What is the difference between an appraisal and an assessment?
Real estate is filled with terms that are more-or-less synonymous. From mortgages to loans, houses to homes, or lawns to yards, the list of interchangeable words is rather lengthy.
Two other terms that seem one and the same are appraisal and assessment. Yet while these do share some similarities, their differences far surpass their parallels. Understanding how they're distinct - and, above all, why it even matters - can make you a more informed homeowner, potential seller or prospective buyer.
What is an assessment?
In many ways, an assessment is almost self-defining, in that every so often, municipalities assess the value of houses in a given area or community. They do this for one overarching purpose: to determine what homeowners will pay in property taxes, an expense for which every homeowner is responsible. Typically, among those who are still paying off their mortgages, property taxes are included as part of their monthly mortgage bill. Those who already own their house - meaning they've paid their mortgage in full - ideally set aside money each year so they have the funds to pay by the due date.
The property taxes that someone pays in any given year is ultimately determined by the assessment.
What is the assessment process like?
Perhaps the biggest distinction between an appraisal and an assessment is what they entail. Municipalities send out one or several tax assessors to go around the city and assign values to existing homes. They use a number of different variables - such as sales comparison data and cost method - to determine what a given property is worth.
One thing they don't do - at least not typically - is physically go inside the house to see how many rooms there are, what installations are in place and observe other physical aspects of what makes a house a home. Because of this, assessments may not adequately reflect a property's true value. The assessment is one step in the process conducted by the municipality to determine what homeowners pay in annual property taxes.
How often are assessments performed?
There is no hard and fast rule as to how often assessments occur. That is determined by the local tax assessor's office. But as The Balance reported, it generally occurs once every five years. Some municipalities do them more frequently (i.e. annually), others less (i.e. once every 10 years).
What is an appraisal?
An appraisal is a much more exhaustive evaluation process. Lenders typically require a professional appraisal to be done on the subject property whether for a purchase or a refinance transaction. Among the reasons include determining fair market value and loan-to-value. For a purchaser, this also helps to ensure you aren’t paying too much.
If there is one thing that has consistently increased in value, it's real estate. Every month, the National Association of Homeowners releases reports detailing how much the average single-family residence sells for in the U.S. As of May, the median has risen on a year-over-year basis for 98 months in a row. This fact alone speaks to the smart investment of homeownership.
An assessor only takes into consideration external factors like some of the ones mentioned above, a professional appraiser considers many unique aspects of a residence. These are a handful of them:
- Number of bedrooms
- Architectural style
- Square footage
- Construction materials used in installations (e.g. marble countertops, hardwood floors, etc).
- Window composition
- Age of house
- Roofing material
- When the roof was last installed or updated
- Insulation type
- Basement and whether it's finished
- Foundation (e.g. Concrete slab, crawl space, etc.)
And that’s just the beginning. While it’s not an exhaustive list, it gives a better sense of the many variables used by an appraiser when completing the Fannie Mae Uniform Residential Appraisal Report.
Who requests appraisals?
Generally speaking, mortgage lenders will request an appraisal to obtain a detailed understanding of the property based on overall condition, conformity to the area, and market value. The appraisal report is used to assist the lender in its lending decision.
Ideally, appraised values and assessed values would be identical. That's rarely the case, mainly because the processes involved in each are so different from one another. Whereas an assessment is an educated guess, an appraisal is an informed, comprehensive calculation.
As a prospective or current homeowner, ensure that you know both of these figures. If its assessed value is higher than its appraised, you may have a case for paying less in property taxes to your municipality.
For more information on any aspect of the homebuying process, contact us at Residential Mortgage Services. We'll guide you home.
Understanding the Mortgage Pathway
As a homeowner, you know that you have several ongoing responsibilities. High on the list is ensuring your humble abode is properly maintained - both inside and out - so it retains its value.
An additional major task is keeping up with your monthly mortgage payment. It's a regularly occurring errand that gets you one step closer to full-fledged ownership.
Once the check is in the mail, payments are out of sight, out of mind. But have you ever wondered where that check actually goes? One would naturally assume it goes to whoever made the loan in the first place, such as a bank or mortgage servicing company.
