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Mortgage Speak

What's the difference between interest rate and APR?  

Even if you're not an expert in the real estate industry, you're probably aware of the various phrases that are synonymous with one another. Whether it's loan and mortgage, buyer and borrower or house and home, there are several terms that are similar in meaning.

Then there's annual percentage rate and interest rate. While there are undoubtedly similarities to both terminologies, their differences are noteworthy.  It is important to understand how they contrast and compare. Whereas one is more straightforward in what it describes, the other is more all-encompassing.  

For the sake of simplicity, let's start with the likenesses and then move on to what makes them distinct. 

How they're alike   

Annual percentage rate (APR) and interest rate are written out or described as a percentage. For example, 3.5%. 

How they're different  

Interest rate is related to the cost of borrowing the funds and one of the factors used to calculate the monthly payment of the mortgage loan. APR is more inclusive, meaning it takes other fees into account, in addition to the interest on the loan. As noted by the Consumer Financial Protection Bureau, these include:  

  • Points  

  • Fees  

  • Closing costs  

  • Other charges  

APR’s are usually greater than interest rates because these fees are expressed as a cost over the life of the loan.  As noted above, the monthly payment is based on the interest rate, not the APR. 

Why are they important to know?  

More than anything else, knowing and understanding the APR and interest rate is to increase understanding and transparency of the mortgage loan. It's important to go into any major purchase with your eyes wide open and being aware of both can help you with the decision-making process and how to best approach managing your expenses.  

Disclosing the APR and the interest rate as separate and distinct is also the law, mandated by the appropriately named Federal Truth in Lending Act. The TILA authorizes lenders to make borrowers fully aware of these details.   

Another reason why it's important to know is to help you avoid sticker shock. Think about any major purchase you've made; you've probably bought something that turned out to be more than initially advertised.

By including the APR into your calculations for how much you can expect to pay, you'll get a better sense of the rock-bottom price when everything is included, above and beyond the list price and the interest rate on the loan itself.  

With these details out of the way, here are a few things to be mindful of when you're evaluating the APR and what you'll spend from month to month, as referenced by the CFPB: 

APR has limitations  

In addition to terms and phrases, the homebuying process is filled with choices, one of which is whether you select a fixed-rate mortgage or variable interest. If you choose the latter, it means that the interest on what you spend could change over the life of the loan, thus impacting how much you spend per month. Understand that APR can't predict the future, so the APR has its limitations when it comes to measuring how much you can expect to pay should interest rates fluctuate.

Compare apples to apples  

Fixed-rate loans and adjustable-rate loans, while similar, are two different animals in terms of how they operate and are calculated. Therefore, comparing the APR of an ARM with the APR of a fixed-rate loan may be difficult to draw any broad-based conclusions, even if one is higher than the other. Instead, it's best to judge the APR when measured up against the same loan type (i.e. fixed to fixed, ARM to ARM).   

The same goes for the APR of a closed-end loan and the APR of a home equity line of credit, or HELOC. Fees aren't included in the APR figure for the latter.  

If you have any concerns or points of confusion about buying a home, please contact us at Residential Mortgage Services. The only silly question is the one that's unasked.   


General

Touring homes smartly in a COVID-19 world 

Few events have so dramatically impacted virtually every facet of our daily lives as has the coronavirus crisis. Its uniqueness and virulence swept the globe with shutdowns, spikes in unemployment, and many have lost their lives.  

Now that most of those closures have been lifted — and the employment rate slowly improves —  some Americans are taking a cautious approach toward returning to some semblance of pre-Covid-19 life. Others, meanwhile, are changing their behaviors entirely and remain practicing social distancing. 

Somewhere in the middle are homebuyers, as most individuals who bought a home the traditional way say they would do it again if given the chance despite what they know now, according to the results of a new poll. 

Among Americans who attended an open house within the past year, nearly two-thirds said they would attend another showing in the current conditions, according to a recent survey conducted by the National Association of Realtors.

Not only that, but they would rely more heavily on real estate professionals. Indeed, 47% of buyers acknowledged home experts — such as agents and loan officers — are particularly important for guidance during uncertain times. 53% of sellers echoed these sentiments. This leaves a group of people who say they would not attend an open house at least until it is deemed safe to do so by local authorities or medical professionals.  

If you fall in the latter category, you're not alone. Virtual open houses are ongoing, which enable you to see via computer or mobile device just about everything you would under normal circumstances.

