Q: In an earlier column, you stated "as a general proposition, it is my belief that the higher the mortgage the better off you will be". I have read this type of statement in one form or another many times, but I do not understand the rationale. Would you be good enough to explain this in some detail?
A: Certainly. In the Washington metropolitan area, where property values continue to go up, it means that the equity in your house is getting larger day by day. Because your house will continue to increase in value regardless of the amount of your equity, it is my belief that your equity should not just sit there, depreciating in value.
Let me give you an example: Suppose you purchased your home several years ago for $50,000, and took out a mortgage in the amount of $40,000. Today, your house is worth approximately $75,000, and your mortgage is down to $33,000. Your equity in the property, under this hypothetical is $42,000 -- namely the difference between your mortgage and the market value.
You are not using your equity. As I indicated, it is just sitting there, and you should consider refinancing, and putting the money to better use. Most lenders will be happy to consider a refinance loan of 75 per cent of the house's market value, and you should easily be able to borrow $55,000. Paying off your existing mortgage of $33,000 leaves you the sum of $22,000 -- in cash. Your house is still going up in value, your mortgage is higher, and you are making better use of your equity.
There are two important cautions to consider, however. First, can you afford the monthly payment? Presumably, your income has gone up since you first purchased your house, and you can afford higher monthly payments, and in fact can use the greater tax deduction.
Second, what use do you intend to make of your refinance money? Just to take it out of your house and put it in an interest-bearing savings account does not thoroughly utilize this money. You may be considering purchasing another house, for rental and investment purposes, or you may be planning to make significant improvements to your existing house.
In the final analysis, each situation must be looked at on its own terms. Everyone has different facts which should be considered. The bottom line, however, tells me that you should make greater use of your equity.
Q: I am buying my first home, and have recently started looking at "open" homes for sale. I soon found out how little I know about buying a house. Although I have purchased many books on the subject, there is one thing that is usually mentioned with little or no explanation: What is an FHA insured loan, how does it work, and what qualifications are necessary of the buyer?
A: The Federal Housing Administration (FHA) is the leading government insurance underwriter. It was established by Congress with the passage of the National Housing Act of 1934, and is now a part of the Department of Housing and Urban Development. The commissioner of FHA is also an assistant secretary for housing at HUD.
Every American is eligible for an FHA-insured loan. Since FHA does not actually loan money, you must make an application to an FHA-approved lending institution. If you look in the yellow pages under "Mortgages", there are a number of listings for FHA lenders.
Generally, FHA-insured mortgages require smaller down payments and lower monthly payments than conventional loans. Because the FHA will insure mortgages only up to a maximum of $45,000 for a single-family home, and because property values have been rising so drastically in the Washington metropolitan area, there have been fewer FHA-insured loans made in recent years. However, they still are available, and you should inquire of the appropriate lender.
Benny L. Kass, a Washington attorney, answers questions on real estate in case of The Real Estate Section, The Washington Post, 1150 15th St. NW, D.C. 20071.