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Mortgage Speak

What is the difference between an appraisal and an assessment?

Real estate is filled with terms that are more-or-less synonymous. From mortgages to loans, houses to homes, or lawns to yards, the list of interchangeable words is rather lengthy.

Two other terms that seem one and the same are appraisal and assessment. Yet while these do share some similarities, their differences far surpass their parallels. Understanding how they're distinct - and, above all, why it even matters - can make you a more informed homeowner, potential seller or prospective buyer.

What is an assessment?

In many ways, an assessment is almost self-defining, in that every so often, municipalities assess the value of houses in a given area or community. They do this for one overarching purpose: to determine what homeowners will pay in property taxes, an expense for which every homeowner is responsible. Typically, among those who are still paying off their mortgages, property taxes are included as part of their monthly mortgage bill. Those who already own their house - meaning they've paid their mortgage in full - ideally set aside money each year so they have the funds to pay by the due date.

The property taxes that someone pays in any given year is ultimately determined by the assessment.

What is the assessment process like?

Perhaps the biggest distinction between an appraisal and an assessment is what they entail. Municipalities send out one or several tax assessors to go around the city and assign values to existing homes. They use a number of different variables - such as sales comparison data and cost method - to determine what a given property is worth.

One thing they don't do - at least not typically - is physically go inside the house to see how many rooms there are, what installations are in place and observe other physical aspects of what makes a house a home. Because of this, assessments may not adequately reflect a property's true value. The assessment is one step in the process conducted by the municipality to determine what homeowners pay in annual property taxes.

How often are assessments performed?

There is no hard and fast rule as to how often assessments occur. That is determined by the local tax assessor's office. But as The Balance reported, it generally occurs once every five years. Some municipalities do them more frequently (i.e. annually), others less (i.e. once every 10 years).

What is an appraisal?

An appraisal is a much more exhaustive evaluation process. Lenders typically require a professional appraisal to be done on the subject property whether for a purchase or a refinance transaction. Among the reasons include determining fair market value and loan-to-value. For a purchaser, this also helps to ensure you aren’t paying too much.

If there is one thing that has consistently increased in value, it's real estate. Every month, the National Association of Homeowners releases reports detailing how much the average single-family residence sells for in the U.S. As of May, the median has risen on a year-over-year basis for 98 months in a row. This fact alone speaks to the smart investment of homeownership.

An assessor only takes into consideration external factors like some of the ones mentioned above, a professional appraiser considers many unique aspects of a residence. These are a handful of them:

  • Number of bedrooms
  • Location
  • Architectural style
  • Square footage
  • Construction materials used in installations (e.g. marble countertops, hardwood floors, etc).
  • Window composition
  • Age of house
  • Roofing material 
  • When the roof was last installed or updated
  • Chimney
  • Insulation type
  • Basement and whether it's finished
  • Foundation (e.g. Concrete slab, crawl space, etc.)

And that’s just the beginning. While it’s not an exhaustive list, it gives a better sense of the many variables used by an appraiser when completing the Fannie Mae Uniform Residential Appraisal Report.

Who requests appraisals?

Generally speaking, mortgage lenders will request an appraisal to obtain a detailed understanding of the property based on overall condition, conformity to the area, and market value. The appraisal report is used to assist the lender in its lending decision.

Ideally, appraised values and assessed values would be identical. That's rarely the case, mainly because the processes involved in each are so different from one another. Whereas an assessment is an educated guess, an appraisal is an informed, comprehensive calculation.

As a prospective or current homeowner, ensure that you know both of these figures. If its assessed value is higher than its appraised, you may have a case for paying less in property taxes to your municipality.

For more information on any aspect of the homebuying process, contact us at Residential Mortgage Services. We'll guide you home.

Helpful Tips

Summer Safety Tips

Jul 3
Category | Helpful Tips

Summer Safety Tips

As we approach the thick of summer, it can be easy to get so caught up in the fun and beautiful weather that we forget the common dangers in our everyday summer activities. Below are some safety reminders to keep in your back pocket while you enjoy the summer ahead.

Sun Protection

Summer often involves “fun in the sun,” but remember to be careful about protecting yourself from the dangers of the sun as well. Too much exposure to the sun’s UV rays can increase the risk of skin cancer later on, so building healthy skin protection habits from an early age is beneficial in the long run. Some basic things you can do to protect yourself are to stay in shady areas, wear a wide-brimmed hat and sunglasses to protect your face and eyes, wear long sleeved shirts, pants, or some kind of cover-up, and be sure to use sunscreen. It is best to put on sunscreen with SPF 15 or higher around 15 minutes before you go out in the sun. Don’t be fooled by cloudy or overcast weather because the harmful UV rays can still get through, even if it’s not sunny. Also, it is important to remember to reapply sunscreen every two hours, or directly after you’ve sweat or been in the water. 