Here are a few things to keep in mind as you go about the homebuying process in a constantly evolving environment amid the Covid-19 world.

Do your homework on virtual open houses 

Thanks to the internet, search tools, and home listing applications, doing your research has never been easier or more convenient.  Taking a deep-dive into all the particulars of a potential home purchase is especially important for virtual open houses. Although modern technology is incredibly versatile and images are clearer than ever, nothing compares to touring a home. Thus, you'll really want to lean on your real estate agent who will likely be able to obtain details on the home that may not be available to you through regular home listing apps or search tools. For example, they may be able to get floor plans of the house which you can use a map to guide you during the virtual tour.  

You may be surprised as to just how many people not only are looking to buy a house — largely due to record-low mortgage rates — but have attended virtual open houses. Talk to friends to see what they know and where to go.  

In addition to your agent’s ability to find available listings and when they are showing, they can likely connect you with the Multiple Listing Service (MLS), a private real estate listing database that sends alerts to your email when certain properties in your area become available. 

Linda Devlin, a Pittsburgh-based real estate professional, told Homelight that MLS is highly customizable

"On the MLS, agents have always been able to post when we are going to have an open house, including the date and time," Devlin explained. "Now, MLS has added a virtual open house URL so we can put the link right there in the MLS listing. We can then send it to buyers or post it on any social media site." 

Book viewings in advance 

While all 50 states have emerged from lockdown mode, social distancing measures are still in place that restrict crowding and mandate face masks. For example, while there traditionally is no limit to how many people can be in an open house at any given time, that may not be the case for states looking to curb gatherings.  

If you wanted to view a house in person, ask your real estate agent about convenient times to do so that won’t require special Covid-19 precautions. This way, you can really get a feel for the house and can avoid uneasiness about being among many people at once. In a recent survey conducted by Gallup and released in July, 54% of respondents said the lack of social distancing in their area had them worried, up from 45% in mid-May. 

Inquire about disclosures 

Disclosures are material defects in the house that traditionally cost money to repair. The seller is required to inform potential buyers of these, but you may forget to ask about them or not notice them during a virtual tour. Talk to your real estate agent about this issue.  

By adapting to the circumstances of the moment, you can get all the information you need despite the restrictions to make the right decision for you and your family. 


Things to Consider

What home buyers would have done differently 

Homeownership can be a rollercoaster ride of emotions. And they can occur at all phases. Some are somewhat skeptical about their purchase initially but grow to absolutely love it. For others, it's the reverse - they adore their place in the beginning, but after a few months or years, aren't as wild about it as they were back then. 

It raises an interesting question: If first-time buyers had to do it all over again, or were given the opportunity to do so, what would they change? Here are a few of the most common mistakes first-time homebuyers make. Being cognizant of them —whether you're on the cusp of buying a house or are in the market a second or third time — can help you avoid making decisions that you may come to regret: 

1. Not factoring in the hidden costs  

When you see the price of a house you like and it's within your budget, it's a great thing. However, there are several added expenses that the price doesn't include, such as mortgage insurance, property taxes and repairs. According to a 2018 poll from Bankrate.com, in the average year, a homeowner pays roughly $2,000 just to maintain their place's upkeep. 

Rely on your real estate agent to give you the whole picture. If you are a debut or repeat buyer, run the numbers and evaluate all the costs that come with buying a house. You may not be able to get a precise figure, but the more people you talk to, the better off you'll be in determining what a house will cost you over the long term.  

2. Thinking with your heart rather than your head 

When it comes to buying a house, love at first sight really does exist. When you see a potential home that looks great from the listings —and visiting the place confirms your initial reaction — it's a wonderful feeling. The problem is the rush of emotion can lead to impulsivity, buying the house without doing your research into the property's history. It may also result in a bidding war, where you are keen on purchasing the home so long as it is within the range that was pre-approved by your lender. 

Instead, it's best to adjust your expectations and not let emotions guide your decisions. No house is perfect, so try to be as objective as possible and not rush into anything until you're certain you've covered all your bases before you make a formal commitment. 

3. Foregoing or paying a minimal down payment 

Perhaps the biggest misunderstanding people often have upon entering the home buying process is the down payment. Some think they're required to come up with a 20% down payment when in reality they can pay much less. Some mortgages don't require any down payment whatsoever. 

