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Do Adjustable Rates Make Home Loans Dangerous?

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ARM BasicsAdjustable rate mortgages or ARMs are home loans where your payments change with the state of the economy, to reflect changing interest rates. A typical ARM has a period fixed for five years and then adjusting annually after that. The hazard for ARMs is that, if the economic conditions are right, they can become very expensive down the road.

Breaking Down The Payments

Home loans pay interest as rent to the lender for the amount outstanding and gradually repay the principal. In the case of fixed rates, the interest rate is set when the loan company or bank creates the loan, and you have a predetermined schedule that pays a fixed rate of interest on the outstanding balance, and the rest of the payment goes to returning the principal.

A fully adjustable would allow the lender to charge you whatever interest they felt like each month, this is not the case with ARMs. The interest rate adjustments occur on a schedule, they tie to some independent factor, commonly the prime lending rate plus a predetermined percentage.

As the principal you have paid increases, the less interest and the more rapidly you pay down the balance of the loan; this is also true of ARMs but when they adjust you continue to repay the principal according to schedule but the updated interest rate changes your overall payment.

Give And Take For An Enticing Initial Lower Rate

The market for ARMs is not a free-for-all, but this type of loan does present a risk in the future if the prime rates should change dramatically right as your rate is due to adjust. If the prime rate were to climb rapidly to the double-digit levels seen last in the 1980s, your home loan could become extremely expensive as soon as the ARM updates.

The advantage of ARMs is that you can get a better initial rate; ARMs cost less to start, and you might pay less over the life of the loan, assuming economic conditions remain favorable for the next fifteen to thirty years.

However, even if the average prime rate stays flat, there is the risk that, for reasons yet unknown, the prime rate spikes for a short time, just as your rate resets and you have to pay higher interest for a year or more. Additionally, it may not be possible to refinance on favorable terms because, if the prime rate goes up, all new lending will tend to incur a higher rate of interest.

Betting On Good Times Ahead

Just because double digit resets are not likely, that is not the same as impossible. If you borrow on an ARM, you take the risk that the unexpected will occur. The other side of that risk is that introductory rates on ARMs are often lower than the equivalent fixed rate loan.

If it works out that rates do not change, or they improve, over the lifetime of the loan it could save you a lot of money. When you choose an ARM, you are making a bet that interest rates will not move against you.

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Refinance To Pay Off Your Home Loans Faster, But Watch Out For These Traps

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Mortgage Refinance BasicsOf Shorter Terms And Greater Equity

Your signed up for your first home loan, it was probably over thirty years because that was the cheapest way to finance or it gave you the most home for your monthly payment. When you were shopping for funding, did you happen to notice that fifteen-year loans did cost more but not double what you ended up paying each month?

Now that you have a history of making payments on time perhaps you can refinance your home to pay off your loans faster, or you can refinance to make your payments smaller. You can even refinance to take cash out of your home, although, unless you intend to invest it in real estate it is probably not a good thing to do; hold on to your equity and growing your wealth will be the much more rewarding path in the long-term. If this sounds like a smart move, start to make inquiries about it, but keep these potential traps in mind.

The Loan Term Reset Trap

The first trap to avoid in refinancing is rolling from from one thirty-year term to another because you will just reset the clock back to the beginning. It is like you are adding the payments up front where they are mostly interest and little principal. In addition to the closing costs, you will end up paying more interest over a longer period.

Leaving Mortgage Insurance Behind

If you financed your present loan through FHA, with a small down payment and mortgage insurance or on a conventional loan with PMI, it was a great way to get started. However, once you have accrued some equity, you can move on to save costs and expand your equity share more quickly. FHA rules require you to have mortgage insurance for the life of the loan, hence the necessity to refinance to get those savings. For conventional loans, PMI payments can be stopped after the loan balance is paid down sufficiently.

The Cost Of Closing Trap

There are always costs in refinancing; these closing costs must be weighed against the monthly savings to determine if it is worth refinancing. The cost added to your loan should be less than the savings you gain over three years. Also, try to avoid the temptation to take cash out at closing because this is essentially a hidden closing cost. Even a relatively small cash advance will cost you several times the amount over the life of your loan.

