Flood Insurance
Though rare in the state of Colorado may still be required depending on where your property is located. You will be notified by the selling agent if the home falls in a flood plain.
You will also know that you are already in a flood plain by the amount of money paid to your home owners insurance. Homes that are required to have flood insurance typically pay 3 to 4 times more in insurance then any similar homes not located in flood plains.
Though floods are rare flood plains are determined by the 100 year flood projections for any given area. Because they are the number one natural disaster claims in the country lenders take it serious.
Floods are created by a number of things but primarily from Storms, Melting Snow, Hurricanes, Water Backup, Dam or Levee Failure, or internal plumbing issues. Regardless of the reason these claims can be quite costly to the insurance companies and that is why the premium for these programs run so high
In recent years the flood insurance programs have been tied to one or two major providers and have doubled since the floods in Louisiana and the Eastern States.
My recommendation is to be aware of the costs and make the best financial decision for yourself. Although you may be in love with a home in a flood plain, typically they are tougher to sell and sell at a lower premium then homes not located in a flood plan. Know the area and know the real estate market for that area before jumping on a contract.
Escrow
Escrows are collected at the time of closing and is done so as a courtesy to you. Escrows simply put are funds collected for taxes and insurance premiums due on the home.
These premiums will be collected monthly and will help determine your total payment for the loan.
Normally 14 Months of insurance is collected at closing on purchase transactions. The first 12 months is sent directly to the home owner insurance providers and the remaining 2 months are put into a start up escrow account held by the lender.
Purchase transaction will typically require only 2 months taxes as the taxes for the previous year have already been paid by the sellers. The sellers will also be responsible for all taxes up to the closing date giving you a fresh start day one of moving into the home.
Refinance transaction work a little differently, the total amount collected depends on when during the calendar year your closing takes place. The appropriate insurance and tax premiums will be collected to ensure the lender has the funds to make payment when these premiums become due.
Some loan programs will allow you to pay your escrows on your own, but additional risk premiums will be added to your interest rate to deal with the risk of default do to unpaid taxes and insurance. This is not advised and should be carefully considered before the decision to not escrow is made.
When Should You Refinance
A refinance by definition is a transaction that replaces your current loan with a new loan offering more favorable terms then your previous mortgage.
A refinance should only be done if there is a net tangible benefit for you and your family. Lenders take it seriously and will only allow you to do the transaction if a benefit can be seen.
In the past the net benefit found in a refinance could be minimal and may have contributed to some of the housing problems people are facing today.
Things that are considered a net tangible benefit are:
Lowering your payment through an interest rate reduction
Stretching out your payment terms in order to lower your payments.
Moving your loan from an Adjustable Rate Mortgage to a Fixed Rate.
Debt consolidation: though your payment may be higher as long as your total monthly debt goes down a net benefit can be identified.
Court ordered refinance requirements normally associated with a divorce or separation between two people.
Death of one or more borrowers and in accordance to the estate’s wishes.
In short it has to make sense before you can refinance you loan.
You should consider a number of things while determining if refinancing is your best option. Here are just a few of the things to keep in mind as you refinance:
Are the terms negotiated going to better my situation.
What are the closing costs and when will I break even on the loan based on those costs.
What will the real estate market look like in the near future?
Financing a Condo or Town Home
These transaction are very similar to normal financing options offered to single family residence, however there are some difference that need to be considered before making an offer.
Condo’s and Town House normally do not appreciate at the same rate as single family residencies.
These homes also have Home owner associations who collect fees which in return increases your total monthly obligation in the property.
The benefit is that you do have outside entities that allow you to have some amenities currently not being offered in a normal single family residence such as pools, club houses, trash removal services, snow removal services, and up keep of common landscaping areas.
Condo’s and Town Homes can offer 1st time homebuyers a less expensive way to own a home.
Lenders do analyze these properties much closer then normal single family home loans. The reason for this is the amount of fraud and the amount of default associated with these loans.
The biggest fraud in Condo and Town Home purchases are investors purchasing the homes as primary residences only the rent them out immediately after purchasing the property. For this reason investors require that the complex have at least 51% of the homes in the complex as owner occupied units. If not the lender will automatically treat the transaction as an investment property.
Default risk is associated with the slower then normal appreciation for the units. When owners find that they have to move or simply have circumstance that require them to sell the property, an equity issue can arise. The equity issue prevents the home owner from selling which increases the likelihood of default.
Finally it should be noted that Home Owner Associations are not know for their ability to serve the best interest of the complex. Most of the horror stories I hear come from the fact that the Home Owner Associations are controlled by a select few that have their own interest in mind. It is not a heavily regulated entity and should be carefully considered before making the decision to buy a Condo or Town Home.
Temporary Buy Down
Temporary Buy Down programs are offered by most lenders and can help lower your payments on a purchase transaction over the short term.
These programs should be looked at as a Partial Adjustable Rate mortgage that has a feature that will eventually go to a fixed rate.
The way a temporary buy down works is that for a period of two years your mortgage interest rate will be much lower then the eventual fixed rate being offered on this home.
The buy down must be purchased by you or the seller in your behalf in order to qualify. The buy down has a cost associated to it.
For example if you lock your rate at 6.5% and you have a 2/1 buydown in place your first year interest rate will be 4.5% and the 2nd year will be 5.5% and year 3 – 30 will be set at 6.5%
The benefit of a program like this is that the seller or builders will offer the incentive to you to qualify you for more home at the time of purchase.
Be CAUTIOUS of this program, and most of all be aware of the negative aspects here are just a handful of them:
The interest rate offered in the buy down will typically start about .5% higher then the going rate in the market. So you may have been able to lock in a rate better today then what your 30 year fixed rate will be at the end of the temporary buy down period.