Stay Hydrated

After spending time in the sun, the body can get dehydrated, so pay attention to how much water you’re drinking. When it’s hot outside, your body needs more water to replenish its fluids. Although the amount of water you should drink daily varies from person to person, a good estimate is to drink as many ounces as half your body weight in pounds. Some symptoms of dehydration can be headaches, fatigue, muscle cramps, and itchy or dry skin. It is always important to be on the lookout for these symptoms, especially with children since it can be difficult to get them to drink water. If you’re having trouble getting your kids to drink more water, try mixing it with fruit juice to make it taste better or use fun cups or crazy straws.

Caution on Ticks

Another thing to be on the lookout for during summertime is ticks. If you can, stay away from bushes and shrubs to reduce the chances of encountering ticks, and wear light colored clothes so it is easier to spot one on you. Wearing long sleeved shirts and pants can make it harder for ticks to get to your skin, and even tucking your pants into your socks can offer more protection. Once you come inside, check your hair and skin for any ticks and wash your clothes with hot water. If you do find a tick on you, don’t panic. It usually takes about 36 hours for the tick to release the bacteria that can cause Lyme disease, so use some tweezers to remove it as quickly as you can.

Food Safety

If you want to enjoy the summer weather during your mealtime, an outdoor BBQ, lunch at the beach, or a picnic in the forest are great activities to do. However, in the heat, you have to be extra careful about how you are storing your food when you go outdoors so it doesn’t spoil or get contaminated. Use ice packs in your travel coolers to keep bacteria from spreading in the heat and keep any raw meat in a separate cooler from your other food and drinks. Always remember to bring hand sanitizer or wet wipes when you’re eating on the go if washing your hands isn’t an option.

Mosquito Prevention

If there is one thing everyone hates about summer it’s the mosquito bites. To be proactive about limiting the amount of mosquito traffic you get around your home, get rid of any standing water in things like baby pools, bird baths and flowerpots because mosquitoes only need ½ an inch of water to breed. Make sure your screen windows and doors are free of any tears so mosquitoes can’t get inside your home. Mosquitos can be attracted to certain things you wear or how you smell, so avoid wearing dark colored or floral clothing and any sweet-smelling perfume or cologne.

Continue Social Distancing

Although everyone is eager to get outside and do all the things they love, this summer is going to look different because of the COVID-19 pandemic. In the interest of public health, it is important to remain cautious about which activities we take part in while keeping the safety of ourselves and others in mind. Keeping your hands clean, staying at least 6 feet from others, especially those who are sick, and covering your nose and mouth when around others are some daily precautions we can take to limit the spread of the virus.

Enjoy your summer and remember to stay safe!

Understanding Mortgages

What does an Underwriter do?

After your loan application has been checked over by your Loan Officer and Processor, it is ready to head over to the Underwriter for approval.

At this step, the Underwriter looks over all the documentation passed on to them to determine if the borrower is eligible to be granted the loan amount they applied for. They conduct a thorough credit analysis of the borrower’s finances, including employment records, income sources, and credit reports. In the end, they determine whether the financial ratios, like debt-to-income and loan-to-value, satisfy the requirements of the lender. If the Underwriter finds that the loan request should be altered for any reason, they work with the Loan Officer to find a new course of action.

There are four outcomes to the Underwriter’s decision on the approval of a loan:

  • Your application is approved, meaning your loan can move on to closing.

  • Your application might be deemed "approved with conditions," meaning your lender could require additional financial information, such as proof of insurance, marriage certificates, or tax forms.

  • Your application could be suspended, which might be the result of missing documents or the Underwriter’s inability to confirm your income or employment; you can reactivate your application by providing the missing details.

  • Your application could be denied because your finances did not meet the lending requirements, in which case you could reapply later once your finances have changed, or sometimes lowering the amount of the loan you applied for can help.

Underwriters have an in-depth understanding of the lending requirements along with federal rules and regulations and industry standards, so they know just what to do when it comes to any type of loan situation. An Underwriter is expected to pay close attention to detail, when it comes to analyzing loan applications and documents, to ensure everything has been evaluated correctly and the process can be as smooth as is hoped.

This important step in the mortgage process is there to help ensure that the mortgage loan you have applied to receive makes sense for you and your financial situation. It is both a protection for your mortgage lender and for you as a borrower. 

Mortgage Speak

Understanding the Mortgage Pathway

As a homeowner, you know that you have several ongoing responsibilities. High on the list is ensuring your humble abode is properly maintained - both inside and out - so it retains its value.

An additional major task is keeping up with your monthly mortgage payment. It's a regularly occurring errand that gets you one step closer to full-fledged ownership.

Once the check is in the mail, payments are out of sight, out of mind. But have you ever wondered where that check actually goes? One would naturally assume it goes to whoever made the loan in the first place, such as a bank or mortgage servicing company.

While this is in part true, the mortgage payment paper trail is much more involved and intricate than one and done. In short, just as there are many working parts to finding or buying a home, the same is true for paying off your home loan.

