Fixed Rate Mortgage

Whether it’s realized or not, a fixed rate mortgage is the initial way most people consider financing when they are buying a house.

Since most of us need to finance the majority of the cost, we apply to a bank or other lender for a mortgage loan.  Based on a number of qualifications including your financial profile (I discussed this in an earlier post) and the value of the property, the lender pays for the property and terms of repayment are established.  — For the duration of the loan the lender will hold title deed to your property as collateral (security) against payment default.

The amount of money lent is called principle.  The length of time you have to repay the principle is set when the loan is issued.  (It’s usually 15 or 30 years and payments are most likely to be made monthly.)  You will repay the principle in increasing increments.  This may sound odd since I’m talking about a loan called a fixed rate mortgage, but “rate” is not a reference to speed.  Rather, the percent of interest you are charged is fixed (set) for the duration of the loan.  (Your interest rate will be lower if you take a 15-year mortgage.  —Lenders feel the risk of default increases with the longer 30-year term.)

Interest is the lender’s compensation for making the loan and payments are set up so that your first payments are almost entirely interest; very little of your initial payments go against the principle.  Over time, however, small increments of repaid principle add up, leaving less of a balance on which to charge interest.  Slowly, your payments will change from being primarily interest to mostly principle.  And, since the financial experts know the schedule at which this happens, they can set the dollar amount of your mortgage payment at a constant.

(Note:  Even though your mortgage payment remains the same, there are some other costs—like insurance—that are bundled with your monthly payment.  These additional obligations may cause your total housing payment to vary slightly over duration of the loan.)

As you pay off the principle of your loan (the money you owe), you accrue equity (monetary worth; money you can use) in your property.  During inflationary times your equity value can increase quickly.  This means that the financial impact of the interest you pay on your fixed rate mortgage decreases.  Of course, when the general economy falls (and therefore, property values) your interest will cost you more in relation to the worth of your equity.  Nevertheless, because of its consistency and because it facilitates budgeting, a fixed rate mortgage is attractive to many home buyers.

Mortgage house mortgage

In my last post about buying a house I talked about some financial information a traditional lender will want to see when you apply for a mortgage.  Next I want to present the forms that type of mortgage can take.  (The most common are fixed rate and adjustable rate.)

You probably know that a traditional mortgage isn’t always an option for everyone.  In fact, in an earlier post I brought up some alternative forms of financing that involved motivated sellers.  So, you can expect me to address that topic again soon.

Buying a house : mortgage

HyperSmash
How much house can I afford?  If you’re thinking about buying a house, the question of a mortgage is probably occupying your thoughts right now.  You’re wondering how much money a traditional lender (like a bank) will give you—and what information will be used to get that figure?

The second part of that question is easy to answer.  They will use everything they can obtain about your finances:  Factors will include your income and recent income tax returns, existing debt service, and credit score.  (Your credit score will also significantly influence your interest rate; a high credit score should make you eligible for lower interest.)  They may also want to review your spending patterns and how often you change jobs and residences.  (They are looking for reliability and stability.)  —Here’s something that may surprise you:  Lending institutions do not favor people who have a lot unused credit.  They are concerned that it will be abused in the future.

If you cannot supply the required information, it is quite possible you will be denied a mortgage for just that reason.  Neither does having all the figures guarantee approval.  The lending institution will see how your financial profile fits within a set of “rules” that determine how much of a mortgage you can afford (and that, for all practical purposes, defines how much house you can buy).

The rules are actually a set of percentages (of your gross income—that’s your income before taxes are taken out) used to figure the maximum you would be offered as a mortgage loan.  Although some lenders allow a very small variance, if your percentages are greater than those of the rules it’s becoming standard to offer you less (and perhaps at a higher interest rate) or, quite possibly, decline your application.

There are three rules (all based on maximum considerations).  The following is a summary of these rules:

1)      Monthly Mortgage Payment—The Rule of 28:  Your monthly mortgage 

payment should not be greater than 28% of your gross monthly income.

This number is simple to figure:  Divide your gross annual income by 12

and multiply your answer by 28%.  So, if you have a gross annual income

of $60,000 your mortgage payment should not be greater than $1,400

(60,000/12 = 5,000 x .28 = 1,400).

