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Ask Realty Times - February 27, 2004
by Peter G. Miller
Question: My son has been told that because his credit is excellent he can qualify for a $200,000 house with his $31,000 per year income as a teacher. He has $30,000 cash and can show at least $10,000 more in a savings account. He has been offered a 3-year lock at 3.875 percent. In three years he will refinance to another variable rate. Is this all a gamble or is it safe? Answer: Your son has done a great job saving. If he buys a $200,000 home and puts down $30,000, he will need a mortgage of $170,000 plus closing costs. With a 3.875 percent start rate for three years he will initially pay $799.40 per month for interest and principal. He will also have a monthly cost for property taxes, the mortgage and, with 15 percent down, private mortgage insurance (MI). Is this a "3-year adjustable-rate mortgage" (a 3/1 ARM), meaning there is a fixed rate for 3 years and then the rate floats for 27 years, or do you mean after three years the loan will have to literally be "refinanced" with a new mortgage? With a 3/1 ARM there's a possibility (and, to me, an absolute likelihood) that the rate and monthly payment will rise after three years -- so you need to know the maximum payment that might be ahead after three years and during the entire loan term. Another good question for this mortgage is this: Does your son have a right to prepay the quoted loan in whole or in part at any time and without penalty? If the loan must be refinanced after three years then what you have is a three-year "balloon" mortgage. To me, a 3/1 ARM can be reasonable (depending on the terms) because it's a 30-year loan commitment. Alternatively, I see a three-year balloon mortgage as unattractive and needlessly risky. After all, with a balloon loan you have to ask what happens in 3 years if your son needs to refinance and the best available rate is 15 percent (rates have been this high and higher)? What if your son loses his job? What if your son does not qualify for a new loan? By any chance, is the quote received by your son available to him because as a teacher he has access to special programs? If so, this may explain the low start rate. Please speak with a variety of lenders to see what financing is now available. As well, compare with 30-year fixed-rate mortgages and the FHA ARM program. Question: The real estate business has changed. The Do-Not-Call legislation has put a major damper on my marketing efforts. I previously conducted my business by picking up the telephone and making that call. I am reluctant to do so now even if I verify that the person I am calling is not on the Do-Not-Call list. My business has changed. My attitude has changed. I conducted myself very professionally in the past on the telephone. The steep fine ($11,000) puts fear in me. What can I do? Answer: Your individual conduct and professionalism are not being questioned and yet your preferred method of marketing is now limited. The federal Do-Not-Call regulations reflect substantial questions of privacy, consumer preference, the ability to control a phone in one's home, etc. You are right to take this rule seriously. You can still make calls to certain numbers but the penalty for calling the wrong phone, as you note, is substantial. Many brokers have long refused to make cold calls and yet are successful in the marketplace. Such professionals routinely have strong websites, regular newsletter mailings both online and off, an extensive referral base, frequent open houses, buyer seminars and solid community ties. Brokers and all professionals must look at the emerging realities of the marketplace: The Federal Trade Commission says more than 55 million numbers have been registered on its Do-Not-Call system. Whether one agrees or not, this is a case where the public will cannot be ignored. Question: I recently put an offer on a house and gave a $1,000 deposit. I signed all the contracts. I never received a signed copy from the owner because he was away on business. His agent overnighted him the contracts and two days later cashed my check and marked the house as "sale pending." The owner of the house is now saying he does not want to sell. Do I have a right to that house? The agent did refund my money, but I feel the owner signed the contracts and the house should be mine. Answer: Entire libraries are devoted to the question of what is or is not a contract. In general terms, you need an offer (a bid to purchase), acceptance (an owner who says "great" and signs the offer) and consideration (such as a deposit). A signed document is awfully good evidence that something was accepted, but based on your note you don't have any proof that the seller actually signed the offer. Moreover, you did not sign a "contract." You did sign an "offer." To have a contract you would need the seller's signature and acceptance of all terms. Sellers are not required to accept offers, even full-price offers. That the owner was "away" does not mean a signed agreement could not be sent overnight or electronically transmitted. All homes, prior to closing, can be described as pending sales -- the term "pending" meaning contingent, not-yet-accepted, not final, unfinished and unsettled. Your deposit has been promptly returned -- that's good news and a credit to the broker. The question to ask is this: If you really want the property would it make sense to submit another offer? Maybe the first offer can be modified to gain acceptance from the owner.
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