Should you lock in your interest rate?

What does it mean to lock in an interest rate?

First things first, there’s no point in wondering when to lock in your mortgage rate if you don’t even fully understand what that means.

Every mortgage comes with an interest rate. This varies on many different things that you can control, such as your credit score. However, it also deals with a lot of things completely beyond your control.

For example, because Donald Trump was not expected by many to become president, his presidency is slightly unpredictable, which means that the interest rates could be too. When our neighbors across the ocean voted yes to “Brexit,” interest rates went way down by .125% or 125 points.

So, with this new presidency, rates could go way up, way down, or stay relatively the same. Right now, they’re at an almost one-year high from the presidency, but that isn’t to say they couldn’t go down again.

Basically, it’s mostly guesswork. There are financial experts that spend every day, all day attempting to understand what the interest rates will do, and they still get it wrong sometimes.

Because the interest rate is unpredictable, “locking in” a rate means that the bank promises to lend you the money at the rate during the time when you locked it in, not the rate on the day of closing on your new house.

For example, let’s say that interest rates are 3.75% when you lock in your rate. 30 days later when you sign the paperwork to close on your house, the rate becomes 3.8%. You only have to pay the 3.75%!

Sounds great, right? Unfortunately, this can work the other way as well and you could end up locking in a higher interest rate. This leads many people to ask the question: when is the right time to lock in an interest rate?

Is there a perfect time?

First, it’s important to know how far in advance should you lock in your interest rate if you choose to do so. You are able to lock it in any time after you are pre-approved up to a certain amount. But does that mean that you should?

Almost all experts agree that you should wait until you have a signed contract on a house first. Don’t get preapproved and lock in a rate before your realtor has even shown you all of your options. While we all hope to find the perfect house on the first day of looking, it could possibly take months.

Why does that matter, you ask? Locking in the rate costs more for the longer amount of time if the bank allows you to do it. If you want to lock it in for 120 days instead of an average 30-60, you’re going to have to pay a lot. Typically, it isn’t worth it and my advice would be to wait.

Okay, so now you’ve got a signed contract and you’re going to almost certainly purchase a house. Congrats! Is there a perfect hour, like Tuesday afternoon, is said to be best for booking airline flights? Unfortunately, no.

As said before, interest rates are relatively unpredictable. As much as everyone would love to know when the best time is, it’s hard to know. That’s doesn’t mean it’s completely hopeless, though.

One day to keep your eye on to see if rates go up or down is the first Friday of every month when the jobs report is released by the U.S. Bureau of Labor Statistics. This report typically has an effect on interest rates.

Another good day to keep in mind is when the Federal Reserve holds its two-day policy meetings and releases its statement. The dates for these meetings can be found on their website and are almost sure to influence the rates.

So, is it smarter to lock it in or wait?

Unfortunately, a lot of this is chance. So, you have to ask what your family, specifically, can afford to do. If you wait and rates go up, will you have problems affording the house long-term? If so, the safest bet is to lock in your rates right away.

While it is true that you could lose a bit if they go down, it’s much smarter than risking losing the ability to comfortably purchase the house if they go up.

You do have one more option, called a “float down” provision. As you might suspect from the name, this means that if the interest rates go up, you will not be affected at all, but if they go down, you will get the new, lower rate (or “float down” to the lower rate).

Well, why didn’t I say that from the very beginning, right? Clearly, this is the best option that everyone would like to choose.

Banks realize this as well, so they charge quite large amounts to add this float down provision to your mortgage. While this depends on the specific bank and their rates, as well as your financial situation, the extra cost is usually not advisable. As the bank has to make money too, they usually factor out this cost so that they won’t lose much money if the interest rate does go down.

However, sometimes this could be the smartest move for your new mortgage. Talk about this in depth to your lender, real estate professional, and family, making sure you understand both the long and short term costs of all decisions.

When making the decision to lock in your mortgage rate or not, the main question, as stated before, is just to ask yourself: what will I lose if the interest rate goes up versus down? Can I afford the risk of waiting? If not, and the initial rate you’re offered is fair, lock it in!

If you need any help finding a lender, contact us!

When should you treat for termites?

Everyone buying or selling a home knows that almost everyone will opt for having a termite inspection. In fact, some loans even require you to get one. Those who work in this profession and see termite inspection after inspection, though, understand that the answer to “Should I treat for termites?” isn’t a simple yes or no.

Don’t possibly lose the sale of a house because of arguments about if termite treatment is even necessary. It’s time for all buyers, sellers, and real estate professionals to understand why treating for termites can be so complex.