While this is in part true, the mortgage payment paper trail is much more involved and intricate than one and done. In short, just as there are many working parts to finding or buying a home, the same is true for paying off your home loan.
Let's examine how it all works on a step-by-step basis. It can help you get a better sense of some of the lesser-known aspects related to financing and the housing market from a dollars and cents perspective.
Mortgage servicer sends payment to GSE
As soon as your lender receives your monthly payment, the process is underway. This starts when the servicer takes out a small fee for the administration of the loan and escrow account, which is used to fund property taxes and hazard insurance.
What remains usually goes to one of three government-sponsored enterprises: Fannie Mae, Freddie Mac and Ginnie Mae. GSEs (government-sponsored enterprises) are financial services organizations that are chartered by the U.S. Congress and serve many different functions, such as oversight and enhancing the flow of credit and liquidity.
Were it not for these organizations, homeownership would likely be more difficult to attain.
GSE bundles loans and sells them as mortgage-backed securities
Following the money gets a little bit trickier once your mortgage payment gets into the hands of mortgage-backing giants like Fannie and Freddie.
At this point, GSEs take the payments on the loan and bundle them with many others. Think of it as a package. These packages are known as mortgage-backed securities (MBS). Pooling loans together allows large banks to then sell them as shares to investors.
The individual or institutional investors are ultimately the ones who make the funding available for mortgages because they purchase the loans.
Their ability to be repaid is contingent on the end-user - the homeowner - submitting their mortgage payment consistently.
Who are these investors?
Much like homes themselves, investors come in all shapes and sizes.
Generally speaking, though, investors that purchase shares in MBSes are large pension or mutual funds. Some of the more common ones include J.P. Morgan, PIMCO and Morgan Stanley. Their valuation is what allows them to buy and make the funds available to homeowners.
They make money by collecting on the dividends accrued through interest on these mortgage payments. In essence, the interest earned goes into these mutual funds as earnings on the original purchase of the mortgage security.
MBS were game-changers
Mortgage-backed securities revolutionized the residential real estate industry by making homeownership far more achievable for families operating on a budget who may not have adequate funds otherwise.
Created in 1963 through the Housing and Urban Development Act - during the administration of Lyndon B. Johnson - MBSes provided more liquidity in the marketplace by allowing non-bank financial institutions and investors to participate, as noted by The Balance.
Evidence of this fact is the homeownership rate, which naturally waxes and wanes but has risen significantly from 50-plus years ago. According to the most recent statistics available from the U.S. Census Bureau, nearly two-thirds of Americans own residential property. In the 1950s, homeownership hovered in the 40% range among single individuals, according to archived Census figures.
How paying off your mortgage benefits you long term
Being consistent with paying off your home loan is smart for a variety of reasons, not the least of which is it helps to improve or maintain your credit score. It also gets you on the road to saving more of your hard-earned money by fully owning your residence one check or automatic deduction at a time.
But if you have any kind of pension or retirement account with investments in bonds and mutual funds, you're building a better retirement - in a roundabout way - through the interest from those ongoing payments. According to polling conducted by Gallup, 62% of Americans who have yet to retire anticipate stock or mutual fund investments to be a source of income once they exit the workforce.
Following the mortgage payment pathway is a bit complicated. But starting your journey couldn't be simpler by going through Residential Mortgage Services. Contact us to learn more.
What You Should Know About HOAs
When you buy a house - whether for the first, second or third time - you don't just become a homeowner. You are also part of a community, composed of neighbors, schools, small businesses and the like.
Increasingly, communities throughout the U.S. have new members on the block. They're called homeowners associations, or HOAs, and according to the Community Associations Institute, an estimated 25% of the U.S. population is part of one. HOAs are particularly common in Florida, totaling 48,250, followed closely by California (48,150), with Texas in a distant third (20,050), Illinois (18,700) and North Carolina (14,000) rounding out the top five.
Not only that, but as many as 3,000 HOAs are poised to be created in 2020 alone, putting the total number overall at between 352,000 and 354,000.
Given their ubiquity, it raises a central question: What are homeowners associations? More to the point, what is it that HOAs do?
What are HOAs all about?
