The housing market today offers buyers many financing alternatives. In this column and several succeeding installemts we will look at some of the financial choices available.
One choice is to pay cash. As a practical matter this is generally not done, but there may be cases where a cash purchase is a reasonable alternative. For example, a retiring couple may want to take the cash from the sale of a large home and to buy a smaller house or condominium. With their limited future income, it may be best not to face the continuing burden of monthly mortgage payments.
A more common choice is to assume the seller's mortgage. Assuming a mortgage means the buyer takes over the remaining payments. There are a number of questions to ask about assumptions: Does the lender have the right to charge the same rate of interest? Must the lender approve the buyer? Is there an assumption fee?
Suppose a home with a a $75,000 mortgage at 9 percent is sold for $100,000. The buyer might assume the mortgage and cover the balance with cash or a second trust (a loan in addition to the first one), or both. The advantage to the buyer would include an interest rate that could be below prevailing rates, no points to pay at settlement and a clear source of financing. A "point" is equal to 1 percent of the mortgage and is paid in cash settlement.
Assumptions are not always possible, or desirable, and so many buyers turn to conventional financing. A conventional loan requires a 20 percent down payment; the interest charged is at the prevailing rate.
Conventional loans are available from a variety of sources, including savings and loan associations, banks, mortgage companies, insurance firms and credit unions. It pays to shop around because the morrgage market is continually changing -- as are the interests of individual lenders.
The best way to check the money market is to call mortgage loan officers at various lending institutions. Keep a list of the people you speak to -- and their phone numbers. Since the money market is always in flux you should call lenders on a regular basis, every two weeks at least. Questions to ask:
Is the lender now making loans? If not, who is? If the lender is making loans, what is the rate of interest? How much of a down payment will be required? How many points will be charged atsettlement?
You will also want lenders to describe their general qualifications for a buyer. This is usually a basic requirement that monthly payments for principal, interest, taxes, and insurance should not exceed 25 percent of the buyer's gross monthly income.