, modernizing a bathroom or kitchen, installing new counters and cabinets and upgrading electrical systems.

• Incurable defects. Another reason why you might be getting a property at a cheaper price as compared to the neighboring houses is that it might have some serious problems which are not so easily fixed. For example the property might be located next to a garbage dump or might be really ugly. If you have to spend another hundred thousand dollars in replacing the foundation, putting in a new plumbing or complete rewiring, purchasing such as the property doesn’t make sense.
Serious deficiencies in a property like this are called incurable defects.
They are not feasible to correct if you want to maintain a semblance of order in your home affordability. Not only will it eat into your financial resources but will more than likely make you end up owning the most expensive house in the neighborhood which is never really good in terms of recovering the money that you’ve spent one it comes to reselling the home.

This does not mean that all rehabs are to be frowned upon. You just have to get into a more careful analysis of several factors and how it is going to affect the prospect of getting your money back when you sell in the future.

There is a benefit in renovating cheaper homes as long as you’re getting it for a price that is much less than the prevailing value of the homes in the neighborhood. The amounts that you can spend on a home to rehabilitate it usually depends upon the difference in the price of the home that you purchase and the prevailing price of the average home in the neighborhood.

If you take the previous example in mind, buying a house for \$165,000 where the prevailing market rate is \$225,000 means that you can afford to spend no more than \$60,000 to bring your home up to the prevailing standard set by the other homes in the neighborhood. This is because, staying within limit and carefully planning the rehabilitation of the home ensures that you get your money back when you resell the home in the future.

The principle of progression works well with the location principle when choosing a home. Buying one of the less expensive homes in a good neighborhood improves your chances of property appreciation in the years ahead and maximizing your return on the sale.

### Principle of regression: Do not buy the most expensive house on the block

The principle of regression is completely opposite to the principle of progression. This principle states that when you buy the most expensive house on the block, you are likely to suffer when you sell the home in the future.

Just like the higher value of homes around the cheaper home tend to pull its value up, the cheaper homes around a very expensive home might tend to pull its value down. Another problem with buying the most expensive house in the neighborhood is that bringing any improvements in the home do not increase their value at all.

The value of the home is already high as far as the home appraisal is concerned because it is already estimated to be more highly priced than any of the other homes in the neighborhood. If you buy a home that is worth \$200,000 in a neighborhood where all of the homes are around the \$150,000 mark, putting an additional \$50,000 to modernize the bathroom or putting in a new kitchen will not increase the value of the home to \$250,000.

This is going to be a problem when you resell the house. While nobody will deny that you have indeed rehabilitated or improved the home by putting in a new kitchen, people are typically hesitant to buy \$250,000 home in a neighborhood where no other house matches the same kind of quality standard.

When people want to spend \$250,000 on purchasing a home they want to stay in the neighborhood were all near the homes are of the same standard as well.

Over improving a home by excessive improvements is a possibility and a trap that many homeowners have indeed fallen into. The money might be well worth the expenditure as long as you are going to stay in it and use the improvements you have made.

But it is a fact that most of the homeowners change homes twice or thrice in their lifetime.

While some people stay in the home for their entire lives, most of us change residences. The point is that the improvements might serve you well for as long as you’re staying in the home but when you try to sell the home, those improvements will not fetch you an extra price. The money that is spent on the rehabilitation goes to waste. This phenomenon is called over improving a property.

Over improving the property is not just applicable to the more expensive homes but can also happen when you buy it one of the least expensive homes in the neighborhood.

It is just a matter of controlling and evaluating how much you should spend it in fixing the home up. You should take a clear view of the kind of properties that exist in your neighborhood and the best time to do it is before you start the rehab work. If you are going to end up with the most expensive house on the block when you finish a project, it is usually advised that you should not do the project.

### The principle of conformity: Unusual is usually costly

If you want to have a maximum chance of future appreciation of your home that you buy, you should typically conform in size, age and condition and style to other homes in your neighborhood. This is called the principle of conformity.