What can termites really do?

Termites are nothing to joke about. It’s estimated that they cause up to five billion dollars of damage and repair costs in the United States annually. There are a variety of types and termites are active year-round in most states, although not quite as active in the winter. They cover a total of 49 states in America, with Alaska being the only one lucky enough to not have these nasty creatures.

Termites eat wood from the inside out, so the damage that they’re doing to your property is oftentimes not found until it is already extensive. And don’t think that only your wood is in danger! Termites can also feed on paper, books, insulation, and sometimes even swimming pool liners and filtration systems!

What do inspectors look for?

Finding termites aren’t easy. These pests like to stay hidden in dark areas that are oftentimes very difficult to spot unless the damage is severe. The good news is that most types of termites eat relatively slowly, even if there are tens of thousands of them.

So if the inspector catches it in time, you probably won’t have to deal with too much damage. What exactly do they look for?

See any swarmers?

Swarmers are a type of subterranean termite inside of a colony that fly away after reaching maturity to create a nest of their own, typically in the springtime. You need to keep an eye out for these, as the other termites in the colony stay hidden.

Swarmers look similar to winged ants, but there are a few differences. The termites’ lower set of wings are the same size as their top set. Ants’ lower set is smaller. Termites also have wider wastes and straight, beaded antennae.

The fact that termites spread out in this way is why some experts recommend getting treatment even if the termites are right outside of your home. Termite nests are said to be spread out underground over areas up to one-half acre or more in size.

There is no unanimous agreement about if you should treat a home that was found to have termites in wood very closely nearby. Some believe that you should simply keep a closer eye on your home and have more frequent inspections to make sure it stays secure.

Others, though, think that if termites live very close to your house, it’s only a matter of time until they infest it if they haven’t already, and you should stop the damage as soon as possible.

As there is no universal answer, consider getting a second opinion and working this out with the buyer and seller specifically.

Mud tubes or mud patches

Termites are actually smarter than you think. They dehydrate quickly and need to stay in an enclosed, humid environment to live. They also cannot be exposed to predators as they have no strong protective features.

So, how do they overcome these problems? They create what are called ‘mud tubes.’ They essentially function as tunnels, allowing the termites to travel, protected, through your home.

They also love comfort, so they will fill any holes or cracks in with this mud substance. If you notice a small hole in your foundation that is now filled with mud, this could be a sign as well.

The mud tubes can be found in many locations leading into your house, such as around pipes, the foundation, the crawlspace, support piers, sill plates, floor joists, and more. Mud tubes have a diameter similar to a straw, although occasionally are thicker, and look exactly like their name has you imagine.

The termite inspector will crack these open to see if any white worker termites are moving through the area. Sometimes if they don’t see any termites, they will leave a space in the middle opened. If the center is sealed back after a few days, termites are certainly using this tunnel.

This is another area where termite specialists disagree, though. Some say that if there are no signs of active termites, these mud tubes could simply be from an infestation years ago that has already been taken care of. Others, though, argue that termites often desert certain tubes while foraging in a different area.

This decision, then, usually comes down to when the last treatment on the house was. Here, though, even if there was a recent treatment, there could have been a mistake and termites could still be active.

So, do I need to treat for termites?

I wish I could tell you a straight yes or no, but it’s just not that easy. Much of this comes down to the specific inspector, their experience, and their opinion.

For example, while termites eat the wood from the inside out and are extremely difficult to spot, experienced termite inspectors have a trick up their sleeves. They simply tap at pieces of wood that could possibly be affected to see if it sounds more hollow than it should. While an expert inspector can usually be right, it’s not an exact science.

If there are termites on your property near the home, all experts believe you should take extra precaution, but does it really mean that you need to treat at that time? If inactive mud tubes are spotted, does this mean that the termites are gone or simply in a different area now? Many lean towards this meaning that the termites are no longer at the house, but others disagree.

The bottom line is that you need to find a highly trusted and experienced inspector and rely on their expert decision. If you need any recommendations, feel free to send me an email or give me a call and I would be happy to direct you to some great termite inspectors in East Tennessee.

Buying your first investment property

Working with HUD homes and foreclosures, I see many people buying rental properties. There are typically three main groups that come wanting to invest in a home.

One group has years of experience and does this for a living. A second group is knowledgeable first or second-time buyers who have taken the time to understand the ins-and-outs of this business before jumping in.

The third group might be you if you aren’t careful. They heard from their friend that buying a house to rent out is a smart move, but didn’t do much research on their own. They have some money in savings and decide to dive head-first into unknown territory.