2)      Total Monthly Housing Payment—The Rule of 32:  The monthly average of all bills directly related to your housing payment should not be greater than 32% of your gross monthly income.  In addition to your mortgage payment, these are bills associated with housing—any mortgage insurance, homeowners insurance (including insurances covering specific occurrences like flood or hurricane), property taxes and HOA fees.  (This is where lenders may allow that small variance I mentioned earlier.  Some will allow 33% for these bills.) Based on a gross annual income of $60,000 your average monthly bills related to and including your mortgage need to be no greater than $1,600—certainly no more than $1,650.  And yes, a few dollars does make a difference to a lender.

3)      Monthly Debt Service Payment—The Rule of 40:  The required minimum monthly payments for your outstanding debts may not be greater than 40% of you gross monthly income.  This includes your mortgage and related bills, loans of any type—student, auto, etc.—and credit card payments.  (This explains why lending institutions do not want you to have much unused credit.)  Note:  This figure does not include utility bills.  (They are usually accrued and paid in full, cyclically.)  Based on that gross annual income of $60,000 with a monthly gross income of $5,000, at 40% your total monthly debt service should be no greater than $2,000—and of course the majority of that will be dedicated to housing.

Thinking about that Rule of 40 can be a bit deceptive.  Using the figures I’ve given you, $5,000 minus $2,000 leaves $3,000—right?   No, it does not.  Since the $5,000 indicated is gross monthly income, taxes and other deductions have to come out as well as all your living expenses—food, utilities, fuel, car maintenance, insurances (car, health, life…), savings, entertainment...  The list is practically endless.  Your money is not.  Lending institutions want to offer you the largest loan they can.  Your figures may make the maximum prohibitive.  Regardless, you may want to consider (1) reducing your monthly bills and (2) reducing the amount of money you want borrow.  This may mean reducing the amount of house you buy, but living better in it.  Or, you could wait to buy until you have large down payment.  The bank will give you as much money as its policies allow in order to make as much money as they can on the interest you pay.  You don’t want buying a house to lead to financial hardship.  You want to get a mortgage that will allow you to feel good in the house you buy.

Mortgage for your new house mortgage

As you put your plan together for buying a house, you have a lot to think about.  Financing is a major issue.  And, of course, most of us think mortgage when we think of financing.  In the past mortgages were fairly easy to obtain.  Recently, however, lending institutions have become considerably more conservative.  Many people may find the requirements for securing a mortgage so inflexible that they become discouraged—willing (too easily) to abandon their dream.

Rather than giving up, consider alternatives to a traditional mortgage.  Certain forms of creative financing are really not uncommon.  You may already be familiar with the terminology:

1)      Seller Carryback Loan

2)      Seller Second Mortgage

3)      Lease-To-Own

4)      Subject To Existing Financing

These forms of financing involve motivated sellers.  They tend be short-term solutions that can put a buyer into position to get a traditional mortgage.  I’ll discuss mortgages and these other financing methods in detail in later posts. Buying a house

Buying a House How to buy a house home

You’re planning on buying a house!  What will make a suitable home for you?  We all have our dreams—the mansion on the mountain, the rose arbor and white picket fence, the little cabin in the woods, a modern condo…  We’re sure that owning the ideal house will take us a long way on the road to the perfect life.  But, you already have a life and if you are honest, you’ll admit that your ideals sometimes don’t fit well in your reality.  Instead of dreaming, you should be strategically thinking about the issues involved in buying and then owning the building or space you want to make into your home.

Of course, everybody knows that it takes money to buy a house.  We also know that most of that money will be financed.  (I’ll address that in another post.  Insurances, taxes, and utilities are subjects for later, too.)  The issues I want to discuss in this post have financial significance, but they are initially connected to emotions, lifestyle, and practicality.  Owning a house really puts you in partnership with a building.  And, as in any relationship, there needs to be an analysis of the assets (and the baggage) belonging to each party before the union becomes permanent.