Buyers usually do not want to buy a home that sticks out as a sore thumb as compared to every other house on the block. This does not mean that your house should be identical to all of the houses in the neighborhood but should follow a certain pattern which does not make it stand out very overtly.

• Size This principle suggests that your house should not tower the other houses on the block or vice versa. For a house is smaller than the surrounding houses, use the principle of progression as a guide to bring it into size conformity with the other houses and you will increase your homes value. On the other hand, if you increase the size of your home which is already larger than the existing houses in your neighborhood, you are not likely to add any value to the home as far as appreciation and resale value is concerned.
• Age It is uncommon to see an older home in the middle of a row of modern houses. However, you can every now and then find a brand-new house located in the middle of older homes. A modern home will look out of place in such a neighborhood and will in fact not fetch a higher value when it comes to reselling the home.
• Condition The coThe condition that your house is and will obviously have an effect on the resale value. If your house is extremely ill maintained and looks like a dump, it will not fetch a high price. Similarly, by being the best maintained home in the entire locality, you are not likely to increase its resale price either. Even if your home conforms to all of the houses in style you can still over-improve your home with the quality of material, workmanship and appliances in your home if all that greatly exceeds the prevailing neighborhood quality standards.
• Style and Architecture This is not saying being that the architectural style of your house has to be like all the houses in the neighborhood but simply means that it should follow conformity principle to the general overall look and style of the housing in the neighborhood.

All this does not mean that your house is to be as bland or boring as every other house on the block. The warning sign in to watch out is when people tend to look at your home and think it’s weird, eccentric or feel that it sticks out like a sore thumb or is highly noticeable as compared to the rest of the houses in the neighborhood.

### How To Select The Best Neighborhood To Buy A Home

When buying a home, most of the people have a limited amount of money that they can spend on a home. This means that you have to choose one set of advantages over another when it comes to deciding on the kind of neighborhood you want to live in.

For example, a neighborhood that has a good schooling system in proximity might not have such big and grand houses as compared to another neighborhood that is more on the outskirts of the city.

We have already mentioned good characteristics of a neighborhood. At the end of the day you will have to decide whether buying a home in a neighborhood that has good schools is more important to you rather than one that is nearer to the office and saves you an hour of commuting everyday.

Different neighborhoods can be good and advantageous in different ways. The decision can be tough. Just prioritise what is more important to you.

When you are on a budget and can afford only a certain amount of home, you need to prioritize what requirements are more important to you. Do you want to live in a neighborhood that has great schools, or would you prefer to live in a smaller home that allows for easier maintenance and has outdoor activities available.

Do you want to stay in a more average community that allows you to buy a bigger home or do you want to stay in the heart of the city where you are close to the action day and night.

Do you want a family home or a singles pad that allows you to live your fancy free and footloose lifestyle. At the end of the day, you have to decide what need and what is more important to you.

### Research and investigate the neighborhood

As we have already mentioned in the previous section, when trying to estimate the amenities and features of a neighborhood such as health of the local economy, presence of amenities such as parks and entertainment, school quality, crime rate and the stability of the neighborhood, you should do the research and try to find out as much information firsthand as possible. This information is available from several sources and can be tapped into effectively to give you a fair idea of the neighborhood.

Local resources. Check the local library and local chambers of commerce for more information on the neighborhood.

Talk to the people who live in the neighborhood. There can almost be no better source of information than getting information about a neighborhood from the people who actually live there and what they have to say about other neighborhoods that you are considering. People staying in a good neighborhood may be very keen to point out the parking problems, unfriendly and snobby owners as well as other disadvantages of the other neighborhoods that you’re contemplating.

Similarly, residents of a not so good neighborhood may tell you about the problems that they are currently facing and how their neighborhood is not so good as compared to certain other neighborhoods and how they wish that they could move to that particular area.

Renters are an invaluable source of information because since they don’t have a lot of money invested in their home, they are more candid about the shortcomings of a neighborhood and about their future plans of relocating to a better area. Of course, you can observe a lot yourself by driving or walking through the neighborhood at various times of the day and evening to see how charming the neighborhood stays throughout the day.

