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Glossary of Terms
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Frequently Asked Questions (FAQ)
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In this section you will find
information designed to
help you get the best deal on a mortgage,
1031 Exchanges, as well as
buying pre-construction
condos in Florida!
According to the non-profit organization
THE FANNIE MAE FOUNDATION,
these questions should help you make the best decision
when searching for a home mortgage:
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1. Company Name and Phone Number: Write down the name
of the loan officer with whom you speak, so you can get back
in touch if you decide to apply for a loan at that financial
institution.
2. Mortgage Type: Your task will be simpler if you've
narrowed your search to the type of mortgage loan you prefer.
When comparing mortgages among lenders, compare the same loan
among the lenders you call...In other words, compare a 30-year
fixed rate to a 30-year fixed rate, a one-year Treasury ARM to
a one-year Treasury ARM, etc.
3. Interest Rate and Points: Interest rates change
often, even daily. Make sure you record the date of your rate
quote. Try to call all lenders on the same day so you have an
accurate comparison. Another way to evaluate rates is by
examining the Annual Percentage Rate (APR). It indicates the
"effective rate of interest paid" per year. The figure
includes points and other closing costs and spreads them over
the life of the loan. While the APR provides you with a common
point for comparison, it's important to look at the whole
product before deciding which mortgage to get.
4. Interest Rate Lock-ins: When a lender agrees to hold
the quoted rate for you, this is called a "lock-in." Ask when
can the rate be locked in, at the time of application or only
upon approval? Will the lender lock in both the interest rate
and points? Can you get a written lock-in agreement? How long
does the lock-in remain in effect? Is there a charge for
locking in a rate? If the rate drops before closing, must you
close at your locked in rate or can you get the lower rate?
5. Minimum Down Payment Required: Ask the loan officer
what the lowest allowable down payment is, with and without
private mortgage insurance. If Private Mortgage Insurance (PMI)
is required, ask how much it will cost. Find out how much is
due up front at closing and the amount included as monthly
premiums. Ask if you can finance the up-front cost of mortgage
insurance. Also ask how long MI will be required. In some
cases, you may be able to cancel the MI when your loan balance
drops below 80 percent of the original value of the property
or when a new appraisal establishes that your mortgage is 80
percent or less of the new appraised value.
6. Prepayment of Principal: Some lenders charge
borrowers a prepayment penalty if they pay the loan off early.
If you think you may sell your home before the loan is paid
off (most mortgages are repaid early) or plan to make
principal payments before they are actually due, you need to
know if there will be a penalty and for how long it will
remain in effect. Some penalties are in effect only for the
early years of the loan.
7. Loan Processing Time: Loan approvals can take 30 to
60 days or more. Peak business periods, particularly when
rates are dropping and many homeowners are refinancing, can
affect a lender's response time. Ask each lending institution
for its estimate, and see which can promise very short
approval times. If interest rates are rising or you have an
urgent need to get moved in, these "express" services may be
the answer.
8. Closing Costs: Closing costs are fees required by
the lender at closing and can vary considerably from one
financial institution to another. Ask specifically about the
application fee, origination fee, points, credit report fee,
appraisal fee, survey fee (if required), lender's attorney
fee, cost of title search and title insurance, transfer taxes,
and document preparation fee.
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If you're shopping for an adjustable-rate mortgage (ARM),
ask the additional questions that follow:
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9. Financial Index and Margin: The interest rate on an
ARM is determined by adding a margin or spread to a specified
financial index. This is called the fully indexed rate. Find
out both the financial index used (Treasury Certificate of
Deposit, Cost of Funds, etc.) and the margin (that is, how
much higher is the ARM rate than the index rate?).
10. Initial Interest Rate: Is the initial rate quoted
the fully indexed rate or a lower introductory rate, sometimes
called a teaser or discount rate? A teaser rate may sound like
a bargain today but it may turn out to cost you more in the
long run. This low rate lasts only until the first adjustment.