Your ability to endure a long-term commitment is probably a good place to start. —There is that major financial obligation involved in buying a house.  Many factors can influence your ability (and willingness) to make that payment every month for (maybe) 30 years.  For example, is your job stable?  If you lost it, would you be able to continue making your house payments?  For how long?  Foreclosure will affect your credit for a very long time.  What happens if you get a promotion or your dream job really does become available—on the other side of the country?  Are you going to be happy (or could you even manage) living in a dumpy little apartment while the house you leave behind sits waiting for a buyer? (And, it sits empty while you still make those monthly payments.)  What if you just have plain old wanderlust?  (How many times have you moved when your lease was up?)  People used to figure they could turn a profit on a house if they lived in it for 5 or 6 years.  Now it may take ten or more.

How much space do you need to live comfortably?  And, what kind of lifestyle do you have?   Are you a homebody?  Could you work from home?  Do you want to entertain a crowd—frequently (or maybe never)?  What phase of life are you in?  Is your family likely to grow in the next few years? —I’m not just thinking about babies.  Is it likely an adult child could return home because of divorce or job loss?  What about aging parents? These questions are among the factors you want to think about when you consider the size and style of house you’re interested in.  Not everyone can run up and down stairs all day long.  Not everyone needs a house with four or six bedrooms and three baths.  Not everyone needs a formal living room and a family room.  Not everyone needs a gourmet kitchen or a complete office suite in the house.  But, some people do.  We need to think about how we normally live.  If we have too little room or too few amenities, we’re uncomfortable (and we can become quite obnoxious if we get too uncomfortable).  When we have too much, we’re in danger of becoming slaves to our house.  Think about heating space you never use.  If you rarely have company, it might be economical when you do have guests to rent a place at a nearby resort or stay at a hotel rather than paying for rooms that are closed up most of the time.  How do you feel about maintaining a yard when you have too many allergies to enjoy it?   One maxim says, “The things you own, own you.”

When it comes to maintenance, do you have the skills and are you willing to spend the time it takes to do the work yourself?  If not, can you afford to pay someone to do it for you?  If you think a Victorian is a suitable home for you, keep in mind that a grand old house need lots of TLC.  And that doesn’t mean you get off easy if you buy new; all houses require preventative maintenance.  Are you interested in a sleek new condo?  Many of those come with a staff that does scheduled maintenance and someone may be on call 24/7.  Most are also governed by a type of home owners association.  Maintenance fees are charged regularly (whether you need to take advantage of the services, or not) and depending on the repair, you can still be financially responsible—in part or in full.  As for a condo that doesn’t have a home owner’s association?  Just try to get all your neighbors to agree to a new roof if your unit is the only one with a leak.

The building won’t be your only maintenance consideration.  Appliances wear out too.  It’s not easy to cook three meals a day for a family of five on a two-burner hot plate while you save money so you can afford to replace the stove.

Furnishings are another issue.  Do you own enough to fill a house?  Or, are you going to have to do it piece by piece.  (That can be fun—or exasperating—depending on your ability to tolerate half-finished projects.  It will be expensive.  And will you stop when it’s appropriate or go on to clutter?)  It’s also possible that you already own too much furniture.  Downsizing can also be pleasant or stressful.  For some people possessions are like old friends and parting with them hurts.

Then there’s the yard.  Most homeowners have one (apartment-style condos being the usual exception).  Often there is a neighborhood HOA that sets (and can legally enforce) certain standards.  As a homeowner, either you will be devoting time to yard work or you’ll pay someone else to do it.  One perk that comes from doing it yourself: You’ll probably get to know the neighbors and may develop a sense of community.  Having friendly neighbors was common in the past, but at least one generation has lived with housing styles and amenities (attached garages, privacy fences, entertainment systems, etc.) that encourage cocooning.  And many have had the money to pay gardeners.  That’s.changing.  We still need our yards to look good, but money is tighter, so we’re getting out and taking care of them ourselves.  It’s costing us time, but we may be enjoying them more.

Talk about neighbors brings to mind “the neighborhood.”  If you buy a house, with rare exception (I’m thinking of a very isolated farm or woodland setting), it’s going to be in one.  Even when you are looking at an apartment-style condominium you have to consider the building a neighborhood.  Regardless the type of house you want to buy, you need to consider the area surrounding it.  Are the homes and yards well kept?  What’s the crime rate?  Is shopping convenient?  What about mass transportation?  Can you afford to drive to work?  People sometimes fall in love with a particular house or area and dismiss the impact of its location.  You don’t want to do that.  When you’re buying a house you need to be willing to live with its neighborhood.