Get the market statistics from your real estate agent. Days on market statistics indicate how long an average home takes to sell once it’s put on the market for sale. As a rule, the faster the property sells the more likely it is to sell close to the full asking price. Quick sales indicate a strong demand for housing in that area which will be an advantage in the future when you are ready to sell. It will also lead to a brisk appreciation of your home value.

Get help from professionals. Speak to real estate agents, lenders and appraisers to compare the potential value of property in each neighborhood. You should understand that the real estate agent who is responsible for selling a couple of homes in a particular neighborhood may give you disguised information and may not be so forth with us to point out the defects of a particular neighborhood.

However, appraisers have no vested interest in a particular property. Appraisers can charge to analyze the neighborhood property values and pricing trends but are likely to give you a more accurate idea of what your property might be worth in the future and whether it is overpriced or underpriced currently.

It makes sense to spend a few hundred dollars if you’re going to spend hundreds of thousand dollars in purchasing a home, to get an un-biased professional opinion on the neighborhood’s property value.

### What Are The Qualities Of A Good Neighborhood

One of the most important decisions that you can make when buying a home is to choose the neighborhood carefully. Buying a home in a good neighbourhood can have several advantages.

Different people look for different facilities and amenities in the neighborhood of their home. This depends a lot on personal need. It is uncommon for a certain neighborhood to have all the good characteristics. Thats why different people choose different kinds of places to live in.

For someone who has children, having good schools close by might be preferable option rather than somebody who is looking to retire and looking for a peaceful area.

If you’re single and footloose and fancy free, your ideal neighborhood may be a downtown singles condo in a complex that is near to the heart of the city and the action.

The following are some sought after qualities of a great home locality and neighbourhood.

### More Appreciation Of Home Prices

One of these advantages is that you can look forward to and appreciated home value in the future.

While you have to pay a premium to buy a home in a good neighbourhood, these costs can often be recovered when you sell your home. Home prices in good neighbourhoods tend to appreciate no matter what the condition of the real estate market is otherwise.

If price appreciation is important to you, this is an important point to remember. A currently good locality may not offer the best returns. The prices of a home in a neighbourhood that is upcoming in a good location may offer more appreciation in home value.

Economic health.

The economy of a particular community such as availability of jobs and growing opportunities tends to increase the value of a home in the future. Evaluating the job market and the overall economy health of a particular community and neighborhood will help you understand how a particular neighborhood is going to grow in the future along with the value of your home.

Amenities and Facilities

There are several amenities that might be sought after by a person in a place that one desires to live in. Good roads, lush green parks, ocean views, easy parking, proximity to schools, churches, shopping, places to eat, good transportation, playgrounds and recreational clubs are good examples.

The more of these amenities available, the more of a premium by price are you expected to pay to stay in that neighborhood.

Schools and College System

For a family who has school going children, having good schools nearby is an important factor for good neighborhood to buy a home in. People with children would be very concerned about the schooling system that is available in a particular community and neighborhood.

Choosing a good neighborhood is not always about appreciating the investment in your home, but also about choosing the right community background and environment.

Good schools produce good children which leads to a better community and development in the future. Do not rely on surveys or somebody else’s opinion when assessing the school quality but visit the school yourself and speak with parents and teachers in a particular community to get a first-hand view of the schooling system that is available in the neighborhood your are interested in.

Low Crime Rate

Most of the people today are concerned with the safety of their home and family as well. This is a well judged concern as crime rates in many parts of the country are high. As with choosing a neighborhood with quality schools, do not rely on hearsay or isolated newspaper reports. Communities compile crime statistics, generally by neighborhood. Call or visit the local police department, visit its website or check the towns reference library to get the facts.

Stability

You might wish to purchase a home in a neighborhood that is stable when it comes to changes and development. You do not want to purchase house in a neighborhood that is in a constant state of flux. This means that the neighborhood and the environment that you buy in into today may quickly change in the future.

