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Ask the Egghead: Is an adjustable-rate mortgage a good idea?

Dear Egghead: I’m ready to buy a house, and the lender I’m working with recommended an adjustable-rate mortgage instead of a fixed-rate mortgage because my payments would be lower. Are adjustable-rate mortgages a good idea?

ANSWER: Lots of loan officers are going to hate me for saying this, but no — I do not think adjustable-rate mortgages are a good idea. They’re a bad idea now, they were a bad idea in the past, and they are a bad idea in the future.

Lenders are pushing adjustable-rate loans these days because lots of potential home buyers are hesitant to buy because rates have gone up in the past several months.

Currently a five-year ARM starts with a rate of 4.75 percent, compared to about 5.5 percent for a 30-year fixed-rate mortgage.

Yes, it’s true that an ARM will allow for lower monthly payments as you begin paying off the loan. The other side of the coin: if interest rates continue upward, your monthly mortgage payment goes up too. Interest rates might climb to the point that you can no longer afford to make your monthly payments.

If you can’t afford the house using a 30 year fixed-rate mortgage, that’s a strong clue that you can’t afford the house, no matter what loan you have.

“Instead of finding a different loan, you need to find a different [lower-priced] house, says Greg McBride, chief financial officer of Bankrate.com.

The saving grace is that, if rates decline you can refinance at a lower rate. So it’s not like you’re betting the farm with an ARM.

But be aware, some ARMs will requires fees or penalties if you pay off the loan or refinance early. That can cost many thousands of dollars, so research the potential fees if you’re contemplating an Adjustable Rate Loan.

Ask the Egghead: What is dual agency?

Dear Egghead: My real estate agent sent me an electronic document to sign, and it involves “disclosure and consent to dual agency.” What does that mean, and is it a good thing to have?

ANSWER: Your agent should have explained it already (informed consent is essential in cases of dual agency), but we’ll define it here: Most often, a real estate transaction involves two agents: a buyers agent, and a seller’s agent. With dual agency, a single agent represents the buyer and the seller. This might happen, for example, if you visited an open house, and started dealing with the agent hosting the open house, not realizing that this agent represents the seller.

State laws require disclosures about this (which is the document your agent has provided) and in some areas, it’s actually illegal. Here is a link to Virginia’s law regarding dual agency, which is fairly typical.

Is dual agency a good thing in your circumstance? Let’s take a look at the pros and cons:

PRO: Ease of communication. If the same agent is working with both the buyer and seller, there is less chance for bad communication to sour the deal. There will probably be less unnecessary quibbling back and forth.

PRO: More possibility to reduce the commission. Since one agent is getting the full commission, it’s possible the agent will give a discount on the commission, reducing costs for both sides.

CON: Conflicts of interest. A dual agent can’t serve two masters equally. If the agent provides advice to the buyer, for example, then the agent will be shortchanging the other side.

CON: Conflicts of interest. The agent is getting 100 percent of the commission that is normally split between buyer’s and seller’s agents. So the dual agent has less incentive to negotiate hard for a buyer seeking a price cut, and more incentive for the price to escalate, while limiting tough negotiation.

Dual agency is illegal in eight U.S. states (Alaska, Colorado, Florida, Kansas, Maryland, Texas, Vermont and Wyoming) and that that alone should give you great pause. If you want to play it safe, stay away from dual agency if you can — there are simply too many things that can go wrong. Why give up your right toward having your own exclusive representation if you don’t need to?

Also, don’t confuse dual agency with designated agency. With designated agents, there is an agent representing the seller, and another agent representing the buyer, and both work for the same brokerage office. This lessens the danger of conflicts of interest.

A licensee may not act as a dual agent or dual representative in a residential real estate transaction unless he has first obtained the written consent of all parties to the transaction given after written disclosure of the consequences of such dual agency or dual representation. A dual agent has an agency relationship under the brokerage agreements with the clients. A dual representative has an independent contractor relationship under the brokerage agreements with the clients. Such disclosure shall be in writing and given to both parties prior to the commencement of such dual agency or dual representation.