Schools are another contributing element to the quality of a neighborhood and so to the value of a house.  If you have children, you are very interested in the caliber of education offered.  If you do not have children, you may not consider it to be important.  If you are a curmudgeon, you might even resent the feet that stray into your yard and the noisy chatter of students as they pass by.  (Actually, these intrusions happen much less than we think.  Most children are chauffeured to school by a parent or bus.)  Anyway, back to the presence of schools:  Even if you will not be taking advantage of them, schools affect the resale value of your house—and that you do want to consider.

Here is another other topic I want to broach: Renovation.  Unless you are purposely looking for a fixer upper—in which case, I’m sure you’ve already started counting the cost in time and money—you are thinking, “What?  I haven’t even bought the house yet!”  But, from the time a house is built, renovation looms.  It goes back to the neighborhood.  Neighborhoods are rarely in stasis.  They are either improving or in decline.  To maintain or add to the value of their property homeowners renovate.  You’ll want your house to at least reflect the neighborhood standard.  It won’t be “keeping up with the Jones.”  It’s an effort to increase your net worth.  Again, (someday) when your house goes back on the market, you’ll want it to have increased in value and to be appealing to prospective buyers.

Dreaming has a place when you’re getting ready to make a home.  Thinking and planning take precedence in buying a house.  A home will provide you with rest, refreshment, and refuge from the world.  A home is made within some type of housing.   Your building and property supply the place to make your home.  You supply the care, time, and finances required to make it enjoyable.

Safe driver

I consider myself a safe driver, but I had a wake-up call a few days ago.  I nearly rear-ended somebody.  The car I almost hit was stopped on a tree-lined, hardtop country road with a speed limit of 55—at dusk.  Actually, by skill and luck I avoided two accidents as there was also a car close in the approaching lane.

I made it safely into my driveway, but I was shaken and calling the driver of that stopped car every name in the book—idiot being the mildest.  Much later, I wondered if the driver of the on-coming car might have had a few choice things to say about me.

Over the last couple of days, as I talked to my friends about this incident, I’ve had a chance to think about how comfortable and complacent most people (including me) are about being driving safety.  We’re inclined to take it for granted that we are safe drivers.  Sometimes we’re not so sure about everybody else, but we assume we can compensate for their deficiencies.  Well…  We can’t, unless we’re prepared and consciously alert to the possibility of trouble.

I thought back to high school—to Driver’s Ed class.  Many of us were excited and anxious about driving.  (Some of our instructors were, too.)  Knowledge of driving laws was certainly an objective of that class, but so was giving us enough experience behind to wheel to take the edge off our excitement.  We needed to learn that calm, commonsense was a major key to being a safe driver.

The more I thought about it, the more I realized that over the years I’ve replaced commonsense with a mild sense of contempt:  Of course I drive safely.  (Or do I?)  I decided to give myself  “a checkup from the neck up” on what I know to be safe driving practices—to consider if I really do practice them.

Speed limits, traffic signals, caution and warning signs, etc. are reminders and qualifiers of the laws learned online or from official pamphlets as we prepare to get a driver’s license.  These signs and signals qualify and enhance the general laws of the road and they are in place for a reason—safety (everybody’s) on the road.  It would be ridiculous to think any municipality or agency could field enough safety officers to provide ubiquitous guidance to motorists on all roadways at all times.  A driver’s knowledge of basic traffic laws and a respect for cautionary signs and limits takes the place of those officers.  (Can you imagine having police personnel at every corner directing traffic?  Or on every curve signaling for you to slow down?)

Those signs take the place of police and like a police officer, they are to be obeyed.  Their instructions are not subject to our convenience.  They can, however, be subject to conditions.  For example, speed limits indicate the maximum safe speed when road and weather conditions are ideal.  When less-than-ideal driving conditions exist (heavy rain, poor light, etc.), it makes sense to slow down.  Use some judgment—the police do.  Are you aware that you can be ticketed for “driving to fast for conditions?”