For example, if you purchased your home because there was a lot of open space and parks around your house, it may quickly change if a multi-storied apartment building comes up in these open spaces. Check with the local planning department and a good real estate agent for the inside information on the future proposed construction projects and proposals in the neighborhood that you are considering to purchase a home in.

Pride of ownership.

The pride of ownership that the people take in their homes is going to determine a lot on how the neighborhood is maintained and shapes up in the future. If you drive through a particular neighborhood where people tend to take good care of their homes, you will be able to see it in the beautifully maintained homes and clean surroundings etc.

Property prices can decline when the homes in a particular neighborhood are no longer maintained and the neighborhood is full of houses that are in decay. Poorly kept houses, abandoned cars, owners that are not staying in the homes but renting elsewhere, high rate of vandalism and crime are all significant the neighbourhood is not being cared for and has the potential to decline further in the future.

Degradation of homes in an area is contagious and can spread from one home to another, quickly encompassing the entire neighborhood making a once good neighborhood decline into disrepair and one of low demand and real estate value.

### 5 Tips To Get Great Price On A Home

These are some great tips to get a better price when buying your home.

There are times when you see ads in the newspaper that tell you that a property has been slashed in price by 15%. You can save \$20,000 when you buy. Such ads may be put in the home owners themselves or by the real estate agents. Your first reaction might be to think that this sounds like a great deal. But perhaps you can better look after your interest by being cautious. Perhaps the property was overpriced before or perhaps it has some major flaws that make it a problem to sell.

It is not impossible to find a deal on a home where you pay much less than the fair market value. But in order to succeeded in this you either have to be just plain lucky or prepared to do some hard work of looking around and putting in an abundance of time and effort.

You can target a property that has not been taken care of and is underpriced for simply this reason. Sometimes the home owner and the agent do not take much care in putting in required repairs and maintenance which results in the market value of the home to be lower than other similar houses on sale. You can take advantage of such a property and save yourself some money.

The easiest repairs to implement are cosmetic repairs such as landscaping, repainting the walls, refinishing the hardwood floors etc. You should be careful when you come across such a property. You should ascertain that the property does not have any major defects or requires major repairs to be conducted. ]

If this is the case, not only will it take up a lot of your time but also may end up costing you more than you saved on the upfront cost of the home. Besides, you do not want to spend the next few months putting in repairs and fixing up the property in order to make it liveable.

This is where the assistance of a competent home inspector comes in. Have the property properly examined by a qualified and professional home inspector. Make sure that there not too extensive repairs involved or major changes with reconstruction work required.

### Buy When The Economy Is Slow

Buying a home in an economy that is slowing down can be a great way to purchase a home at a bargain and throwaway price. When things are on the downturn in the economy, you might suddenly find that several houses are listed for sale and at a reduced price. For some reason, people are wary of making large investments such as purchasing a house or even buying investment funds from banks when the Interest rates are falling and the stock market index is on the low side.

Common sense should dictate that the kind of prices that you can get during this time will not be available when the economy is booming and surging ahead. However, a major reason why people are uncomfortable with making large investments at this point of time is because of job insecurity.

However, as long as you’re not buying a home for investment purpose, you are going to be a homeowner for several more years. If because of the slowdown there is a further decline in the value of the home, it is not going to effect you.

If the prices on the homes for sale are competitive now, and you can afford to make the payments on your mortgage loan then there is not much reason why you should hesitate to buy.

You will probably never get prices as good as this and will be glad you bought the home when the economy recovers and the real estate starts to pick up again.

People tend to panic when they loose equity in the home. It does not matter. It will only matter if you try to sell. As long as your home is your home, there is no cause for worry. The prices will come up eventually.

There are several factors that tend to correct the prices of real estate. There are several signs that you can watch out for that indicate that the soft prices on the forms available today might be on an upsurge in the near future.

