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Fixed versus variable rate mortgages: what you need to know

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Fixed or variable rate? It’s a question every homebuyer is faced with when obtaining a mortgage. If you’re unsure about which option is best for you, this primer should help.

What are fixed and variable rate mortgages?
Fixed rate mortgages are straightforward and involve paying the same monetary installments and interest rate for the duration of your term.

Variable rate mortgages, on the other hand, are a little more complicated. They’re tied to your bank’s prime rate, which may change over time.

Your bank’s prime rate is based on the target federal funds rate or the rate banks charge each other when they lend funds overnight. A quoted prime rate is typically the average of the prime rates charged by the major banks.

The target federal funds rate can increase or decrease several times per year. For example, in 2018, this rate changed four times. It rose by 0.25 percent each time, climbing from 1.25 percent in March to 2.50 percent in December.

Should you choose a fixed or variable rate mortgage?
Variable rate mortgages typically have a lower interest rate than fixed rate mortgages and historically, they’ve saved people money. However, fixed rate mortgages have the benefit of offering certainty and predictability. They make budgeting easier and take away any trepidation around potential interest rate hikes.

To better determine which mortgage type will cost you the least, see what leading economists are forecasting for the target federal funds rate. Just keep in mind that no one can reliably predict future fluctuations.

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Negotiating tips for buyers and sellers

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Whether you’re a buyer or a seller, you can find something good about the current real estate market.

Interest rates are low, making for more appealing mortgages (and an abundance of available loans). And inventory is a little tight, making for less competition.

So if you’re a buyer, you can find a ready loan at a good rate. If you’re selling, you’ll probably have less competition.

All of this begs the question: How do you negotiate in this climate? Or do you even try to negotiate?

That might depend on where you live. Always consult a real estate agent before making an offer.

As a buyer, remember the number of houses for sale is low nationwide. Even in the coronavirus crisis, median home prices have increased. It’s probably not true that most sellers are desperate because of job losses or financial hits. Buyers really should not expect to get a lot for a little.

In fact, you can easily lose your dream house by bidding low, even in the crisis environment. If supply is low, make a robust offer. Sometimes it makes sense to bid for higher than asking price. Just be sure your price makes sense to you and the bank, as the property will need to be appraised prior to a mortgage gets approved.

Sometimes a personal letter will go a long way to forwarding your offer. Children selling the family home might be encouraged to know that the buyer will love it, for example.

You can also consider requesting repairs, credits, or adjustable deadlines if you offer full price.

As a seller, even if you are in a hurry to sell, resist the urge to lower your price. Home prices are not declining, they are generally rising.

Remember that creativity can make or break a deal. Rather than reduce your price, seek other incentives that appeal to buyers like credits, improvements, furnishings, or more flexible closing deadlines.

A counteroffer doesn’t need to be in the middle. If a potential buyer offers $10,000 less than asking price, the temptation is to split the difference. Consider countering at the price you want, and offering incentives. Or hold firm.

Some real estate pros recommend asking for solid earnest money of up to 5 percent to ensure the buyer is serious.

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4 reasons an offer may be rejected

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Making an offer on your dream home only to have it rejected can be heartbreaking. To help you prepare, here are four reasons sellers may have for turning down a bid.

1. It was too low
If your offer is too low, the seller may think you aren’t serious about purchasing the property. If the house hasn’t been on the market for long, they may also think it’s too early to consider offers below the listing price.

2. It was too high

Offering a lot more than the asking price is a bad idea unless you’re paying cash. This is because realtors are likely to warn their clients that the house won’t appraise for the amount bid. Once the lender realizes the loan is for much more than the actual value of the home, the transaction could fall apart.

3. It was written by your agent
Sometimes, listing agents engage in what’s known as dual agency. This means that if they represent both the seller and the buyer, they’ll charge a slightly smaller commission. The end result is that the seller will net less money if they accept an offer written by the buyer’s agent. This practice is regulated differently depending on where you are, so it may not always be a concern.

4. It doesn’t meet their needs
Every seller is unique, and it’s a good idea to find out what they need from the deal before you make a bid. They may have a specific closing date in mind, or perhaps they’ll only consider offers that come with proof of pre-approval. Your real estate agent can determine what the seller requires.