If you have the ability, consider putting as much toward the down payment as possible. In addition to the fact that this helps you build equity faster, a down payment helps you reduce how much you spend on monthly mortgage payments and will help you pay off your loan faster, potentially years quicker. 

It's important to note that you should only pay as much toward your down payment as you can reasonably afford. In other words, if it requires draining your savings dry, then it's probably too much. 

4. Not taking advantage of a land survey 

There are several reasons why buying a house is typically the biggest decision a person makes in their life. It's not only a significant investment, but it can result in opportunities as well.  

The extent of those opportunities may be available through a land survey. While getting one isn't required, it can be very helpful and give you more room to improve or use your land how you want. As noted by HGTV, a professional survey may determine that you have much more square footage of land area than the seller led you to believe. This means you have the legal right to use the extra space as you would like.  

5. Failing to refinance 

Interest rates have been low for quite some time now, but they're particularly low today, averaging 2.87% among 30-year fixed-rate mortgages, according to the most recent statistics available as of this writing from Freddie Mac.  

The general consensus is refinancing makes sense if you can lower your interest rate by even half a percent. Some may opt not to refinance because of the paperwork involved or feel like such a small percentage difference won't amount to much. In reality, it can save you thousands of dollars over the life of a loan. 

Your awareness of these pitfalls can help you make the most of your home buying experience so you never come to regret it.


Helpful Tips

Why email is not considered a secure method for supplying mortgage documents 

If there is anything that most Americans have in abundance, it's email. Whether it's their personal inbox or their work-related account, emails practically never stop. In fact, the typical worker receives an average of 126 emails a single day, according to estimates from Radicati.

It's easy to understand why. Emails are simple, convenient, quick and can be sent from virtually anywhere, any time and by multiple means, be it personal computer, laptop or mobile device.  

Since mortgage providers aim to simplify the mortgage application process, supplying the required documentation via email would seem to make sense. While undoubtedly convenient, delivering the necessary materials for a home loan electronically may be inadvisable.  

The primary problem with this mortgage application method boils down to one thing: security. Think about what is included in your typical mortgage application. You name it, it's there, including your name and street address, Social Security number, bank accounts, available savings, where you work and the names and numbers of people who may be cosigning.  

While internet security software has improved dramatically in recent years as tech experts learn the duplicitous strategies of cybercriminals, identity theft remains an ongoing and far-reaching problem. According to the Identity Theft Resource Center, 1.6 billion private records have been exposed since 2005 in the U.S. alone and in 2019, breaches impacted 493 million people

Email is regularly abused and exploited 

Hackers seek to exploit any opportunity to steal data, be it through unsecured Wi-Fi networks, ransomware or denial-of-service attacks. But among the most common methods of all is by email.  

Email-based hacks are frequently designed to look like they're from someone you know or a reputable organization. In reality, the perpetrators are merely pretending to be someone they're not and seek to fool email recipients into clicking on a link that is embedded with malicious code. Just by clicking on the link can be the key the cyberattacker needs to access all your sensitive data or potentially steal documents you're sending as part of the mortgage application process.  

Another problem with emailing mortgage documents is the HTTP connection or Hypertext Transfer Protocol. This is the portal used to visit websites by entering the appropriate address. When there is an "S" written after the HTTP (HTTPS), it means that the connection is encrypted. Should there be an attachment with the email, there is no risk of it being intercepted.  

However, the same may not be true for the recipient. In other words, their HTTP connection may not be properly secured. That's because there is no knowing what type of network they're using. For example, if it's public Wi-Fi and it's unsecured, the attachment could be stolen or compromised. 

The risks associated with sending mortgage applications are better understood now, but that wasn't always the case. For instance, in 2014, 70% of mortgage lenders allowed loan applicants to submit their financial information through email, according to a study conducted by HALOCK Security Labs.  

The comprehensive nature of mortgage applications is yet another reason why emailing them is inadvisable. Here is a list of what information is typically included or asked for in a mortgage application: 

  • Copy of driver's license  

  • Social Security number(s) 

  • Paystubs from last two payment periods 

  • Current and prospective home addresses 

  • Retirement assets 

  • Bank account information 

  • Federal tax returns 

If even one piece of information was stolen, it could be potentially devastating, ruining years of hard work. But for all of these details to fall into the wrong hands can be crippling. 

What should you do instead? 

