Ask Realty Times - November 19, 2004 - 11/19/2004 - Mortgage Loan Refinance Debt Equity

Ask Realty Times - November 19, 2004
by Peter G. Miller

Answer: What you are proposing is a classic form of real estate investment, taking equity from one property to acquire another. By using the second property as a prime residence you will have access to owner-occupant financing at the best rates and terms.

It is smart to set aside money for reserves -- if possible that's money that should not be spent. Instead, hang onto it for repairs, improvements and perhaps a few dollars toward the purchase of property #3.

Are there hazards with your plan? Sure. Property values could fall. Your current home may not rent or may not rent for what you expect. Tenants may damage the property.

However, the issue that concerns me is using reserves to help with monthly payments on the second home. If this means you now do not qualify for financing on the basis of your income then lenders will not be happy with 10 percent financing.

Rather than a single-family home, perhaps consider a duplex, triplex or quad where you live in one unit and rent the rest. That might allow you to generate a greater income and qualify more easily for a mortgage.

Question: We recently obtained a mortgage to buy a townhome. We provided documents and signed papers three weeks ago and were told by the lender that our rate, 4.5 percent for a 5-year ARM, was locked.

However, the mortgage broker tells us, three days before closing, that one of his lenders found an issue with our permanent residency card, since according to him we only have a stamping on our passport and not the actual card. This is incorrect since the stamping clearly states that it is only temporary proof of our permanent residency and the INS normally takes up to several months to provide the card itself. He also tells us that now, the rate is 5 and 3/8 percent and with an pre-payment penalty clause for 2 years.

Now in our contract, we realize that he has included only the application fee of $350 and no rate-lock fee, though he kept telling us that the rate was locked. Also, the two items for the rate-lock option were not checked by us since he said he would check them off himself.

In this situation, what can we do?

Answer: You can certainly complain to managers at the mortgage company and if you get no relief you can contact state and federal regulators and ask for their assistance.

That the lender did not charge a fee to lock-in the rate does not mean there was not a lock-in -- many lenders lock-in rates without cost.

Question: When a broker is going to relocate to another state and practice there, when should he or she tell his current clients? I want to work with them as long as possible, to close their deals, and I don't want them to think that I'm flaking out on them.

Answer: One approach would be to accept no further business. As to the clients you now have, they are entitled to local, knowledgeable representation and advice. This means that client interests, which come first, may be best served by referring them out to other professionals.

Question: I am thinking of refinancing an investment property with a three-month CODI loan. Is this a good loan for a refinance rental property or would I be better off with a 30-year fixed at 5.75 percent with 0 points? My gut says fixed.

Answer: A "CODI" loan is the certificate of deposit index used by some lenders to set interest levels for adjustable-rate mortgages (ARMs). It's usually based on the average rate for three-month or six-month COD rates. As this is written, the index for the six-month COD is at 2.41.

In addition to the index, to get the full rate you would also have to look at the "margin" -- a set percentage added to the index.

The ARM cost can move up and down while the fixed-rate loan is a known and stable factor. Today, at this moment, the ARM may be cheaper but what about the future? If ARM rates rise at what point would your property have a monthly loss?

Speak with lenders and see what the index and margin total, how often the rate and payment change, whether negative amortization is allowed and if there is a prepayment penalty -- and then take another look at fixed-rate loans. Believing that rates will rise, I'd pick the fixed-rate mortgage.

Question: What is the correct policy regarding broker fees for a land contract. The buyer wants to move into our home so his agent said to do a land contract until the planning commission can give the okay on the new minimally defined re-plot. Now the real estate brokers want their total commission but only 30 percent of the sale price is going to be paid by the buyer. We, the seller and the attorney, feel that this is not right since the buyer will not have a clear deed and further transactions are pending. What do you think?

Answer: Take a look at the listing agreement. Were the brokers hired to find a "ready, willing and able" buyer or were they hired to literally "sell" the property?

What attracts you to this deal? If your goal is to sell the property, then your interests are best served with a buyer who can close. The current transaction depends on government action -- but what if the government says "no?" And what if the buyer for whatever reason is unable to obtain the balance of the purchase price?

Question: I've been living in my aunt's house for 13 years. She died in December of 2003 without a will. The house went into probate and now it's going to be placed on the market. Could I just buy out my aunt's husband? I talked to my family and they all agreed to let me stay in the house.

Answer: That you have lived in the property and even though the owner was your aunt, you have no automatic entitlement to the property. Had there been a will, and had the property been left to you, then you would now have the home.

Instead, state rules come into play because there was no will. The estate will be divided according to the percentages and requirements of your state, and state rules vary. By buying the home from the estate you will be providing it with money that can be used to pay off the husband and other creditors. For details, please consult with an attorney who deals in probate matters and elder law.

Question: I am the executor of my mother's estate. A prospect and I have e-mailed back and forth regarding the property. The price we originally discussed is now unacceptable to me because of additional information and I have set a new and higher one. Does the prospect have a contract at the low price on the basis of our e-mail exchange?

Answer: As this is an estate situation must the sale be approved by a judge? If yes, the court will decide what is an acceptable offer and what isn't.

You may well have discussed a sale price in your e-mail but your correspondent did not offer to buy on the basis of the lower price when it was available or provide consideration to you in the form of a deposit at that time. In effect, you withdrew your original price before receiving an acceptable offer.

It seems impossible to believe that casual e-mails contained all the terms and conditions necessary to have a sale, items such as who pays the transfer tax, a closing date, the amount down, whether the clothes washer stays, etc.

Take a look at a local real estate agreements and you may also find terms and disclosures required by government -- these too are unlikely to be found in e-mail exchanges.

For details and specifics, speak with a knowledgeable real estate attorney in your community.

This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.