Traps That Steal Long-Term Value

Are you certain enough of your income to justify a higher monthly payment to clear your loan sooner? If you find yourself forced to sell, you will not get the benefits down the road. Don’t get trapped into refinancing and then having to sell with all the additional closing cost hanging over you.

Refinancing is only really beneficial if you intend to stay put for a significant length of time. If you are in your home long-term, you want to cut your term from thirty years to fifteen, and have enough equity to forego mortgage insurance then you can save some money by refinancing. If you replace your previously government-backed home loan with one that has no need of mortgage insurance, a lower interest rate and half the term you will pay much less over the life of your loan.

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Financing Manufactured Housing And Mobile Homes

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Home Mortgage BasicsYou Can Finance Your Manufactured Home

Since the dawn of the automotive age, mobile homes have been convenient options for consumers to purchase as habitats, with or without title to land on which to place these abodes. In its modern form, the humble mobile home is now called a manufactured home, and it is a low-cost way to become the owner of your domain.

Historically, manufactured housing has had a reputation of sorts. However, standards of construction and design have improved dramatically. Prefabricated homes have a range of niche uses from vacation homes to senior housing. The ability to move homes on site, assemble the sections and connect utilities rapidly makes them ideal to support disaster relief and other temporary housing needs.

Mobile Versus Manufactured Defined By A Date

The name comes from being prefabricated structures, transported complete or in sections by road to the community where the owners will live. Manufactured homes are most often doublewide, meaning two sections or more joined side-by-side, transported separately and joined on site; these are more popular and hold value better than singlewide homes that arrive onsite complete.

The most significant distinction is that mobile homes ended production before June 1976, and manufactured homes entered production after that month. Pre-1976 mobile homes are not financeable, but you can obtain loans for newer manufactured homes if they meet state and HUD regulations that facilitate national distribution by manufacturers. FHA, USDA, and VA insured loans are available for manufactured housing whether the home is sited on a purchased or leased lot.

Appreciating Personal Property Or Real Estate Depreciation

Manufactured homes lie on the boundary between personal property and real estate, sometimes are convertible from one to another. In real estate, the value resides in the land, which cannot be moved or removed by definition and so its value cannot depreciate, merely changed by its use and zoning, but all of the structures on the land are subject to depreciation.

Manufactured housing depreciates more rapidly than conventional site-built structures; it has a direct impact on the ability of owners to finance the purchase of it. Singlewide homes depreciate more quickly than doublewides. The standards of construction in manufactured homes have improved to justify treatment as conventional housing structures. However, the status of a particular home is determined by many factors including the laws of the state.

Refinancing Manufactured Homes

When manufactured homes hold title as personal property, they are financed by chattel loans of fifteen to twenty years at sub-prime interest rates. Converting the title to real estate enables borrowers to refinance chattel loans to mortgages at lower rates of interest. Refinancing will require that you have the title to the lot and a permanent foundation. Manufactured homes are a specialization for some realtors, who deal with nothing else. By becoming experts in manufactured home sales, they can help buyers find the right financing and get settled in as comfortably as owners of any other type of home.

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Private Mortgage Insurance Is Your Conventional Loan Leverage

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private-mortgage-insurance-basicsBut Leave It Behind At The First Opportunity

If you thought that borrowers have to put a twenty percent down payment on a home to conventional home loans, you would be pleasantly surprised to find that this is not the case in fact. Borrowers can purchase insurance on conventional loans. The innovation of private mortgage insurance or PMI has been enabling buyers to acquire homes with minimal down payments for many years now.

The Lender’s Side Of Conventional Loans

Conventional loans come from corporate financial institutions, whose objective is to invest capital and receive income in return. The practice of banks and other lenders has been to mandate a deposit of twenty percent, or more; this is not only a tradition it is a firmly established business practice of the financial industry.