Chances are if you’re reading this, you’re already steps ahead of group three. While there is more research that has to be done on your own, such as exactly what loans you qualify for and housing trends in your specific area, read on for tips that will help every first-time rental property buyer.

Where’s the money coming from?

When you look at buying an investment property, you’ll realize that you’re presented with very different options when it comes to loans. While there might be better offers to those buyers who are planning on living in their home, don’t get too discouraged.

There are many types of loans you can get for investment properties as well. These types of loans, though, generally require a higher down payment and have higher interest rates.

If you have enough money set aside and are looking for a great investment to put that money into, great. Go ahead and skip the rest of this section. Otherwise, keep on reading.

If you don’t have enough money for a large down payment, it’s time to consider an investor. The details of the investments they make greatly vary and depend both on the person and your relationship with them.

Typically, though, they will pay for the house themselves and take a percentage of the profits each month. You, then, work as a type of property-manager in this case. You’ll find the renters, take care of any problems that arise, and rake in your percentage of the monthly payment.

Clearly, you will get more of a profit if you invest your own money. Then, you also don’t have to work out any questions of ownership. It’s also important to consider, though, that this poses more of a risk. Later, we’ll discuss if the risk is worth it for you.

Calculate all of your expenses

Of course, you’ll figure out your loan payment before you buy a home. But what else do you need to know?

First, if this is your first rental property, it’s probably best to stick to a home that doesn’t have much to fix. If you happen to be a contractor, feel free to take on what you feel comfortable with. Otherwise, wait until you find a home at a great deal that doesn’t take much work.

If you’re unsure where the best locations are or how much you should be paying when you buy an investment property, Priority Real Estate can help all those in East Tennessee. Otherwise, ask a real estate professional that you trust.

So, once you’ve finally found a home you’re interested in, the real work begins.

First, determine the total price you will be paying to purchase this home. Then, you’ll likely need to work on small things, like repainting the walls or fixing the stove. Add all these renovation costs in.

After this, understand how much you expect to get from a monthly rent. You can do this by looking at other rentals in the area with similar square footage. The next amount you need to add is the monthly taxes you’re going to pay on this property. Remember, taxes can be more for an investment home than a primary home 

Don’t forget to add the cost of insurance if you’re planning on buying it. Then, estimate annual maintenance and add in a few months of not having renters, as it might not be swept off the market immediately.

After you’ve figured out how much money you’re really going to need for this home, go to a lender to determine the type of loan you can get. From here, put pen to paper to see if you can pay your loan, or even more than what is due each month, and still make a profit.

Make sure all of this, such as how quickly you could get a renter or the money set aside for maintenance, isn’t too much guess work. If you’re unsure about the rental market in your area, as a real estate professional and make sure to that the contract is contingent on a home inspection.

If all the numbers work out, though, you might just be on your way to your first rental property!

Can you handle renters?

There’s just one more fact to consider. Unless you have enough money to spare on a property manager, you’re probably going to have to interact directly with your renters.

Many of the people who are going to be living in your rental property are wonderful families who you’ll be happy to host for many years until they decide, for whatever reason, to move. The reality of the situation, unfortunately, is that this isn’t always the case.

Maybe after months of not paying their rent, you’re forced to evict someone. You go to the house one day after giving them the notice to see it deserted, left in complete disarray. The refrigerator is missing, the walls are yellow from smoke stains even though the contract specifically said “no smoking,” and the carpets are covered in cat urine.

If you talk to people who rent out homes for a living, you know that this has happened to almost all of them at least once.

Another scenario is when renters try to take advantage of you. You’re a kind and understanding person, so when your renter is late on their rent, you tell them to just pay when they can. This drags on for months and months because you’re too afraid of being mean to your renter, but you’re worried about making your own payments because of it.

While the majority of people in the world are good, you renters might not always be. It’s important to realize before you buy your first rental property that you will have to be ‘the bad guy’ occasionally. Are you ready for that?

If you are and all of the numbers from the previous section add up well for you to buy a rental property, go for it! It’s truly a great investment opportunity that could bring you relatively stable monthly income for the rest of your life.

If you need help finding a home in East Tennessee, contact me.

Should you buy or rent your home?

Living in a post-housing collapse means that people are more frightened today than they have been in the past, and rightfully so. There were many causes of the recession, but the ultimate result is that both banks and possible buyers are more skeptical about home buying. So, the main question today is: should you rent or buy your house?