Otherwise known as "property owners associations" or "community associations," HOAs are essentially groups of ordinary individuals that make various common-interest decisions for other people or families who live within the same general vicinity. Members typically live in similarly styled houses, apartments, buildings or condominiums. HOA board members - who are typically elected by homeowners within the organization - schedule meetings on a regular basis (usually once or twice a month) to discuss any number of issues owners may be experiencing, and how to go about addressing them. They also traditionally maintain budgets, make plans for upcoming events or projects and put together announcements that are relevant to other owners within an HOA.
A classic example of something a homeowners association makes decisions about is maintenance of a shared-use property. Say you live in a part of the country where heavy snow is common during the winter. An HOA may decide to hire an outside contractor to plow driveways and parking lots. Board members determine what provider to select and prepare the money needed to pay for snow removal services. They may also be responsible for landscape work or trash pickup.
Where does HOA funding come from?
Of course, none of these services are possible without money, which comes in the form of dues paid by all the members of the HOA on a recurring basis, be it monthly, quarterly or annually, as noted by Nerdwallet. These fees can run the gamut in terms of dollar amount. They can cost a few hundred a month to several thousand, but according to the most recent figures available from Realtor.com, HOA fees for a single-family home average between $200 to $300 per month.
In terms of what other things HOA fees pay for, this also can be wide ranging. Some take care of certain utilities, such as heating, central air conditioning or water; others may address the costs of maintenance for a shared-use fitness facility, pool or tennis court.
What are CC&Rs?
One of the primary roles HOA boards play is putting together certain bylaws everyone within the organization is expected to follow. These rules and regulations are called CC&Rs, or covenants, conditions and restrictions.
CC&Rs serve as guidelines everyone within an HOA is made aware of as to what decisions must go through the board before proceeding. For example, perhaps your windows are in need of replacement. Depending on the HOA's CC&R's, moving forward with this project may first need clearance from HOA representatives. Generally speaking, any decisions that affect the exterior of houses or condos requires the go-ahead from HOAs.
CC&Rs frequently also include rules regarding pets. For example, while an increasing number of HOAs allow homeowners to have a dog or cat, they may not permit households to have more than one of each or prohibit them from being larger than a given size or weight.
As noted by Realtor.com, just because certain rules are in place does not necessarily mean that they're hard and fast. While it is true that board members serve as the ultimate authority in terms of what is and is not allowable, each HOA member has a voice and their opinions matter.
As a result, you may want to consider speaking with someone on the board to discuss your concerns and see what, if anything, can be done to address the situation. There could be some wiggle room depending on the issue in question.
If you're thinking about buying a house where an HOA is in place, do as much research as possible. The more you know about it, the more informed you will be regarding whether the HOA's services, amenities and rules are in keeping with your lifestyle and budget.
What is the Truth in Lending Act?
Trust is a foundational element to virtually every relationship, whether it's personal or business-related. Trust is what enables people to make decisions and provides a sense of security that when someone says they're going to do something, they'll follow through.
At the same time, though, trust isn't something that's easily given; it's earned. So if you're looking to buy or refinance a home, seeking out a lender that can provide you with the financing you need, how can you know they'll live up to their word?
The Truth in Lending Act is one such reason. Enacted under the Consumer Credit Protection Act over 50 years ago, the TILA is likely something you've heard of but might not know much about. However, this particular law is worth understanding because it can help provide a better perspective on the homebuying process and assurance that the lender you select has your best interests in mind.
Here's more information about a fairly little known statute that can give you added guidance and security on your mortgage shopping journey:
What is it?
Signed into law on May 29, 1968, by President Lyndon B. Johnson and going into effect approximately a year later, the TILA is a sweeping regulation that requires both credit card providers and lenders, in general, to provide certain protections for you as a consumer. For example, you've probably heard of why it's important to "read the fine print" before selecting a credit card, because it often contains language detailing various fees and costs that come with signing up. The TILA requires lenders to specify exactly what those terms and rates include - in a language you can clearly understand - so you can make a more informed decision.
As noted by Credit Karma, full disclosure hasn't always been a part of the financial product selection process for consumers. It is, of course, in lenders' best interest to be as fully transparent as possible with their customers about the particulars of a product or service, but it's not something that they were necessarily required to do. The TILA, in effect, mandated transparency so consumers have more authority over how they spend their money.