Fluctuations in the market value of real estate and the cost of a forced sale mean that in all probability, an investor can be reasonably confident of recovering 80% of full market value in the unfortunate cases when loans result in foreclosure, it is also the difference between the retail and wholesale values of real estate.

However, finance companies want to reach out to the large pool of consumers who do not have access to large piles of cash to invest. The solution has been to insist that borrowers purchase mortgage insurance.

Extending Loan To Value Ratios With Private Mortgage Insurance

The deciding factor in lending is the loan-to-value ratio or LTV, where 80 percent of, say, a $360,000 loan is $288,000, and the down payment would be $72,000. So, for a lender to underwrite a loan for more than the wholesale value of property, the most important requirement is that their additional investment must be insured to account for any potential losses.

PMI exists to bring the risk of a low down payment conventional home loan in line with the acceptable investment standards of mortgage lenders. Government-backed loans provide a similar protection in which the agencies that sponsor them provide the insurance.

FHA And the VA do not make loans, but they are in the business of promoting homeownership. FHA does this by providing mortgage insurance for the portion of loans over 80%. VA loans can be up to 100% without any insurance requirement.

Calculating PMI

The cost of PMI derives from the value of the loan and the credit score of the applicant. Using the above example, you put down 5% or $18,000; you need insurance on $342,000, which might cost between $86 and $428 a month, depending on how you qualify. This amount will be added to your monthly payment for as long as your loan balance has a LTV ratio of greater than 80%.

One significant difference between mortgage insurance on FHA and conventional loans is that with PMI, once your outstanding LTV ratio is below 80% it can be terminated, this can mean a significant reduction of the monthly payment.

PMI offers the opportunity for consumers to purchase homes on conventional loans that they would not otherwise be able to afford, it is a classic win-win situation. Lenders can safely make loans to a market segment that otherwise would not be able to purchase homes and consumers can achieve home ownership and build wealth for the future.

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Do These Three Things To Raise The Down Payment On Your First Home

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First Time Buyer BasicsThree Things To Unlock Your First Home

Did you know that it could be cheaper to buy than to rent your home? That’s right! Even if you have never owned real estate before, there are officially sanctioned hacks that are designed to support home ownership in the United Sates, even after all of the highly publicized problems of the last decade.

If your plan is to buy your first home, and you don’t have enough cash to make a down payment, what do you do? Well, it is reasonably straightforward. If you have a mediocre credit score and steady employment you are half way to owning your home.

A Home Ownership Plan For Everyone

Let’s run through the basics how you can get there; it boils down to three inter-related things: Your debt, your income, and finding the down payment. We are assuming here that you are not a servicemember or veteran of the United States Military or Coast Guard, who might be able to purchase a home without any cash using a VA loan.

But you will probably still be able to qualify for an FHA-backed loan; this is another government–backed loan program designed to get working Americans into home ownership with a low minimum down payment of 3.5 percent and you can add any buyer’s closing costs to your loan.

Debt To Income Ratio And Saving For Your Down Payment

If you are starting at zero savings and mediocre credit score, you are going to do three things to achieve your first home purchase: Reduce your debt, increase your income and save up a deposit. Lenders will carefully analyze your debt-to-income or DTI ratio, and they will prefer to see less debt and more income.

You will need to come up with 3.5% of the purchase price of your new home. Let’s start with a ballpark figure for the value of a starter home or condominiums you can expect. For argument’s sake, let’s make it exactly $150,000, which means that you will have to produce a deposit of $5,250 to close the deal on your new home. If you express this as weekly savings, it is $101 a week to save in a year or $67.31 per week over eighteen months.

Helpful Deposit Raising Tips

Here are some tips about things to do to save up for your deposit.

Create a budget – This will enable you to see what you have to earn and what you can do to reduce your debt. Of course, you will have to be disciplined enough to live within the budget so make sure that it is realistic.

Pay off loans – Reducing debt will have a positive impact on your credit score and reduce the numerator of your DTI ratio.

Change jobs sooner rather than later – If you want to buy a home in a year to eighteen months, change employment for a higher income as soon as possible because lenders will want to see job stability before they approve your loan application.