Finally, it’s rare for a seller to reject an offer without countering, so chances are you’ll be able to negotiate.

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Market assessment vs. home appraisal

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One of the most important things in real estate is understanding the various ways to estimate the value of a home. This includes market assessments and home appraisals, two very different things that both provide valuable information.

What’s a market assessment?
Also referred to as a market evaluation or analysis, a market assessment is a comparative review of sold, expired, and active listings for similar homes in a given area. It’s meant to provide an overview of a neighborhood and of the value of homes within it.

A market assessment is a useful tool for both buyers and sellers. Buyers will have a baseline against which to compare the price of a home they’re interested in, and sellers will gain an idea of what’s a reasonable list price for the current market.

What’s a home appraisal?
A home or real estate appraisal is meant to provide information on the condition and features of a given house. Factors like repairs needed, square footage, number of bedrooms, and so on are taken into account. Home appraisals are valuable to lenders, as they help determine the value of the property.

A home appraisal will typically be required by lenders, but market analyses aren’t. Nevertheless, both will provide home buyers and sellers with valuable information.

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Why sewer inspections are a must when buying an older home

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A standard home inspection won’t include a look at the sewer line. However, if you’re considering buying an older home, you should have a plumber to assess it. Here are a few types of problems that may be found.

Tree root damage
If the home is more than 20 years old, the sewer line needs to be inspected. This is because the pipes can become damaged by tree roots within this span of time. All too often roots will penetrate and clog them, consequently leading to more serious plumbing issues.

The house has a cesspool

Some older homes relied on cesspools. While municipal sewer systems made them obsolete, many were left in place. Soil erosion and heavy rains can cause them to cave in, thereby leaving behind huge holes.

Tar paper pipes
Many homes built prior to 1950 have tar paper pipes, also known by their trademark name of Orangeburg pipes. Over time, they disintegrate, which can lead to serious water damage and the need for expensive repairs.

A sewer inspection is the only way to uncover these problems. If you want to buy an older home, be sure to get a plumber to take a close look at the sewer lines before you make a bid.

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4 reasons you should bid at the listed price

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If you’re ready to make a bid on a home, you may want to consider resisting the impulse to negotiate. Here are some key reasons why making an offer at the listed price could be a good idea.

1. You’ll get the seller on your side
Making an offer for the listed price is likely to make the seller more receptive to requests. For instance, they may be willing to pay for inspections or to accommodate your move-in schedule.

2. You’ll get the listing agent on your side

Matching the listing price that was initially suggested by the seller’s agent will make them look competent. They may be more receptive to your offer and to any requests you may make.

3. You’ll get an edge on other offers
If the seller received multiple offers, it’s likely that most of them are for less than the listing price. This will make your offer stand out in comparison.

4. You’ll make future negotiations easier
If you try to get a bargain upfront, there may not be any room to negotiate for repairs later. The seller is much more likely to be receptive to such requests if you offer to pay the list price.

If you find your dream home and can afford it, you may want to skip the negotiations. Besides, if the house gets appraised for less, the seller may be willing to lower the price.

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How to change realtors

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There are many reasons why you may want to change realtors. Here are some tips that’ll help ensure a civil split.

For sellers
Hiring a listing agent to sell your home usually involves signing a contract with them. Typically, it’ll state that upon the purchase of your home, the agent will get a commission, possibly even if they were fired. The best thing to do if there’s friction between you and your agent is to contact the brokerage and explain the situation. They may agree to let you out of the contract or propose a way to resolve the situation amicably.

For buyers

Buyers’ agents don’t usually require their clients to sign legally binding agreements, making it somewhat easier to part ways. However, it’s always better to be upfront and let the agent know before you hire someone else. This also gives them the opportunity to address your concerns and to salvage the relationship, which may be valuable if they’ve already put time and effort into helping you.

If you signed a buyer representation agreement with them, however, you’ll need to break the contract before you do anything else.

Even when done amicably, changing agents may involve a lot of work. The best thing to do is to select a good realtor from the get-go.

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