How has the TILA changed over the years?
Any law that's been in place for more than half a century is bound to go through some alterations; the TILA is no different. Its first amendment, for example, occurred shortly after its effective date, when Congress decided to prohibit unsolicited credit cards, according to the Consumer Financial Protection Bureau. Other significant updates followed suit, including the Fair Credit Billing Act of 1974, the Consumer Leasing Act of 1976 and the Home Equity Loan Consumer Protection Act of 1988.
One of the more recent updates to the TILA occurred during the Great Recession. The then-new stipulation to an existing statute, dubbed Regulation Z, barred lenders from "unfair, abusive or deceptive lending and serving practices," according to the CFPB.
Installed in 2008, the update required lenders to cease and desist in supporting or producing any advertisements that could be construed as misleading. It also required that they provide disclosures regarding interest rates, for example, several days prior to customers making a decision on whether to take out a loan or other financial product.
In short, the TILA has been amended numerous times over the years, and will likely continue to be - to ensure you're always the one who is in control of your financial affairs.
How you can use the law to your advantage when buying a home
You know the home shopping process entails a lot of paperwork, but much of these documents are for your benefit and stem from the TILA.
For example, say you're interested in a home equity line of credit, or HELOC. Even though you may have already signed on the dotted line for a deal, you have three days from when you did so to back out if you choose. The right of rescission enables you to walk away from certain loan offers without worrying about losing money due to penalties.
Additionally, the aforementioned Regulation Z required that other aspects of a mortgage deal be put in writing. This includes need-to-know aspects like the amount of money that is being borrowed, the agreed-upon interest rate, charges and life of the loan.
It's worth noting that the principles and particulars governing the TILA don't apply to all mortgages. In fact, they more often relate to home equity loans and HELOCs. Other home loans fall under the auspices of the Home Mortgage Disclosure Act.
The TILA is not there to confuse you, but to work for you. If you have additional questions about it, please don't hesitate to ask us here at Residential Mortgage Services - a lender you can trust.
Fixed-Rate Versus Adjustable-Rate Mortgages: What You Should Know
If you like choices, entering the housing market offers plenty of them. Even though inventory isn't quite as high as in previous years, nearly 2 million existing-homes up for sale is quite a few, according to the National Association of Realtors. Architectural home styles (e.g. Victorian, American colonial, ranch, contemporary, etc.) run the gamut as do mortgage types, including FHA loans, VA loans, conventional loans and more.
As it pertains to interest rates, though, it comes down to two: fixed versus adjustable. Each has its pluses, minuses and distinctions that make it different from the other. But don't let the binary nature of these fool you; there are a variety of considerations within each that you need to be mindful of to figure out which one is the better of the two for you.
If you're in the market to buy a house and hoping to take out a loan, here is a bit more on each that can help you decide the appropriate rate for your needs.
What is a fixed-rate mortgage?
As its title implies, a fixed-rate loan (FRM) includes interest rates that remain the same. This means that no matter how long you take out a mortgage for, the rate does not change from what it was when you initially applied for the mortgage. Due to market fluctuations, interest rates are subject to change on a fairly regular basis.
What makes FRMs worthwhile?
For many years, FRMs have been the most popular form of interest among mortgage borrowers. Part of the reason for this is they are inherently predictable. Generally speaking, people are creatures of habit. They appreciate the comfort in knowing what they can expect. This is particularly true as it pertains to finances. With an FRM, they can rest comfortable knowing that regardless of the rate environment, they'll pay the same interest rate for the life of their loan.
Currently, FRMs are quite low, especially when you compare them to where they once were in the 1970s and 1980s. In the late 1970s, rates were over 10% and even higher than that throughout much of the 1980s. Today, they average around 3.49% during the first week of September 2019, according to Freddie Mac. Last year during the corresponding period, they were 4.5%.
Of course, the amount of interest borrowers pay is determined on a case-by-case basis after your lender takes a look at your finances and credit history.
What are the potential downsides of an FRM?