Keep your job – Do all the overtime you can get.

Keep your present job or don’t But get a second part-time job as well as your full-time job.

Of course, housing prices in your region may vary, but this just makes the point that it will take you some work to get to your home-owning destination. Given the motivation, steady employment, and good credit, homeownership is within reach of most people within the next year to eighteen months. So, perhaps it is time to start getting excited about the possibilities.

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Marking The Path To Home Ownership With Information

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stages-of-home-ownershipUse Your Personal Financial Information To Help Yourself

The digital age gives consumers the chance to find out how they appear to credit agencies, to track changes in credit and manage finances better. With a little determination, consumers who know how to exploit the technology and interrogate the right information sources can use it to assist themselves in qualifying for a home loan.

Unless you just won the lottery or you have great personal wealth, when you go to buy a home you will need to borrow the money to do so from a bank or mortgage company. Lenders will look at two aspects of your finances: Your income and spending habits to decide on your creditworthiness.

Check Out Your Three Credit Reports

The Fair Credit Reporting Act (FCRA) gives you the right to review your credit reports without charge from Experian, Equifax, and TransUnion once a year. If you have not done so in the last 365 days, go to the Website at annualcreditreport.com to download your reports from the three main credit-reporting agencies. These reports will show you exactly the information that lenders will see when they consider your loan application. A little preparation can prevent a disappointment; sometimes consumers discover incorrect information on their reports. You should look through all three reports very carefully and be prepared to query anything that appears to be inaccurate.

Track Your Credit Score Changes

Your FICO Score is an excellent indicator of your financial condition; it is a standardized model for credit scoring, and financial services companies have used it for more than five decades now. There are now web-based services that will give you an up-to-date calculation based on your information from the credit reporting agencies. If you choose one such as creditkarma.com, which does not ask for a credit card when you sign up, you need not worry about fine print trapping you into a payment plan.

Create A Structure To Pursue Your Goal

One of the most useful types of mobile digital applications is the personal finance app. It gives you the insight to track your spending and set up a budget and savings plan. As an example, mint.com will help you set up a budget and even connect with your bank and credit cards to give you real-time information. When you have this sort of insight into your personal finance you have a better chance of staying in control and beating your goals.

The credit card companies and banks know a lot about you, and they use that information to market unsuspecting consumers with any enticing financial products they think that they can sell. So, don’t be an unsuspecting customer any longer. Information is the key to taking control of your financial life. Make use of online personal financing analytical tools to set a budget, pay down your unsecured debt and start saving for a deposit.

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Jumbo Loans Unlock Dream Homes

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Jumbo Mortgage BasicsFinancing A Worldly Paradise

If price were no limit what kind of house would you buy? If you look around at your local housing markets from this point of view, it’s incredible what you can purchase with sums of money that are not that far out from the typical home loan. If you have excellent credit and enough equity to buy a two-bedroom condo with cash, then you are most likely in a position to finance a big house in the swankiest neighborhood in town. Let’s take a look at how that could work.

Jumbo Home Loans Too Big To Conform

One of the most significant boundaries in residential real estate is the maximum size for a conforming loan. Conventional loans are limited in size to $417,000 in most regions, and $729,750 in the most expensive, where home prices trend above the national average and luxury homes are larger and more expensive than that on the whole. Jumbo loans are those loans underwritten on homes of greater value, and they are more like traditional real estate investments where the lender requires a substantial deposit and above average credit ratings for the borrower.

Lenders have very reasonable concerns related to lending so much in one package, such as the volatility of the local property market and the chances that housing prices would fall. Your jumbo loan will have a higher interest rate, often an ARM with five years fixed interest, which then adjusts annually after that.

Interest and Mechanics Like Sub-Prime

Jumbo loans are not for everyone and not for the financially faint-hearted. It does not take membership in the so-called “one-percent”, but you will need to have proven your chops as an established business owner or professional employee of means.