I’d also like to point out that this article is specifically meant to address the issue for those wishing to buy a house as their primary residence. Buying a home as an investment takes many different considerations that will be addressed in a different blog post, so stay tuned!

First, let’s start with the major benefits to help you decide if you should rent or buy.

Benefits to buying

  • Once you pay off your home, you’ll have a great asset and it is yours – no more monthly payments! If you rent, though, the payments will never stop.
  • It is often possible to buy a home more cheaply, month-to-month than renting one because of the types of loans offered.
  • If you home appreciates in value, you could earn a return on your investment or, at least, break even. This is something that can’t be said for renting.
  • There are tax credits that can be given in the event of home ownership.

Benefits to renting

  • You don’t have to invest your money in repairs, maintenance, or property taxes. Additionally, your utilities are sometimes covered as well.
  • Depending on many factors, you could pay very large, seemingly never-ending, amounts of interest on buying a house that you don’t have to worry about when renting.
  • You have more freedom to move, but also have to deal with possible rent hikes.
  • Contrary to popular belief, homes do not typically appreciate in value more than keeping up with inflation.

So, now, let’s go a little more in-depth on each of the most important points.

Buying could be cheaper than renting

There are quite a few factors that go into this one that make it complicated to generalize. Also, this is more than just recognizing if your loan payment will be more or less than your rent payment.

Your first step in determining if you should buy or rent is understanding what kind of loan you can get. I know some great lenders I’d be happy to recommend if you’re living in East Tennessee.

Determining the loan takes into account your credit score, assets, liabilities, and amount you can have for a down payment. Then, you’ll determine how many years the loan will last, based both on what you can afford and preference and lastly, your interest rate.

After you’ve understood how much you will be paying each month towards your loan, it’s time to figure out the taxes you will owe on your home. Then, it’s a smart idea to set aside a certain amount for the unexpected repair you might have to make.

Adding up all these costs, also including utilities, homeowners insurance, and your realtor’s commission (typically 6%), and dividing them by 12, you can then add that to your monthly loan to determine the total amount you will need to pay monthly.

One great tool to help you understand if you should rent or buy, after knowing all of these costs, is from the New York Times. Just enter each of the numbers, as well as how long you are going to own the home, and it tells you in simple terms if it would be smarter to rent or buy a home.

This calculator also attempts to adjust the cost for home price growth rate, rent growth rate, investment return rate, and the inflation rate you can likely expect in the future.

Another thing to keep in mind, though, is that even if you determine that the payment for buying a home will be slightly more than renting one, rent payments will never end, whereas paying off a home will mean you never have to worry about those pesky payments again.

Of course, even after your house is paid off, you will still have to pay taxes, repairs, and more that you won’t have to consider with a rental, but these will be exponentially less than regular rental payments.

Another question many people don’t know to ask is about appreciation. Will your home actually appreciate in value?

So, it seems that the consensus among experts today is that buying a home (to live in) is not actually a great investment. Studies have shown that the increase of housing value just barely outpace that of inflation.

Don’t think that means it’s a bad idea; it could be the best buy for you or your family! Yet, it also means that you should not attempt to stretch your finances to buy a house hoping for a large return. Staying within your determined budget, though, is the way to go.

So, should I buy or rent?

The best idea when thinking about your future home is to consider that it is a purchase, not an investment. If you can work the numbers out and it’s affordable, you’re saving yourself from rent hikes, an owner that decided to sell the home you’re renting, never-ending rent payments, no control over your own home, and more.

Yes, you will end up paying a very large amount of interest, but that’s unavoidable for most families and doesn’t mean that it couldn’t still be the smartest decision.

Buying a home is a huge, exciting purchase and you need to understand the finances involved before you make the leap. The answer is different for everyone, but the main factors you should look at are:

  • How long will you be living in the home? The longer you plan to stay, the smarter it becomes to buy instead of rent.
  • How much money can you put down? If you can afford to place a large percentage down, it’s probably smarter to buy than rent. If you can’t, that could still be okay because…
  • How good is your credit? If you can’t put much money down but have great credit, you can still end out on top with low, fixed interest rates if you have a high credit score.

With the types of loans offered today, there are many scenarios where your best decision is to buy your house. The smartest advice I can give you is to understand your payments, decide how long you’re planning to stay in the house, then plug the numbers into the calculator.

If you need assistance with finding a lender, understanding home costs in your area or finding a house after you’ve made your decision, Priority Real Estate is here to help.

Michele Karl is the Owner/Broker of Priority Real Estate. She can be reached at the contact page, her email at [email protected], or give her a call at her office at 865-577-6600.