After that, you will be charged the fully indexed rate, at
which point your payments may become unmanageable.
11. Adjustment Interval: How often can the interest
rate be adjusted - every six months, one year, three years,
five years? A loan that adjusts its interest rate after six
months is called a six-month ARM; after one year; a one-year
ARM; etc.
12. Rate Caps: Rate caps limit how much your interest
rate can move, either up or down. Periodic caps limit the
change per adjustment period, and a lifetime cap governs the
maximum amount the interest rate can increase or decrease over
the life of the loan. For example, you may find a one-year ARM
with a 2 percent periodic cap and a 6 percent lifetime cap. If
this one-year ARM is originated at 8 percent, after the
one-year adjustment period it could be adjusted upward to as
much as 10 percent, or downward to as low as 6 percent,
depending on the movement of the index. Remember to consider
the adjustment interval when comparing rate caps. The one-year
ARM just described could reach its lifetime cap of 14 percent
(original interest rate of 8 percent plus lifetime interest
rate increase of 6 percent) in three years if interest rates
rose steadily. A three-year ARM would just be making its first
adjustment after such a three-year period.
13. Payment Caps: Payment caps may appear similar to
rate caps, but don't be misled. While they can limit how much
your monthly payment increases, they don't restrict the
interest rate from going up. Many ARMs with payment caps have
no corresponding interest rate caps. As a result, you may end
up paying the lender less than the amount of interest you owe
each month. If this happens, this unpaid interest is added to
your loan balance, and the principal amount you owe increases
rather than decreases with each payment. This is called
negative amortization and generally should be avoided.
14. Conversion to Fixed-Rate Loan: Some ARMs let you
convert to a fixed rate mortgage at specified times, typically
during the first five years of the loan. Because the
convertibility feature is often an added expense (some lenders
charge an extra point, for example), find out the exact
conversion terms and how much it would cost you to convert
your ARM to a fixed rate loan. You'll want to compare this
cost with the costs incurred and the interest rate savings you
might gain by refinancing your mortgage to a fixed-rate loan.
This will help you decide the relative advantages of each
option to determine which is most cost effective for you.
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Still have questions? Feel free to
contact us.
Our many years of experience can help point you in the right
direction.
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What You Need to Know about Buying "Preconstruction".
Preconstruction sales are those real estate transactions that
are initiated prior to a particular project being constructed.
Since 1990, we have seen condominium prices along the Emerald
Coast go from $80 per square foot to, in many cases, more than $500 per square
foot. Supply just can't quite seem to stay fully ahead of the
demand, fueling further growth and development.
Buying condominiums on a "pre-construction" basis is extremely
popular along the Emerald Coast today. It is not only a great
way to get a great buy on a condo, but has proven to be a very
profitable venture for the investor.
Developers today have to prove to their lender that demand
exists for their proposed project. They need to "pre-sell" a
certain number of units in a proposed condominium development
(often 75%) before the lender will finance the construction.
These pre-sales are accomplished through the use of the
"Reservation Agreement".
This is basically a non-binding agreement in which the
prospective purchaser tenders a deposit (usually 10% of the
purchase price) and agrees to purchase a condominium based on
the "proposed" prices, amenities, floor plans, etc. Your
deposit goes into an interest bearing account (normally with
an attorney). You may cancel this agreement at any time and
receive a full refund.
Once the developer has acquired the necessary number of
pre-sales/reservation agreements, the developer is ready to
proceed to the "hard contract" stage. At this point, the
developer has received his recorded "condo docs" and is ready
to begin construction. Florida law requires that prospective
purchasers of a new condominium development be afforded a 15
day rescission period. This means that after signing a contract
to purchase a new condominium, the buyer has 15 days to review
all condominium documents. If, during this period, the buyer
changes his/her mind, the buyer receives a full refund of
their deposit.