The exception to being a conforming loan means that your mortgage company cannot do what they love to do best: sell the note attached to your loan to Fannie Mae or Freddie Mac, these two agencies gather conforming loans together as pools of debt and then sell them to investors as bonds. Jumbo loans are in a different class, one that is closer to sub-prime lending and the mortgage backed securities so closely associated with the financial crisis of 2007-2008. However, jumbo mortgages are still accessible available to qualifying consumers.

Securing Your Luxury Home

Luxury homes are an aspirational objective for many Americans, the American Dream in the flesh. Qualifying for said goal is the pinnacle of the financial and real estate pyramid; it is the home that would make even your realtor envious.

You will need to qualify on income, pay a twenty percent deposit, and have excellent credit. In return, you get a finer-than-average home, one that is exquisite in style, location or perhaps both. The United States has every manner of luxury home from the Tudor-style country mansion and the house on the hill to urban penthouses and architectural landmarks; jumbo loan financing means that you have arrived, and a beautiful home can be yours.

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Should You Take The First Loan Your Lender Offers?

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Home Mortgage BasicsCrafting The Right Loan For You

The principle here is to get prequalified with confidence but get pre-approved sparingly. The difference is that for the latter, you will have to have a hard inquiry on your credit report that adversely affects your credit score every time you do it; too many home loan inquiries could prevent you getting the terms you want or need. Your lender should have the experience to get close to your needs on the first attempt but it does not mean that you cannot get a better fit to your needs, especially if you are stretching to make the deal happen.

The Ideal Lending Professional

Let’s say you choose a lender, go through all of the paperwork and the approval process, they offer you a loan that you can afford to close with and make payments, you qualify, and the house or condo qualifies. In this case, you might want to go ahead and grab it and get the home you want into escrow as soon as possible.

If you are working with a broker who knows your needs and understands the market you have a strong probability that they will hit the mark with the first proposal. Once you are preapproved, you can quibble over the details of how much and when in execution.

What Is Your Objective Here?

A home loan financing professional will work to find the right thing for your situation and needs. It is the experience and training that will enable them to serve you and get the product right on the first attempt. However, sometimes things aren’t that neat and tidy. If you are stretching to get the most real estate you can afford or negotiations for the home your family has fallen in love with hangs in the balance, you may have to get creative or make use of one of the variations that your lenders can create.

As an aside, never let the seller know that you have fallen in love with the home. In fact, avoid falling in love with any real estate before you have closed the deal. The knowledge that you have an emotional attachment gives the other side an advantage in negotiations that they will exploit ruthlessly; there is no room for emotion in real estate.

The Purpose Of Points And

Ask yourself: Does this loan package give me what I need out of the deal? Factors to scrutinize include interest rates; closing costs and how many points you pay up front for the privilege of a reduced interest rate over the life of the loan. Loans that run for fifteen to thirty years are very sensitive to changes in the agreed interest rate of fractions of a percent. Reduced rates are not only cheaper monthly; they can add up to huge savings over the life of the loan. Prepaying points on your loan can reduce that lifetime cost.

Ease Of Acquisition Versus Affordable Payments

Your mortgage arranger is working to get the deal that helps you to make the real estate purchase that you desire. That does not mean the first package they propose is the right one for you. So, the obvious answer is no, unless you are thrilled and amazed at the perfection of it, you should not take the first offer. It always pays to shop around and look at alternatives in home finance, as with all the great decisions in life.

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Should I Invest All Cash Or Finance My Home Purchase?

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Home Purchase BasicsShould You Keep Ahold Of The Folded Gold?

In spite of the financial stress and strains on the average consumer there is apparently a large subset of investors capable of paying cash for homes these days.

You may feel that you are getting some extra security when you own your home debt free. This may be the case but it might work out that the cash could be put to better use when you have a low interest, tax deducted payment and a health investment portfolio.

To Finance Or Not To Finance

When you have the cash you are definitely in a position of strength in negotiations. You represent less risk and the chance to close fast. There will be less paperwork and sellers will prefer you when there are other offers that are financing. The cost of setting up finance is considerable even if you can get the lowest available interest rates.

