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At least once a day I’m asked by a friend or
customer about potential financing for their house,
apartment building, or commercial/industrial property.
The questions are usually:
- Should I get a fixed or adjustable rate?
- How about no points?
- Should I get a 15-30 year
amortization?
- Should I do a bimonthly mortgage?
- Should I get an 80%, 90% or 100% first?
- What interest rate should I ask the seller to carry
if they would carry a first or second trust deed?
- Should I get a first for the purchase and then fix
it up and refinance?
- What is the cheapest source of money?
The answers to these questions depend on whether
this is an owner-occupied single family house (1-4
units), condo, or whether it is some other type of
property. Obviously, you don’t see lenders offering
125% (of purchase price) financing on bare land. I
will try to differentiate single family
owner-occupied. Some answers will be the same whether
owner-occupied or not.
For instance, the old question of fixed vs.
variable; zero points vs. points, follows the same
basic guidelines. If you’re going to keep the
property for one to three years, you probably will
want an adjustable rate loan with zero points.
Remember, in reality there is no free lunch so a zero
point loan will, obviously, have a higher interest
rate than a one-point loan. If you’re going to own
the property for five, eight, ten, twenty or thirty
years the higher interest (zero points) would NEVER
work out to be the better deal.
If, on the other hand, you’re going to own the
property for a short period of time you would probably
want a low interest rate, adjustable with a teaser
rate and no points. Remember, the teaser rate is an
attractive rate that is BELOW market for a short
period of time – six months, one year or whatever.
If you’re buying a property that you intend to
keep for many years, you will probably want a fixed
rate loan with the lowest interest possible. That
brings into play the 80%, 90% or 100% of purchase
price option. There is no question that your most
attractive rate on an owner-occupied (SF-1-4) would be
a trust deed for 80% of your purchase price. The
higher the LTV (loan to value), the higher the
interest and other fees like secondary underwriting
fees or PMI (private mortgage insurance). If you’re
buying a property and you do not have enough down
payment for the lender’s “best” loan ask the
seller to carry a second trust deed. This will get you
a good rate on a good first and, hopefully, a good
rate on the seller carryback with no points. |
How about a fixer-upper? You’re intending to buy it, fix
it up, and either sell it or refinance it. Should you get
conventional purchase money financing for six months – one
year? In this case, the easiest and cheapest avenue would be
to make a normal down payment and ask the seller to carry a
first trust deed or all-inclusive for the short term you
really need. Use the short-term seller financing to fix up
and improve the value of the property. If you refinance
(after fix up), the loan will be based on the new appraised
value rather than the low (fixer upper) purchase price. Be
careful here as some lenders have “cash out”
restrictions.
If you sell, the financing was “free”. In the
alternative, this is the perfect home for a “zero”
points teaser loan: make sure there is no prepayment
penalty.
If you have followed my drift so far, and you will be an
owner-occupant who intends to keep the property long term,
you probably have now decided to get a fixed interest 80%
(LTV) first trust deed with a seller carryback second (if
necessary).
The next question will be the pay back. When shopping for
the loan in the first place you probably found that a
15-year amortization had a lower interest than 30 years. If
you can easily afford the higher payment: go for it! You
will save tens of thousands of dollars in interest. If you
can’t afford the higher payment, merely take the 30-year
amortization (slightly higher interest) and then OVERPAY
your payment whenever possible. Every extra dollar of
overpayment gets credited to PRINCIPAL and future interest
will be calculated on the lower principal balance. If you
can pay the equivalent of one extra payment per year you
will, pay your loan off many years early. This is similar to
the bimonthly plan, which (as I have said in previous
articles) is just a “cute” way to pay thirteen payments
in a twelve-month period.*
This article is not intended to be the last word in
mortgage financing; hopefully, it will help you find a lower
interest rate. If you’re buying real estate other than
your own home, remember the least expensive source of funds
for that purchase or down payment will be a refinance or “equity
line” second trust deed on your home. Though many people
want to keep their house “free and clear” it usually can
be used for the lowest interest available.
*For more information about the bimonthly mortgage, send
me a self-addressed, stamped envelope and request the
bimonthly mortgage hoax.
Peter Rosenthal
VIP Trust Deed Company |