Let's examine how it all works on a step-by-step basis. It can help you get a better sense of some of the lesser-known aspects related to financing and the housing market from a dollars and cents perspective.

Mortgage servicer sends payment to GSE

As soon as your lender receives your monthly payment, the process is underway. This starts when the servicer takes out a small fee for the administration of the loan and escrow account, which is used to fund property taxes and hazard insurance.

What remains usually goes to one of three government-sponsored enterprises: Fannie Mae, Freddie Mac and Ginnie Mae. GSEs (government-sponsored enterprises) are financial services organizations that are chartered by the U.S. Congress and serve many different functions, such as oversight and enhancing the flow of credit and liquidity.

Were it not for these organizations, homeownership would likely be more difficult to attain.

GSE bundles loans and sells them as mortgage-backed securities

Following the money gets a little bit trickier once your mortgage payment gets into the hands of mortgage-backing giants like Fannie and Freddie.

At this point, GSEs take the payments on the loan and bundle them with many others. Think of it as a package. These packages are known as mortgage-backed securities (MBS). Pooling loans together allows large banks to then sell them as shares to investors.

The individual or institutional investors are ultimately the ones who make the funding available for mortgages because they purchase the loans.

Their ability to be repaid is contingent on the end-user - the homeowner - submitting their mortgage payment consistently. 

Who are these investors?

Much like homes themselves, investors come in all shapes and sizes.

Generally speaking, though, investors that purchase shares in MBSes are large pension or mutual funds. Some of the more common ones include J.P. Morgan, PIMCO and Morgan Stanley. Their valuation is what allows them to buy and make the funds available to homeowners.

They make money by collecting on the dividends accrued through interest on these mortgage payments. In essence, the interest earned goes into these mutual funds as earnings on the original purchase of the mortgage security.

MBS were game-changers

Mortgage-backed securities revolutionized the residential real estate industry by making homeownership far more achievable for families operating on a budget who may not have adequate funds otherwise.

Created in 1963 through the Housing and Urban Development Act - during the administration of Lyndon B. Johnson - MBSes provided more liquidity in the marketplace by allowing non-bank financial institutions and investors to participate, as noted by The Balance.

Evidence of this fact is the homeownership rate, which naturally waxes and wanes but has risen significantly from 50-plus years ago. According to the most recent statistics available from the U.S. Census Bureau, nearly two-thirds of Americans own residential property. In the 1950s, homeownership hovered in the 40% range among single individuals, according to archived Census figures. 

How paying off your mortgage benefits you long term

Being consistent with paying off your home loan is smart for a variety of reasons, not the least of which is it helps to improve or maintain your credit score. It also gets you on the road to saving more of your hard-earned money by fully owning your residence one check or automatic deduction at a time.

But if you have any kind of pension or retirement account with investments in bonds and mutual funds, you're building a better retirement - in a roundabout way - through the interest from those ongoing payments. According to polling conducted by Gallup, 62% of Americans who have yet to retire anticipate stock or mutual fund investments to be a source of income once they exit the workforce.

Following the mortgage payment pathway is a bit complicated. But starting your journey couldn't be simpler by going through Residential Mortgage Services. Contact us to learn more.

Helpful Tips

A Guide to Freshening Up Your Home Exterior for this Stay-at-Home Summer

Over the past few months, the COVID-19 pandemic has turned our homes into our offices, schools and restaurants, and looking forward to the coming months, our list of summer activities is now limited. Our houses must also become a summer entertainment space as well, and what better way to welcome the season of a social-distancing summer than finally getting outside to spruce up the appearance of your home? Now more than ever having a fresh and clean home exterior will give you a sense of rejuvenation when you spend all those hours enjoying the sunshine on your porch or in your yard. On top of this, increasing and maintaining the curb-appeal of your home is also a great way to preserve its investment. Below you will find a checklist of ways to freshen up your home in preparation for this stay-at-home summer.

  • Clean out your gutters

  • Power wash your driveway, sidewalks and concrete porches

  • Patch any holes and cracks in your driveway

  • Inspect your porch for loose boards or nails and repair as needed – Your deck or porch should be resealed if, when you pour water on it, it absorbs the water; if the water beads up on the surface, it is adequately sealed

  • Clean / inspect siding and roofing of your home and repair as needed

  • Prune all shrubs, bushes and trees that are growing close to your home, especially around any AC units – Adding a layer of mulch in your garden can also prevent weeds from growing

  • Clean your chimney

  • Wash your windows and window screens

  • Check for leaks in outdoor faucets and hoses

  • Clean and repair your grill

  • Touch up any chipping paint on the side of your house, fence or doors

  • Wash down any stored outdoor furnitureCheck your lawn irrigation system to make sure it’s functioning properly

Take advantage of the long summer days to keep your home’s exterior in prime condition!

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