• Rising cost of renting, which may bring the cost of renting a house closer to purchase which will in turn make more people want to buy, creating more of a sellers market and increasing the home prices.
• Cost of purchasing a home being almost same as renting a home in which case many more people will prefer to buy leading to a reduction in the available inventory of available homes on the market.
• Number of homes available for rent and for sale becoming smaller, leading to more competition amongst potential homebuyers and thus pushing up the purchase price of the available homes.
• Absence of major new housing projects coming up in the area leading to a higher demand for the existing housing units.

When the economy is experiencing a downturn and the prices on housing is low along with the interest rate on mortgage loans, this could be the best time to make a home purchase. As long as you are confident of paying your mortgage loan in the future, and don’t expect to sell the property in the near future, you have nothing to loose. You will be able to buy MORE of a home for a lesser price.

### Find A Motivated Seller

Another way to take advantage of competitive home prices is to find of motivated seller. A motivated seller is a person who typically wants to sell his house quickly for any number of reasons.

• He could be in a hurry to sell because he wants to purchase a new house and meets the proceeds from the sale of his existing house.
• He might be shifting to another location on a short notice.
• There might be some major changes in his life such as getting married which requires him to sell as quickly as possible.
• The homeowner may also be facing financial difficulties forcing him to sell in order to avoid a short sale or a foreclosure by the bank on his home.

While sometimes, sellers will profess in an advertisement that they are in a hurry to sell, usually they withhold this information so that they do not loose the bargaining power. However, many personal homeowners will not mind sharing this information.

Also, real estate agents do not mind disclosing such information as they are more intent on making the sale than anything else. Knowing the reason behind the home owner selling the home can give you a slight advantage when it comes to negotiating a better purchase price. So feel free to ask for the reason of the sale.

Like most businesses, even real estate has its peak periods as well as slow periods in an year.

By slow periods we mean a time in a year when not many buyers are looking to purchase a home. Different regions in the United States may have different times of the year in which the real estate sales are slow. However, holiday seasons such as the time around Christmas and Thanksgiving are typically slow for the real estate business.

When there are less buyers in the market, the competition for the available housing units is lower. Sellers may also offer bargains and sale prices on the housing units in order to attract more homebuyers. It is possible to take advantage of this and get the better price than you would in the peak season when multiple bidders are vying for the same property that you are.

Another time which could be slow moving time for the real estate market would be during the months of July and August when many families prefer to take a vacation. Also, the families who wish to purchase a home before the new school semester have probably already done so.

Similarly, people tend to not purchase a home during cold winters. Depending upon the area and the state that you living in the United States, the severity of the winters could last from a couple to as late in the year as April.

The real estate sales can slow down in the colder and northern parts of the United States till the month of April. Similarly, in the hotter southern parts of the United States, people might not be looking to purchase a home in the peak of summer and prefer to stay at home.

All these times that you can expect the real estate market to be slow, you can also expect to get a better price on the homes for sale. However, it is extremely important to note that many smart buyers will not put up their property for sale when the real estate market is going through a slow period. They will want to sell during the peak times when they can get the best price possible.

You should also know that the properties that are left for sale after the peak season may be the rejects that nobody really wants to buy and for good reason.

At the end of the day, you should not count on looking for a home only after the peak season is over. The best of homes may be gone by then. But this is something that you must keep in mind anyway.

### Learn to Negotiate

As we have said several times before, you should not get too hung up upon the current price of the home and whether or not you can get a slightly better price a few months down the line. The important thing is to be able to find the home that you want and to purchases it at the price that you can afford to pay back in the future.

A small difference in the price that you purchased the home for will fade to insignificance after having owned the home for many years which is probably your intention.

One of the last points that we would like to make regarding getting a home at the fair market value is to be able to negotiate with the seller.

It is usually important to be in a position of strength in order to negotiate. For example, if it is a sellers market where several buyers are vying to purchase the same home as you, then you are likely to luck out with trying to make this reduces price. However, there are many kinds of negotiation possible and you may be able to get the seller to offer you a better price by simply being a nicer person.

### Should You Buy When Home Loan Interest Is High?

We are often asked a common question: “Should I put off buying a home because the loan interest rates seem to be on the high side at the moment?”