Once you execute the official sales (hard) contract and once
the rescission period has passed, the sales contract becomes
binding on the purchaser AND the developer. At this point, you
will also probably be required to make an additional earnest
money deposit. Typically, a 20% total deposit is required.
Now you are set. You've chosen the unit, reviewed the condo
docs, sent in your additional deposit, you've executed the
sales contract, the rescission period has come and gone, and
your developer is now ready for action! Right?….Probably so!
But now comes the wait. Depending on the size of the
development, construction could easily take between 6 months
and 2 years! But don't worry...While you are sitting at home,
day after day, patiently pondering and dreaming about your new
condo, it's comforting to remember some very interesting
things are occurring....
You see, each week that goes by is probably money in your
pocket. With appreciation rates at some area condo
developments pegging the needle at 50% between reservation
agreement and closing, the odds are definitely in your favor!
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For more information or
for an up-to-date list on new condo developments
in the area, give us a call!
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~ Why 1031 Exchanges? ~
Tax deferred exchanges have actually been around for many
years. Throughout our nation's history, farmers have traded
land for land, tractor for tractor, livestock for livestock,
etc. There was no tax consequence on these types of
transactions until 1918, when the first federal income tax was
imposed.
The process for conducting 1031 exchanges today is actually
the result of a 1979 court case involving a man named Starker.
Starker won his case (for the most part) against the
government, establishing the case law that has provided the
foundation for modern-day exchanges. That is why many refer to
a 1031 as a "Starker Exchange".
Although the Starker Decision validated the tax payer's right
to conduct tax deferred exchanges, 1031's did not really gain
widespread popularity until the "Final Treasury Regulations"
were issued in 1991. Since that time, 1031's have become
increasingly popular. So popular in fact, that 1031s are fast
becoming the rule rather than the exception in real estate
transactions!
Most buyers and sellers today can benefit from 1031 exchanges.
To follow is our personal "1031 Top 10 List", the ten most
important things to know about 1031 exchanges:
1. A 1031 exchange does not allow you to sell real
property tax-free, although the 1031 process does allow you to sell tax-deferred.
2. The sale of your "relinquished property" does not
have to occur at the same time that you purchase a
"replacement property". It can, but this would actually be a
"simultaneous exchange" which has become somewhat less popular
since the Starker Case.
3. Within 45 days of the sale of your relinquished
property, you must positively identify up to 3 potential
replacement properties. Or, you may identify an unlimited
number of potential replacements, so long as the aggregate
fair market value does not exceed 200% of the value of all
relinquished properties.
4. You must acquire (close on) the previously
identified replacement property
by the end of the 180th day from the transfer date of your
relinquished property. Because delays can occur, we often recommend against
pre-construction product as replacement properties.
5. Actual or constructive receipt of proceeds (if you
touch the money) from the sale of your relinquished property,
prior to acquisition of your replacement property, will
disqualify the exchange.
6. The use of a qualified intermediary is required. The
intermediary holds the money, accepts the property on your
behalf, then transfers the acquired property to you. Many
local attorneys and title companies offer this service.
Someone who has represented you (attorney, Realtor, employee,
etc.) within the past 2 years prior to the transaction may not
act as your intermediary.
7. If your relinquished property is a condo, you don't
necessarily have to acquire another condo to qualify the
exchange. Just about any properties held for investment are
considered "like kind".
8. The ability to sell a property (paying no capital
gains tax), investing the proceeds into a new property, all
the while deducting the expenses of maintaining the property
on your tax return is a FANTASTIC way to build wealth!
9. Exchanges involving family members have special
restrictions. You may have to hold a property for at least two
years after acquisition.
10. Feel free to contact Ed and Terri for additional
information. Consult your CPA, attorney, or tax consultant to
see how 1031 exchanges may benefit your particular situation!
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Still have questions? Feel free to
contact
Ed & Terri Smith.
Our many years of experience can help you in the right
direction.
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