Ask the Egghead: Should I sell my home to an iBuyer?

Dear Egghead: I’m ready to sell my home. I’ve recently been approached by three companies who have offered to buy my house for cash. It seems very convenient compared to the traditional home-selling process involving agents. Is dealing with an iBuyer a good idea?

ANSWER: It’s true that iBuyers (which stands for “instant buyer”) enable you to sell your house in a quicker, simpler, and lower-stress way. You can be out of the house and close the deal within two weeks, which is lightning-quick compared to the traditional selling process. The procedure is this: You contact the iBuyer, they respond with an offer within a few days, and you have several days to think it over. If your home needs a few repairs, the iBuyer will handle that for you and deduct those costs from the sale proceeds. The iBuyers say they have gee-whiz technology that enables them to do these deals.

Of course, the iBuyer’s motivations are no mystery. They hope to buy your home at a small discount to its market value, then quickly “flip” your house to a new buyer at a nice profit. And there’s the rub — are you paying a stiff premium for the convenience and speed of an iBuyer (the answer is undoubtedly yes), and if so, how much? For example, if you’re giving up a 4 percent premium on your sale price by using an iBuyer, that’s $30,000 (assuming the property is worth $750,000). Would you rather endure the hassle of the traditional selling process and keep that $30,000 in your pocket?

The dominant iBuyers are Opendoor, RedfinNow and OfferPad.

They tend to focus on relatively new homes in competitive real estate markets. Many up-and-coming companies (some might warn that they’re fly-by-night) are operating in this space.

They will ask you to visit their webste, enter your address, specify the age of the property, its square footage, and so on. If they’re interested, they respond with an offer. The advantage of an iBuyer offer is that it will rarely fall through, unlike an offer from a run-of-the-mill home buyer.

The “service fee” typically charged by an iBuyer is 5 percent to 9 percent, and there are closing costs on top of that. That can be significantly more than the standard real estate agent commission of 5 percent to 6 percent.

Scams are not uncommon in the iBuyer world. Make sure you’re dealing with an established business and not one that asks for cash before the sale. For your safety, the transaction should be handled by a title company, a third party,

Ask the Egghead: Should I buy a fixer-upper house?

Dear Egghead: I’m looking to buy a larger house in the same area I live in now. Two houses are for sale at bargain prices but they need lots of repairs. Is it worth it to buy a fixer-upper?

ANSWER: It can be worth it, if you know approximately how much the repairs will cost. You should look for a fixer-upper selling at a 35 percent to 45 percent discount to comparable properties in the neighborhood in good condition.

Fixer-uppers sell at a big discount because most buyers prefer to buy a home that is move-in ready in very good condition. There’s less competition among buyers for houses in poor condition. Many people like the idea of fixing up a house, but when crunch time comes, they opt for buying a house that needs no major work.

On the other hand, a fixer-upper can be a bad investment if the repairs turn out to be more costly than you expected. There are always unexpected problems that arise with a fixer-upper. Those costs could turn a bargain house into a break-even project — or worse, an unprofitable money pit.

A home inspection will be a must, so that you can identify what projects will be absolutely necessary. An appraisal contingency is also advisable.

Can you live in the house while the repairs are being made? Often, living in a house is unbearable while it undergoes major renovations. Is it possible to remain in your current home after you purchase the fixer-upper? If you move into the new place, could you tolerate not having a usable kitchen for six months, for example?

Here are some other points to consider:

  • Along with the lower purchase price is a lower down payment requirement. So some of the cash you’ve earmarked for a down payment can go toward repairs.
  • Property taxes will be lower with a fixer-upper because taxes are based on the sale price of your house.
  • You’ll have a chance to redesign part of the home to suit your preference.
  • If you’re handy, you’ll have the opportunity for do-it-yourself work, potentially saving you thousands of dollars. Sweat equity can be a satisfying result of your work.
  • For some work, you’ll need to identify reliable contractors who can schedule your projects. Your agreement should specify time limits on how long the contractors can take to complete their work.
  • Repairs are expensive. If you need financing, try to find a mortgage that will let you roll the contracting work into the loan amount.