An appraisal is a document provided by an appraiser (the person who conducts the appraisal report) that provides a professional estimate of the value of your home.
Appraisals are conducted by a third-party appraiser who is completely objective in their process. Appraisers do not work in favor of the lender nor the borrower. They simply conduct the appraisal and produce their findings.
Appraisals are most often conducted two ways. The first way an appraiser can conduct an appraisal is by noting comparables. Comparables, or comps for short, are properties within the neighborhood of the home you’re buying that are similar to yours. The appraiser will use the values of the similar properties nearby to determine the value of your home. The second way is by estimating how much it would cost to replace your home should it burn down or be otherwise destroyed. The appraisal will compile all of the findings of the appraiser including:
Comparisons with homes near the subject property
Notes about the real estate market in the area as a whole, including the ages of the homes and the average selling prices of the homes nearby
Notes about the appearance of the inside, outside, and surrounding area of your home
Notes about any visibly unfavorable characteristics about the home like cracked concrete or damaged windows
Pictures of everything that adds value to the home including, bedrooms, appliances, and fixtures
Why Lenders Need Appraisals
Lenders do not want to dish out more than the actual market value of the subject property. An appraiser’s goal is to determine that value. With this figure, the lender knows how much the property will sell for if you default on your loan. They also know how much they can lend to you without taking a loss if you default.
For example: If the subject property is appraised at $150,000 – that’s how much it will sell for on the open market. If your lender gives you a loan of $175,000 and you default on your loan, they now have to try to sell the home at a higher amount than what its appraised for, which can be difficult. If they end up selling the home for the actual market value, they’ve just lost $25,000. It is for this reason that lenders usually give a loan amount that is at or under the appraised value.
Why Borrower’s Need Appraisals
Appraisals are usually buyer paid and can be paid for at closing or during the application process. If you’ve signed a contract to buy a new home for $200,000 and the appraisal comes back valuing the home at $150,000, you should negotiate with your lender to lower the loan amount because you’re paying more for the home than it’s actually worth.
Overall, appraisals are a measure of protection. They ensure that neither party is lending or spending too much during the purchase process of a home.
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The Federal Reserve Brings Good News for Interest Rate Decison
February 1stbrings some good news already. The Federal reserve as expected has held the interest rates steady today as they begin to assess where our economy heading-but they hinted that the rates might stay low for a good while to come.
The Fed’s decision today confirmed those expectations.
“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent,” the Federal Open Market Committee said in a statement. “The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.”
The FOMC also said that it expects economic conditions to evolve in a way that will warrant “only gradual increases” to the federal funds rate in the immediate future. The rate, the committee said, “is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
Mortgage rates have seen historic lows due to a long running bull-market in bonds. Specifically mortgage backed securities. The demand has surpassed the supply and has caused interest rates to drop to the lowest rates in the last 10 years. As the demands start to be fulfilled, mortgage rates will start to go up. The market is at it's turning point according to portfolio managers-some of whom are running the nation's largest bond funds. This means it is time to say goodbye to the longest bull market for bonds in history. The reason: growing worries about inflation. While it is not a problem right now, there are several strong economic factors that typically lead to higher prices down the road.
Rates are already starting to rise, even without the Fed. This week, Treasuries and Mortgage Backed Securities saw a sharp sell-off, bringing yields-which move opposite to prices-to their highest level since October. Rising yields, when coupled with inflation, are a double-whammy to the value of bonds. With job growth comes purchasing power and pricing pressure on businesses and consumers. Yigal Jhirad, portfolio manager for Cohen & Steers, thinks this pressure is already underway. While significant inflation and higher mortgage rates are still far down the road, it is clear that they are on the horizon. This is actually a good thing for housing. The housing market has always performed better in the "sweet spot" of mortgage rates which is in that 5.50% to 7.00% range.
What happened to rates last week?
Mortgage backed securities (MBS) lost -93 basis points from last Friday to the prior Friday which pushed mortgage rates significantly higher from the prior week and marks the second straight week of higher mortgage rates. We have received month after month of positive economic news which would normally pressure mortgage rates upward but due to global instability, mortgage rates have benefitted from strong demand in MBS which have offset the positive economic news. But bonds started to sell off in a big way last week which pushed mortgage rates higher. Why? Because banks started to dump their vast holdings of Treasuries and MBS. Banks had to hold on to capital while they were undergoing the Fed's "stress test". The "stress test" results were released last week and as a result, each bank definitively knew how much excess capital they had.This meant that they could finally liquidate their holdings of their very low yielding mortgage backed securities....this caused demand for MBS to fall off which pushed mortgage rates upward.
Promises that the Federal Reserve says "will work".
On Tuesday August 9th, 2011, the Federal Reserve promised to keep interest rates near zero perent until 2013 and said it would consider further steps to help growth, sparking a rebound in stocks according to an article on Reuters.com by Pedro da Costa and Mark Felsenthal. American citizens know that when it comes to our government and elected officials telling the truth or setting the record straight, you take what is said with "a grain of salt". After painting an unclear portrait, the Federal Reserve says the economic growth has shown more signs of weakness than previously expected. Central Bank released a statement saying "We will hold benchmark rates at rock-bottom lows until mid 2013, and opened the door to other tools to support growth." The announcement foreshadowed how long the Central Bank expects it will take before a struggling economy can move forward in one of the toughest times ever seen.