The main takeaway advantage of FRMs is they remain locked in. At the same time, though, the attractive element of FRMs can also be a detriment should rates lower. In other words, because they stay the same regardless of market forces, you could wind up spending more in interest compared to someone who takes out a loan later on if interest levels slip.
What is an adjustable-rate mortgage?
On the opposite end of the interest type spectrum are loans with adjustable rates. This means that what you wind up spending in interest for however long you take out the mortgage for, will vary, perhaps even considerably.
Much like FRMs, adjustable-rate mortgages (ARMs) are low historically speaking. As the most recent available data from Freddie Mac shows, a 5-year Treasury-indexed hybrid ARM averaged 3.30% for the week concluding Sept. 5. That's down from 3.93% 12 months earlier.
Again, what you spend in interest may be different depending on your situation and when you decide to enter the housing market. It may also be influenced by the loan type you select.
What makes ARMs worthwhile?
The upside of ARMs is that, generally speaking, they usually start out with a lower interest rate, according to the Consumer Financial Protection Bureau. This can make them highly appealing to first-time homebuyers, who may not have as much money as they would like fresh out of college or starting a family. According to NAR data, first-time buyers represent approximately 33% of those who are looking to buy.
The low interest rate may remain the same for several months or perhaps even years. However, once the introductory period concludes, ARM borrowers frequently wind up spending more than they did originally, CFPB noted.
Take what is known as a 5/1 ARM as a classic example, yet another loan option of many that are offered by lenders these days. These products combine FRMs and ARMs by the rate staying locked in for the first five years. Thereafter, however, the rate is subject to change with each passing year until the loan is ultimately paid off completely.
What are the potential downsides of an ARM?
Herein lies the rub with ARMs: They're inherently unpredictable. The amount you spend in interest in one year can be notably more than you pay 12 months later. This can present financial complications depending on your work situation and how you budget your money. At the same time, though, the difference in interest may not be all that significant at all, making the ARM potentially more worthwhile from a cost savings perspective than an FRM.
When should you choose an FRM? An ARM?
While choices are nice to have, they, at the same time can be difficult to make. Selecting between an FRM and ARM is no exception. However, there are certain scenarios in which one may be more preferable than the other. Say you're in a comfortable situation with regard to work or home life and you don't expect any major changes in the foreseeable future. There's a certain comfort in this and can make choosing an FRM a smart move, especially if the locked-in rate is something that works for your budget. In short, if it ain't broke, don't fix it.
As for when a variable rate may be more appropriate, consider how long you intend to stay in the home you plan on buying. Is this a house you see yourself living in long-term or is it more of a starter home? Perhaps you or your spouse are in the military, which would entail having to move to another state. In either of these situations, an ARM may be more appropriate because the way in which rates adjust can enable you to pay a lower interest rate early on.
If an adjustable-rate mortgage seems like the best choice, you may want to ask a few questions of your lender to get an idea of how the ARM changes over time. Here are a few of them, as suggested by the CFPB.
How soon will the rate change?
As we previously mentioned, exactly when an ARM adjusts varies from lender to lender. Much of this is dependent on the type of ARM you have. For example, a 5/1 ARM will stay the same for a longer period than will a 3/1 ARM, specifically for five years versus three. Both of these loan products are hybrid ARMs and may come in other durations (e.g. 7/1, 10/1, 15/15, etc.).
How high will rates go when they do adjust?
This is a particularly important question to ask, because what you spend for the first several years could be notably different than those following. Your mortgage provider will be able to tell you how high they'll go under the terms of the loan contract. There will be a cap, which will prevent the monthly mortgage payment from stretching your budget beyond its limit.
Is refinancing a possibility?
Something that many people do to get a lower interest rate is taking advantage of refinancing. If you get to a point in which an ARM no longer makes sense. You may be able to switch to a fixed-rate loan. However, as CFPB cautions, don't select an ARM with the assumption that you'll be able to refinance. Even though it may be possible for you to do, market forces - as well as your own financial situation - is subject to change, which would make refinancing a move that's not in your best interest.
At Residential Mortgage Services (RMS), we know you have lots of questions about the homebuying process. We're here to offer answers in a clear, concise manner. Whether you're seriously thinking about entering the market or just want some basic information, don't hesitate to ask. We’ll guide you home.