If you’re buying or selling a home, the concept of fair market value is important. Each home, even if it were built identically to its neighbors, is unique. Variables such as physical condition, improvements or damages, location and overall desirability can each affect the perceived value of any property.
According to Smartasset.com, fair market value is the price a property would sell for in an open and competitive market where the buyer and seller each have adequate information of relevant facts. Buyers and sellers must act in their own interests and not be compelled by outside forces. They must agree to the price without coercion as well as give each other a reasonable time period to complete the transaction.
So how do buyers and sellers agree to fair market values? Since there’s no exact figure to begin with, most people rely on a lender’s appraisal of a given property. The appraisal utilizes information from tax records, recently recorded sales of properties, and comparable homes for sale as provided by the local real estate multiple listing service. Your Berkshire Hathaway HomeServices Select Realty professional can also provide you with a comparable market analysis of homes similar to yours based on recent closed sales, pending sales and current listing prices.
Keep in mind that these professionals are providing you with an educated starting point. You won’t know the true fair market value of your home until it’s offered on the open market and you reach an agreement with a willing buyer or seller.
It’s a great time to buy a home, so now is the time to start lining up resources to help you make a down payment. There’s plenty of assistance available if both you and the home you want to buy meet eligibility requirements.
While most programs are designed for first-time and/or low-income homebuyers, some are reserved for workforce personnel such as teachers, firefighters and police or for those who meet other criteria for the community.
Loans (second mortgages) that can be deferred until the property is sold
Loans (second mortgages) that are forgiven over a period of time
The gold standard in down payments is a minimum of 20 percent, but you can put as little as three percent down through Freddie Mac’s Home Possible® or HomeOne federally guaranteed mortgages. You’ll have to pay private mortgage insurance until your home reaches 20 percent equity, either through making mortgage payments to reduce the principle, or through the increased market value of your home over time.
The Veterans Administration provides certificates of eligibility for veterans to present to their mortgage lender that may entitle them to a mortgage with little or no down payment required.
Check for assistance programs and grants in your state beginning with Hud.gov and FHA.com. These programs will typically require minimum credit scores of 580 and a 3.5 percent down payment.
Over the summer of 2020, refinances of existing mortgages rose over 200 percent, according to Realtor.com. Driven by the lowest interest rates and the highest home prices in recent history, many homeowners are opting to skip the frustrations of moving in favor of lowering their current monthly mortgage payments.
Investopedia.com warns that refinancing could be a bad idea if it’s done for the wrong reasons, such as taking cash out of your home to invest or consolidating credit card debt. Refinancing comes with considerable costs and fees – typically three to six percent of your loan amount, which can take as long as three years or more to pay back. If you decide to move sooner than three years into the new loan, you’ll lose money. You must also avoid the temptation to “reload” your paid-off credit cards with new balances.
Trading your 30-year mortgage in for a new 30-year loan also doesn’t make sense, as you’ll be adding more years of interest to the term of your loan. But it can work if you have an FHA loan with private mortgage insurance (PMI) that can’t be canceled and you go for a shorter term than your current mortgage. If you have more than 20 percent equity, you can refinance into a conforming loan with no PMI due.
The best outcome is a healthy break-even point where the costs of refinancing are covered by the monthly savings provided by your new loan. Explore the numbers with your lender before deciding.
Building equity in your home is like a savings account – the more you put toward it, the better. Your home’s equity grows with each mortgage payment you make and with time.
According to BankofAmerica.com, you can calculate your equity based on current appraised value less any mortgages tied to your home. If your home is appraised at $400,000 and you owe $120,000, then your equity is $280,000. But that doesn’t mean you have savings of $280K; it just means that you have a general idea of how much your home will yield should you sell it at that moment, less closing costs, of course.
Lenders consider equity differently. You can begin building equity the moment you purchase your home with your down-payment. ($400K – 20% = $320K) Your loan amount would be $320K and the equity in your home would be $80,000. You can increase your equity by paying your mortgage regularly and paying a little extra every month, which speeds up the amortization of your loan.
To approve a home improvement loan or to determine whether to eliminate private mortgage insurance, lenders take the appraised amount and divide it by your loan balance to get a percentage of how much equity you have. Divide your current loan balance by your home’s appraised value, then multiply by 100. ($120K ÷ $400K = 35%) That means you own 65% of your home.
These numbers are theoretical until you sell your home. Meanwhile, watch your savings grow on your monthly mortgage statement!
Home buyers and home sellers want to know one thing – how much a home is worth. Fair market comparable data, assessments and appraisals are all relevant ways to determine value, but all values are not the same. So what are the differences?
Fair market value. This metric is used to help determine asking and offer prices for a given home for sale. Market conditions and the economy can cause home prices to fluctuate, so get an electronic comparable market analysis (CMA) from your Berkshire Hathaway HomeServices network professional. The CMA will include at least three recently sold homes (within three to six months) that are as similar as possible to the home you want to buy or sell, including the dates of sale, time on the market, addresses, age when built, square footage, condition, features and improvements.
Assessed value. Tax roll authorities use assessments to determine annual property taxes. They use market data such as CMAs from multiple listing services but also include non-market data such as type of ownership (homestead VS investment property) and age of the homeowner (taxes are often frozen for seniors).
Appraised value. Mortgage bankers hire licensed appraisers to ascertain whether or not a home is valued correctly to protect homebuyers and limit their own risk. They use sales and rental data, plus other formulas. If the appraised amount is lower than the sales contract amount, the buyer can either come up with more cash or back away, or the seller can lower the price.
Here’s a case for buying a less expensive home than you secretly want.
According to the U.S. Bureau of Labor Statistics, the average American spends approximately 37% of his or her income on housing. Notably, the top 20 percentile earners spend only 29.9% of their income, while the bottom 20% pay 39.9%. So what do high earners know that you don’t know?
If you have a little less money invested in housing, you’ll have more money to do other things, like:
Invest more in your 401K or Roth IRAs.
Pay extra on your mortgage so one day you’ll be mortgage-free.
Save money to buy another property. Rent out the first home for passive income as renters make your mortgage payment for you.
Build or add to an emergency fund.
Make improvements without adding more debt or tapping into equity.
Conventional loan guidelines from Hud.gov suggest that the average homebuyer spend no more than 29% of his or her monthly gross income on housing. If your gross monthly income is $4,167, spend no more than $1,208, which should include property taxes and home insurance.
What if you have current debts? The Consumer Financial Protection Bureau recommends that your debt-to-income (DTI) ratio be no larger than 43% to secure a qualified mortgage – one the lender has done the due diligence on your ability to repay the loan according to government standards. However, many lenders aren’t comfortable with more than 36% DTI and may charge you higher interest rates accordingly.