Read about how interest rates effect home prices and what you ought to do.

It should seem logical that the interest rate on a home loan should impact the prices of homes as well. Having a lesser interest-rate can make a larger home loans more affordable.

Consider the following example. \$100,000 at the fixed-rate mortgage interest rate of 6% will have a monthly mortgage payment of \$600. At an interest rate of 10% of the mortgage payment increases to \$878.

So it should be true that when the interest rate on a home loan is low, a borrower can afford to purchase the more expensive homes and seek and afford to borrow more.

However, this is not usually how it happens. In many parts of the US in the late 1980s and early 1990s the home prices experienced a downfall in spite of the fact that interest rates were also declining. Similarly even though the interest rates were becoming higher in the late 1990s, home prices are rising as well in many communities all across the country.

This is a clear indication that other factors influence the prices of homes as well. One of them is the fact that lowered interest rate on loans makes building housing at low cost possible as well. The supply and demand for housing which is connected to the overall economy health of the community also plays a large part. In times of economy boom, both the demand for housing and the interest rate on home loans can increase simultaneously. This is not uncommon and happens often.

The point is that if you are ready to purchase your home now, the interest rate on a home loan should not be a very significant factor specially if you are intending to purchase a home for a long time.

If you are purchasing the home as your regular home where you are going to stay for the next decade or so, you will have plenty of opportunity to refinance if the interest rate on a home loans and mortgage as happened to decreased substantially.

Also, the value of the home that you purchase is only liable to increase in the future which will give you the growth in your equity and make it easier to refinance as well.

## How Availability of Homes Affects Their Sale Price

All factors that affect the prices of real estate and homes in a particular area such as the availability of jobs are all tied to one ultimate factor which is the demand and supply it off the housing. The availability of housing in a particular area has a huge impact on the prices. Growing employment rate and growing population rate may still out to appreciate the value of housing prices if there is already an overabundance of available homes and real estate. Conversely, an area that has a low employment growth rate may still see a surge in the housing prices if the availability of housing complexes and real estate is on short supply.

Basically, this is a little like competition between different businesses. When the people wanting housing is more than what is actually available, there is going to be a competition for the same real estate which is likely to drive the real estate price higher. Having a look at the vacancy rate is a good way to measure how much demand there is for existing housing. The vacancy rate can be calculated simply by dividing the number of empty and un-rented rental units by the total number of rental units available. So for example if 50 rental units are vacant in town and 2000 total units are available, the vacancy rate is 2.5%, [50 divided by 2000].

When the vacancy rate is low, there is more competition for the available rental units which is likely to drive up rental rates as well as price of real estate property in the future. Having high rents on a property also makes renting unattractive driving people to purchase homes rather than rent.

Conversely, a high vacancy rate may indicate that more housing exists than the demand. Excess of rentals tends to depress the rent as landlords are trying to find tenants for the properties. All other things being equal, more than 7 to 10% and increasing vacancy rates are generally a sign which are bad for the real estate sellers but good for prospective home buyers.

Another way in which you can get an idea about the availability of future housing in a particular area is to see how many building permits have been applied for. You can have a real estate investor look into the number of building permits that have been applied for in the recent past. This can tell you about the trend of housing in that area for the future. For example, a lot of building permits filed might mean that the housing is going to be in abundance in the near future which will result in either no appreciation or even depreciation of home prices. This is because many builders usually get into a new housing market to capitalize on high rising prices. Such an increase of happens after a sustained rise in housing prices in a particular area and the subsequent growing demand.

Conversely, depressed prices or high cost of building can lead to little or new housing being developed.

The supply of housing is also determined in part by the amount of land that is available to develop. A limited supply of land indicates the trend of rising and appreciating real estate prices in the long run. Therefore prices of real estate has appreciated quite a lot in areas such as Manhattan, San Francisco and Hawaii because they happen to be surrounded by water. Conversely, home prices tend to rise more slowly where there are wide tracts of land available for development.