As safety, rather than convenience is the focus for driving laws, we need to be aware that our attitude and mood while driving influence that safety.  —Or rather, they shouldn't.  If I am driven by my feelings, I probably don’t have enough control over myself to be a safe driver.  Feelings turn our focus inward, but driving isn’t “all about me.”  Instead I need to focus on driving safely and pay attention to what is going on around me.  If I am focused on safety I will not drive too aggressively or be distracted.

Aggressive driving causes a lot of accidents.  Speeding and following too closely are some common aggressive driving practices.  (Allow yourself a 3 second space between your car and the one in front of you—a lot of braking can be done in 3 seconds.)  Changing lanes frequently is another habit of aggressive drivers.  Interestingly, there are studies that show we rarely make time (and often lose it) by weaving through traffic.  Often, when we demand or seize the right-of-way we are driving aggressively; most times when we refuse to yield the right-of-way we are driving aggressively.  Unfortunately, the reaction to aggression tends to be aggression:  Entitlement issues have no place in safe driving.

Distraction is another major contributor to unsafe driving.  A definition of distraction could be inattentiveness to the business at hand—driving safely.  Many things can be distracting. Many drivers think, “I’m only driving.”  They feel competent to divide their attention from the road with talking on the phone, texting, reading (checking the map falls into this category), and other activities that call for our interest and awareness.  How about daydreaming?  (I may even need to guard against how involved I get with some in-car conversations.)  Another source of distraction could be an “and suddenly”—a spilled drink, the baby’s cry, etc.  And, don’t forget rubbernecking:  An accident or a beautiful vista can be distracting.  Driving requires the driver’s attention; everything else must take a much lesser place.

Distraction is the key to that close encounter had the other day.  The driver of the stopped car was watching some deer move through the tree line.  It was a pleasant, familiar drive, even though dusk was making a little difficult to see.  The road is not generally a busy one, so here I came— intent on getting home—doing the speed limit (even though seeing was a little hard…).  And, before I saw the stopped car, I too noticed those deer.  I can imagine what went through the heart of the oncoming driver as I slipped around that other car.  We were all at risk.  Luck more than skill save the situation and we all know better than to count on luck.

Both aggression (including ignoring the law) and distraction hold an inherent trait of selfishness: Something influencing a driver is more important than the safety—than the life —of anybody and everybody on the road.  (His own life being no exception….)  But, many drivers are aggressive or get distracted.  The rest of us need to drive defensively to minimize any consequences we experience from their actions.

Driving refresher and defensive driving courses are available online and or through continuing education programs—some include actual or virtual driving experience in staged hazardous conditions.  These classes provide tips for many specific circumstances.

I think there are three general practices that that can significantly increase your margin of safety:

First, give yourself room—room to stop, room to move over, room to think.  And, not just because another driver might do something:  What are you going to do, where are you going to go if a tire blows or your motor suddenly dies?  When you are driving, space is time and can mean life.

Second, be alert to what is going on all around you, not just in front of you.  Among possible scenarios, the driver beside you may be showing signs of impatience (edging into your lane) or an accident behind your vehicle may be catching up to you.  Constantly using your mirrors and windows should be a matter of routine.

Third, go ahead and assume other drivers will err—by ignorance, accident, or on purpose.  Think about what they could do right now that would put you in a precarious situation.  Then think about what you can do to avoid mishap.  Even if nothing happens now, your mind can store the plans—and having the seed of a plan already in place may give you the precious time to act rather than become confused and distracted when something does happen.

As I think about the incident from the other night, there is one more important point to be made:  I’m somebody’s other driver.  None of us will forever drive faultlessly, but we have a responsibility to work at being a safe driver.  The goal of driving may be to get somewhere.  The concern has to be getting there safely.

Orange Ladybugs

It was wishful thinking; I wanted them to be gone—those orange ladybugs.  They aren’t. 

I’m sure you know what I’m talking about.  In the fall they swarmed in, settling on everything.  For weeks (maybe months) I couldn’t walk through my house without stepping on their little carcasses.  Occasionally I felt like I was the target of a dive bombing mission.  They bite and they smell.