On the other hand real estate is not a liquid asset. This means that all of the cash you put into your home will be tied up and subject to delays, paperwork and fees if you need to get at it. Having a home loan for at least part of the asset will free up the capital for other projects or just for contingencies.

Cash In The Bank Is A Liquid Asset

The uncertainty of changing personal needs means that it is prudent to have cash accessible in case of medical emergencies or a change in your work status. You will have an easier time approaching the bank in good times; attempting to finance is always easier when you have no pressing need.

If you do decide to finance a new purchase or refinancing while putting in cash on your existing home you do have the option of exactly how much to fund yourself. Real estate finance companies and banks take a very favorable view of leveraged properties where you have an equity stake of greater than twenty percent.

After all, it is your equity that will be lost first if there is a substantial drop in price or you are forced to sell at a discount. From your perspective, with a twenty percent equity stake or more you will not have to take out mortgage insurance and you will be positioned to get the best available interest rate.

Retirees Get Taxed On Lump Sums

Finally, your distance in time from retirement is a critical factor in whether you choose cash or finance but it might not be in the way you would expect. It depends on your taxable status and the source of your cash.

In retirement it may save on your tax bill to defer savings withdrawals from your 401k or IRA. So continuing to make the house payment could be cheaper than clearing the balance with savings. You don’t want the lump sum you withdraw to kick you into a higher tax bracket.

What A Choice To Have

It is an interesting dilemma when you have significant amount of cash to invest. The lower long-term costs plus the need for accessible cash to fend off the unexpected turns in life must be weighed against the costs of initially creating the loan. Arguably this is a wonderful position to be in if it applies to you; being stumped by your choice of financial options is the definition of the expression embarrassment of riches.

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Some Places Age Better Than Others – Here’s What To Look For

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Home Purchase BasicsBuilt At The Same Time And Crumbling Together

When you are house hunting and you are looking for any bit of information that will indicate of a good investment opportunity take a cruise around the neighborhood you are considering and just look at the condition. Before you lay out cash for reports and guides to an area try this simple trick.

Use your own senses to determine if the general area will be one in which you would like to live and spend time. Sometimes you can make some pretty conclusive assessments from the window of your car.

Look For Signs Of Decline

Real estate has a lifecycle over which it will build, thrive and then fade over time. Each building has its own life; some buildings will need replacement sooner, others later. What makes a truly long-term thriving neighborhood is the ebb and flow investment and how individual buildings change, so that there is always some growth to counter the decay.

Seek Signs Of Life And Renewal

A healthy neighborhood is one in which there is a relatively constant rate of change. Some of the things to look out for are mixed use, local amenities, a mix of building ages and a general sense of culture and community.

Older neighborhoods bounded by fast roads on all sides might have less potential to renew. They may lack the diversity that makes thriving mature communities so delightful. If all of the buildings are built and sold at once then they are likely to begin to decay at once.

Urban Homesteading Is A Thing For Some

Avoid neighborhoods with too many abandoned buildings and vacant lots. That is, unless you want to be some sort of urban pioneer, ignoring the dereliction to get a really cheap deal on land and buildings. The risk is that no one else sees it that way and the condition only continues to deteriorate.

The lack of municipal services can be a literal hazard. For example, if the fire department is overloaded and underfunded then the entire block could burn down before a house fire is under control.

This is an extreme case however; in fact many areas in decline will be renovated and regenerated by collaborations of government and local businesses. The time to invest in an area like this is after the commitments have been made and ground broken on projects that will help to heal the urban blight and return it to good use.

Using Your Own Senses And Judgment

So when you are house hunting keep this in mind: If it is a new subdivision are there covenants or other restrictions that will prevent renewal? If it is an older community is there a diverse array of property ages, and healthy well-maintained exteriors or are they unmodified and beginning to decay?

This is just one factor in your decision to choose a neighborhood or not but it is one that you can inspect easily with a calibrated eye by just driving around and looking. It could lead to a major decision and all with no fee greater than the tank of gas you use to do it.

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