1. Date of Acceptance:
When your Purchase offer is accepted by the seller, agreeing to the terms of your offer and or counter offer/s, it creates a contract. It is a bilateral contract, a promise for a Promise. The date on which the seller accepts (signs off) the offer is called the Date of Acceptance. Why is it important to the buyer in CA? Because it establishes the date from which your protective contingencies start.
Contingencies are provisions in a purchase contract stating that some or all of the terms of the contract may be altered, completed or rescinded by the occurrence of a specific event, which are set forth by specific dates leading up to the closing. Some examples of contingencies (but not limited to) are, Home Inspection contingency, Appraisal Contingency, Loan Contingencies, and Disclosure Contingencies. If the buyer does not approve the inspection report of the physical condition of the property, the buyer does not have to go through with the purchase. Yes that means they can ask for a cancellation and their deposit refunded. Similarly, the seller might include a Home of choice contingency, asking that their home may not sell to the buyer until the seller finds a home of their choice to buy and close on it. If the seller does not find a home of choice that they can buy, then the seller has the right to cancel on the buyer, and return their Earnest Money Deposit. ( Click here to see our Video on how to sell a home and buy another at the same time in a hot market)
An appraiser – is a neutral 3rd party, with expertise in the local geographic area. The job of an Independent, certified appraiser is to make an estimate of value by examining the property, looking at the initial purchase price, and comparing it with recent sales of similar property. Your bank or other lender will require the appraisal in order to ascertain the worth of the house for lending purposes. Remember, that your lender will lend based upon the value established by the independent appraiser. Having said that, in today’s super-HOT market, many buyers choose to come in with the difference between the appraised price and the contract price ( all it means is more down payment), because that may be one of the ways to negotiate the deal in your favor when you are dealing with Multiple Offers, as a buyer in this sizzling HOT 2016 market.
4. Annual percentage rate (APR):
Understanding the difference between annual percentage rate and interest rate could save you thousands of dollars on your mortgage. Always ask your loan agent what your APR is going to be. APR is a yearly interest rate that includes upfront fees and costs paid to acquire the loan, calculated by taking the average compound interest rate over the term of the loan. Mortgage lenders are required to disclose the APR so that borrowers can more accurately compare the actual cost of different loans with different fees. Interest rate is the cost of borrowing the Principal.
5. (FRM) Fixed Rate Mortgage vs ARM (Adjustable Rate Mortgage):
Fixed Rate mortgage is just what it says it is, a Fixed Rate. It is the most commonly used mortgage in Real estate, by First Time home buyers, because you get the security of fixed rate and payment Payments but higher costs to obtain the loan. However, your payments may change depending on some factors that we will discuss in another Article. FRM is usually for 15, 20, 30 years. On the other hand, ARM (Adjustable Rate Mortgage) is a great product that is quite misunderstood by home buyers, this product may come in for of 3/1, 5/1, 7/1 or 10/1 and has lower costs associated with it.ARM is a product where your interest rate (which is usually a lower rate than you’d get with a fixed-rate loan) stays the same for an introductory period for e.g. 7/1, meaning your low rate is set for the first 7 years and will adjust/ fluctuate annually for the next 23 years . The fluctuation of rates is based upon a predetermined index such as the London Interbank Offered Rate (LIBOR). Most people who do get ARM’s end up refinancing at the end of the term most of the times. Adjustable rate mortgages are a good option for buyers who are looking for an increase in income in the future, where they can save now and afford higher payments later or refinance for a better rate. It may also suit buyers who may be looking to buy for a shorter term. Having said that, ARM’s are usually a volatile product, which are all about timing, usually for a shorter period of time and certainly not for everybody. Having said that, a lot of people who get Fixed rate mortgages, end up refinancing anyways, paying more in costs. So, do your home work, discuss this with your mortgage professional and make an educated decisions, instead of blindly going for one or the other.
6. Balloon mortgage:
A mortgage that is not fully paid off over the loan term (such as five, seven, or ten years), leaving a balance at the end. This usually is seen a lot in ARM’s (Adjusted Rate Mortgage). The borrower must either pay off the remaining mortgage or refinance the loan. Most folks who lost their homes in 2010-2013 were victims of ARM’s and balloon payments. The market crashed, these homeowners went underwater. They came up on the end of the ARM period, where they had to refinance, but could not because of obvious underwater scenario, thus ended up loosing their homes.
7. Private mortgage insurance(PMI):
If you are putting less than 20% down, most likely you will have a PMI insurance. Which essentially means, that it reimburses a percentage to the mortgage lender, if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale). PMI is not tax deductible like your Mortgage Interest or Property Taxes. PMI can be built in your loan. On a FHA loan, PMI ( which is called MIP) may stay for the entire term of the loan or until you refinance to get rid of it. Make sure that when you sit down with your mortgage professional, you ask them to give you at least two to three options, including conventional. As of 2016 a new product claims to offer 3% down conventional financing with no PMI. Sounds like we are getting back to the 2006 and 2007 market, almost no down payment loans. Scary!!
8. Prepayment penalty:
A fee imposed on a borrower who pays off a loan (usually a mortgage) before its end or due date. Lenders impose this kind of fee to encourage borrowers to hold a debt and keep paying interest on it. This is usually lifted after a certain number of years, and rarely seen for the whole term of the loan. Most loan products today do not have such penalties.
9. Closing costs:
Are costs that a home buyer / Home Seller pays over and above the price settled for the home. We will discuss the costs associated with buying the property only. Seller costs will be discussed in another article. These costs typically include your lender’s fees or Points (Yes there are always Lender costs, even if the lender says its at “NO COST”), be aware that some lenders may give you a “No Cost to you upfront” loan, which simply means that the cost of obtaining your loan is added to the balance of your loan and you pay interest on it. It is always better to use the money now to pay lender fees, than to add it to the back of your loan and pay interest on it. Off course that depends on the fact, that you have the money to pay upfront. Other costs may include, but are not limited to prepaid interest, a prorated share of the property taxes, credit report fees, homeowners’ and title insurance premiums (Yes Buyers do pay for title insurance, most Real Estate agents will tell you, that sellers pay for title insurance, that is only partially true), hoa prorations, deed filing fees, inspection and appraisal fees. Real Estate Agent commissions in CA are usually paid by seller ( this is why it is so important for you as a buyer to have an Agent who only represents you, for free). Read our Article on why a Buyer should never have the Listing agent represent them. Some closing costs are tax-deductible, you should check with a CPA before you decide to buy a home.
10. PITI ( in some cases PITIH):
Is an abbreviation for any major expenses that make up your mortgage payment, which mostly includes principal (which is the amount borrowed/ loan amount), interest ( fixed rate / ARM), Property taxes ( in Los Angeles property taxes are calculated at 1.25% and 1% in Ventura county, of your purchase price), homeowners’ insurance, and HOA ( Home owners association) dues.
The best advice I can give you is to find the best possible representation you can. As a buyer in this dirty, unethical world of Los Angeles Real Estate, know you will be taken advantage off. Having great representation will cut down, the time, energy and mistakes when buying the home of your dreams by hiring the right agent. (How to hire the right Agent)
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Pebble Singha is a proud member of BrokerInTrust Real Estate, an Elite All Broker Network and Consumer Advocacy group. My blogs are a way to educate the consumers on what actually goes on in the Real Estate world vs what they think they know. This is one passionate Real Estate Brokers opinion on how he sees the Real Estate World in Los Angeles.