Questions and Answers - Financing a Home
The term is used to describe a mortgage whereby the seller, who has an existing mortgage on the home, offers financing to the buyer at a below-market interest rate. For example, the seller has an existing first mortgage of $40,000 at 7% on the home which sells for $100,000. The seller then requires the buyer to make a $10,000 down payment and to pay back to the seller the $90,000 wraparound mortgage at 1% interest. The new mortgage covers the selling price, minus the down payment, and the seller's existing mortgage continues to be paid by the seller. Benefits include greater profits to the seller and the opportunity for a lower interest rate for the buyer. Wraparound mortgages can only be created, however, with the original lender's permission or if there is no legally enforceable due on sale clause. The transaction can be very complex and both parties should seek the counsel of a real estate attorney. A real estate agent who is a REALTOR® can assist you in locating a qualified attorney.
I RECENTLY READ ABOUT A MORTGAGE PROCEDURE CALLED COMPUTERIZED LOAN ORIGINATION. WHAT IS IT?
Computerized Load Origination, or CLO, is a process in which a loan officer or real estate agent uses a computer to handle a variety of transactions related to obtaining a mortgage, such as taking loan applications and obtaining credit reports on borrowers. Terminals are usually located in real estate offices, but laptop computers are being used more frequently to service borrowers in their homes and offices. The main advantage of CLO is the faster approval of loan applications, sometimes taking only half the traditional approval time. CLO also reduces the amount of paperwork for lenders, resulting in greater staff productivity and potential savings for borrowers. For further information on mortgage financing options, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.
WHAT ARE "POINTS" IN REAL ESTATE FINANCE?
Points are loan fees mortgage lenders may charge for originating a loan. One point equal one percent of the amount borrowed. For example, a one point loan fee of a $100,000 mortgage loan is $1,000. Points can be the responsibility of either the seller or the buyer, and it is usually a subject of negotiation. However, with loans guaranteed by the Veterans Administration, loan points are always paid by the seller. Generally, points paid by the buyer at closing are tax deductible as interest. For further details on tax benefits consult a tax advisor. For additional information on real estate finance, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.
I WANT TO BUY A NEW HOME. CAN I REFINANCE MY CURRENT MORTGAGE TO RAISE MONEY FOR THE DOWN PAYMENT?
Yes. This is a popular option for many people as the proceeds from refinancing your present home are not taxable. After moving you can either sell your old home and retire the mortgage, or convert the home into a rental investment property. If you are moving nearby, it may be relatively simple to maintain the property for rental income, or make arrangements for its management. If you are moving out of the area, however, you may want to consider selling. For helpful advice on real estate matters, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.
WHAT ARE THE ADVANTAGES OF TITLE TRUSTS?
Title trusts, also called property trusts, escrow trusts or holding agreements, are trusts used to hold title to real estate. With such trusts, individual owners' names are not a matter of public record, unless state or local law requires such disclosure. Typical trustees include banks, savings and loan associations, and title companies. Title trusts offer owners increased privacy regarding their real estate holdings and property transfers for a relatively low cost. Many people use them to avoid probate costs is estate planning or to avoid triggering a due on sale clause in some mortgages. Consult a real estate attorney or tax advisor for further information on title trusts. A real estate agent who is a REALTOR®, a member of the NATIONAL ASSOCIATION OR REALTORS®, can aid you is selecting qualified professionals.
WHAT IS A BALLOON MORTGAGE?
A balloon mortgage is a financing alternative requiring the buyer to pay off the entire remaining balance, or balloon payment, at a specified date in the future. Prior to the full payment of the existing principal, the monthly payments are calculated using a standard loan term, 30 years for example. Many borrowers obtain a balloon mortgage with the intention of replacing the mortgage, before its due day, with extended financing at a lower rate. The original lender may provide this replacement financing, or may extend the balloon mortgage. Occasionally, obtaining a new loan from a different lender may be the best choice. It is wise to begin shopping for new financing at least a year before the due day on the balloon mortgage. A real estate agent who is a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®, is a good source of information or creative financing alternatives and lender referrals.
WHAT IS AN "ASSUMABLE" MORTGAGE?
With an assumable mortgage, the existing mortgage on a property is transferred from the seller to the buyer, who then assumes the obligation of making the mortgage payments. Typically, the original lender must approve the transaction and may also charge an assumption fee. Also, it generally is easier to assume an existing mortgage than to obtain a new mortgage. A real estate agent who is a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®, can be a helpful source for a variety of home financing ideas.
MY ACCOUNTANT TALKS ABOUT THE TAX BENEFITS OF REAL ESTATE, BUT HOW DOES IT COMPARE TO OTHER INVESTMENTS?
One of the main advantages of investing in real estate is the tax benefits which allows you to build equity more quickly. Tax benefits include: tax-deferred capital gains for your own home, a one-time tax-free gain of up to $125,000 for persons over age 55, tax deductions that reduce the effective cost of your mortgage payment, and equity buildup. Another benefit to real estate is that you have a lender who acts as your partner in the investment. With other vehicles, the money you risk is generally all, or mostly, your own. For information on tax matters, consult a financial advisor. For professional advice and service on real estate matters, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.
I'M BUYING A NEW HOME AND WANT TO HAVE THE OPTION OF PAYING OFF MAY MORTGAGE EARLY. HOW CAN I DO THIS?
Many lenders will allow you to pay off your mortgage early with out penalty, but it is best to be sure of this before you commit to any loan. One option is to take out a conventional 30-year mortgage which lets you decide when and how must to increase your payments. Another choice is to take out a shorter term mortgage where you monthly payments are higher. This also can save you interest. Still another alternative is to take out a growing-equity mortgage in which your monthly payments increase by a specified percentage each year. Each approach has advantages and disadvantages, so it's wise to seek the advice of various lenders or a tax advisor. For professional advice and service in real estate matters, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.
I'M LOOKING FOR MY FIRST HOME, BUT AM HAVING DIFFICULTY QUALIFYING FOR A CONVENTIONAL 30-YEAR MORTGAGE. ANY SUGGESTIONS?
Some approaches that have helped first-time buyers quality include: * pay more points to get a lower interest rate * consider an adjustable-rate mortgage * shop around for lenders and pick the one with the best total package * shop for a graduated payment mortgage or "buydown" with lower initial interest rates that rise later * look for a government-guaranteed mortgage through the FHA or VA programs which often have lower down payments and closing costs For more information on financing alternatives, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.
WE'RE AFRAID WE MIGHT MISS SOME MORTGAGE PAYMENTS. SHOULD WE BE WORRIED ABOUT FORECLOSURE?
Consequences arising from missed mortgage payments generally begin when payments are in arrears for about 90 to 120 days. However, there are possible ways to avoid foreclosure proceedings. Contact your lender and explain that you want to make good on the loan. The creditor may make a special arrangement, allowing you to pay, for example, interest-only payments or deferred payments with the accrued interest added to the principal. Regardless of the agreement, you'll have to start making some sort of payments again to avert foreclosure. If you feel you'll be unable to make payments for an unspecified amount of time, you may want to consider selling your home. For a quick sale, enlist the services of a real estate professional in your area and set the price realistically. For more information about real estate matters, consult a real estate agent who's a REALTOR®, a member of the NATIONAL ASSOCIATION OF REALTORS®.