Common Financing Considerations

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

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