While submitting documents in person is a safe option, it isn’t always the most convenient, especially during these unprecedented times. Reach out to your lender to see what security measures they have in place so you know that your sensitive material won't fall into the wrong hands. For example, many lenders require those who are submitting documents electronically to set up an account with their own username and password. Sometimes, this method requires multifactor authentication, which adds an extra layer of security.  

Residential Mortgage Services has a secure mobile application, RMS Ready, that allows you to upload documents easily and securely from the comfort of your couch! Security should be your utmost concern, and at RMS, it's ours as well. Contact us today and learn how we prioritize your protection and convenience simultaneously.    


Things to Consider

Why this time of year is a good time for home renovations 

Be it beautiful fall foliage to tasty pumpkin-flavored treats, fall is chock full of sweet surprises, with lots of exciting things to do and accomplish. But here's a task that you may not necessarily associate with autumn: home renovation. No matter what room of the house is due for a do-over, now is the time to take those measures - and measurements. 

In reality, there really is no one single bad time to begin or complete a home renovation. Even during the height of the coronavirus pandemic, more than half of respondents in a Houzz poll were able to finish their projects despite the uncertainty and tumult that the shutdown created. This was particularly true of homeowners living in the South, as nearly two-thirds successfully continued on with the renovation amid the crisis.  

When it comes down to it, though, the fall months just may be the best of them all for remodeling, pairing a seasonal change with those of your home's. Here are a few reasons why, especially in 2020: 

The weather is delightful 

Ask anyone who enjoys autumn, one of their top reasons for the admiration will be the weather. Not too hot and not too cold, fall is the Goldilocks of seasons - it's just right. Not having to worry about the hazards and mess of heavy wet snow, nor the discomfort and productivity losses from hot humid temperatures, make fall a great several weeks of outdoor conditions that are ideal for projects large and small.  

Building materials usually cost less 

As most people know, spring as well as a good portion of the summer, are the busy seasons not only for home buying, but home building.  

Take June as an example. According to the National Association of Home Builders and the Department of Housing and Urban Development, a rate of nearly 1.2 million houses began construction on a seasonally adjusted annual basis this past June, a more than 17% increase compared to the previous month. The surge in demand led to an uptick in prices for lumber.  

However, since building activity usually trails off as the months draw to a close, so too do the costs of building materials. These savings get passed on to you from whichever contractor is performing the renovation. 

Projects are frequently completed faster 

Many factors play into when a renovation is 100%, as there are always issues that can come up that no one was anticipating, such as COVID-19. Generally speaking, though, since construction crews' workload tends to level off as the temperatures get cooler, they have more time available to prioritize whatever rooms you're rehabbing. Additionally, since the holiday season is just around the corner, rebuilders have an added incentive to finish everything before December and January arrive, which is when the snow starts falling in many areas - or at least is more likely to in comparison to October and early November.   

Cooldown period from summer commotion 

Summer may undoubtedly be the season for vacations, but that doesn't mean it's a time when you're less busy. Whether it's travel or having kids at home from college, June through August can be activity- and people-filled. 

Much like the temperatures, things tend to cool off in fall, as students return to their classrooms, dorms and apartments. Work schedules resume. In short, life gets back to normal. Take advantage of this quieter period by scheduling your renovation just as the days get noticeably shorter and leaves change color.  

The season for hosting 

Speaking of holidays, this is typically the period when family, friends, co-workers and extended relatives come to visit to celebrate the annual festivities. What better way to welcome friends and family memebers than with a new-and-improved kitchen, living room, dining room or guest bathroom when things go back to normal? 

You may want to consider installing an island as a gathering place. According to a survey done earlier this year by Houzz, roughly 66% of respondents who had their kitchens redone had an island either put in or upgraded.  

Again, since it's so close to Thanksgiving, Christmas, Hanukkah and New Year's, builders will aim to complete the job by a certain date so they too can enjoy the time with their loved ones.   

Deep discounts are common at home improvement stores 

Retailers know that a great way to increase customer traffic is by offering doorbuster sales events and discounts. And that's just what many of them do during the off-season, which is fall. If you haven't seen them already, take a look at the websites, circulars and signage of your nearest home improvement stores. You're almost guaranteed to see price cuts on a variety of products. You can take advantage of them or relay the info to your builder and designer.  

Close out 2020 with a bang, only the kind you hear from swinging hammers and clapboards. Residential Mortgage Services has renovation loans that are customized to fit your needs. Contact us today.  


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