Of course this wasn’t the first time I had these critters winter-over in my house, but it seems like they were here in greater numbers than before. They were a nuisance until shortly after Christmas.  Then, they just sort of disappeared until early March when they started littering my floors and swarming around the windows again.  Experience tells me they will soon head for the outdoors, but they’ve been enough of a pest that I thought I’d look into the what, where, when, and why of them.  I wanted to know if there is something I can do to keep them from coming in next year.

These orange ladybugs are not the ladybugs I grew up with.  Those were red with black dots, considered cute—used as decorating motifs and clothing embelishments from time to time—and the inspiration for a favorite old nursery rhyme, “Ladybug, ladybug, fly away home…”  The new ones certainly are not enjoyable.  They are, however, part of the same beetle family, coccinellida.  In most English speaking countries they are all commonly called some variation of ladybug, ladybird, or lady beetle.  I think the newcomers are properly call Multi-Colored Asian Lady Beetles because they really do come in a variety of colors—oranges, browns, tans; it’s the orange ones we seem to notice the most.  Other than color these orange ladybugs look pretty much the same as our native red ones to most people.  And, they give us the same benefit the red ones did. They eat plant aphids and other agricultural pests.  In fact, that’s why they are here.

As early as the 1960s, in an effort to control aphids on crops as varied as pecan trees, apples, and soybeans, the US Department of Agriculture sponsored a program to release ladybird beetle species from Asia and Australia.  This was done even though the US had hundreds of native species.  It does need to be said that many of these native species, individually, prefer one or another plant pest as a food source.  Other eating habits and their habitat range also vary.  So, the thought behind the project may have been “to fill a hole.”  It also should be noted that since the foreign species have been introduced, populations of native species have been in decline.  (When was the last time you actually saw a red ladybug?) 

It is not known if the presence of the newcomers is contributing to the decline.  What is known is that the new species are prolific.  They were originally introduced into several eastern and southern states and have spread across the country.  By the mid 1990s people were beginning to consider them a nuisance because they infiltrate homes in great numbers during cold weather.  Orange ladybugs seek shelter when the outdoor temperature falls below 50 degrees Fahrenheit—hibernate during the coldest weather—and become active again when the temperature rises.   They will find any warm, protected crack or crevice. It just so happens that our homes and other buildings provide plenty of spaces that meet the criteria.  That they pack themselves together in large numbers increases the warmth factor.  This probably contributes to the lengthy life span (2 – 3 years) of this variety of lady beetle.  Our native red ladybugs, which rarely live through a winter, do not exhibit the swarming behavior.

Because they swarm in our houses orange ladybugs are a nuisance, but they are not officially considered a pest.  They consume a great many other insects that are detrimental to crops and gardens.  They pose no major threat to humans.  They can bite, but are not reported to draw blood.  They do not purposefully target people and it is thought that many so-called bites may be a prickling sensation from stiff, hairy spurs on their legs.  They also stink.  The odor comes from an orange fluid (beetle blood) emitted as a defense.  Some people are allergic to proteins in this fluid.  It can stain walls and fabrics, too.  Personally, I find it most unpleasant to realize I’m swallowing one as I take a gulp of coffee.  They do get into everything.

I was greatly interested in finding an answer to my question about keeping these insects out of the house next fall.  What I found was not highly encouraging.  Basically, all one can do is prepare the house for cold weather inside and out.  Caulk around switch plates, outlets and any vents to the outside.  Covering vent openings with a small mesh screen at the outside end helps, too.  Make sure windows and doors fit their frames correctly and caulk around them.  If you find a mass on the outside of your house, hosing them off may inspire that bunch to move on—but more will come.  Inside, vacuuming them up is the easiest way to remove them.  (You will want to immediately empty the vacuum outside; it will stink.)  Using bug sprays on any found hibernating is not very effective as their respiratory rate will be too low for the chemicals to work.  Some black light ladybug traps are advertised online.  But again, if the traps work, still more beetles will come.  For this same reason hiring an exterminator is next to futile. (Also, many exterminators hesitate to destroy insects that are so beneficial to crops.)

In conclusion—more will come.  We’ll be sharing our houses with these orange ladybugs again next winter.