In the spirit of Halloween, I want to go over a few mortgage “trick or treats” you could come across during the mortgage process. As I am not going into great detail about each option, I recommend speaking to an experienced mortgage professional before you commit to any financing options. While perusing the offerings below, do keep an open mind as not every product will suit your taste, kind of like when you are deciding which of your kids Halloween candy to eat first!
Below, I’ve listed some of the potential ghouls you may run into along your route to a new home.
TRICK: A rent-to-own style purchase is typically done if you aren’t able to qualify for mortgage financing at the time you would like to purchase a home. It is convenient for you as you are able to move into the house now, pay market rent on a monthly basis for say 2-3 years as well as contribute a little extra towards the down payment each month until you are able to qualify for a mortgage. One of the downsides of this program is you aren’t able to choose from all of the properties currently listed for sale. The majority of sellers want or need all of the funds from the sale of their home immediately and aren’t likely interested in renting to someone for a couple of years while they work on accumulating their down payment or repairing their credit. Having said that, I do know there are quite a few companies you can work with under a rent- to-own program who have a number of properties available under this type of purchase. The tricky part of this type of deal is that not all lenders will finance rent-to-owns when it comes time to get a mortgage and transfer the house into your name. The lenders who will offer the financing are very particular with the documentation requirements so it is VERY important that before you enter into any contract you are FULLY aware of exactly what will be requested at the time you apply for mortgage financing. Lastly, another potential downside under this program is if property values decrease prior to you completing the contract period as the purchase price is most often agreed upon at the time you enter into the contract. Avoid putting yourself in a position where you are committed to purchase a home for more than it’s valued at on the day of completion of the contract.
TREAT: I’m a big fan of variable rate mortgage terms these days and if you are willing to take a bit of a risk, a variable rate could save you some money over the long term. As today’s variable rates are much lower than the fixed rate offerings, you could take advantage of that difference by making higher payments without really noticing it which will go directly to reducing your principle balance which in turn will save on interest costs. Variable rate terms are “convertible” at no charge. This means if you are concerned with rising rates during the term you can convert your variable term to a fixed rate term with only a phone call. It’s the best of both worlds. Keep in mind with most lenders variable rate products, your payments change when prime rate changes, though, conversely, do be aware if the lender you are with doesn’t change the payments. In this case, you need to keep on top of any changes to the prime rate to ensure your mortgage balance doesn’t increase over time.
Borrowing Your Downpayment
TRICK: When you borrower your downpayment funds, you will have the payment on that new loan as well as the monthly payment for your mortgage in addition to all of the other costs related to your new home. If you do decide to borrow your downpayment funds, ensure you can comfortably afford all of the additional costs of buying or wait until you have saved your own down payment.
Waiting to Buy
TREAT: If you’re not yet ready to buy, don’t. We’ve had some turbulent times over the past 5 years and purchasing a home is a commitment while financing a home is a responsibility, not to mention costs for repairs and maintenance. If you want to know more about the real cost of home ownership and the best strategies for riding out the ups and downs of the market, find an experienced mortgage professional you like and ask them all the questions you can.
Buying for a quick-flip
TRICK: If you’re purchasing a property to fix and flip, be aware of exactly what you are getting into and ensure you have realistic expectations on what your profit will be versus the time and money you put into the renovations. For instance, if you spend $30,000 on a kitchen upgrade which includes granite and stainless steel, there is no guarantee the value of the home will increase by that exact amount. The price point tolerance of the buyer’s market at the time you are selling will determine the value of a property and there is no guarantee the market will be able to tolerate such a quick price increase. You could be left holding onto the property and paying the carrying costs while you wait for the “right buyer”, or you may have to lower your price in order to compete with the other properties for sale in the same area. Before getting into anything like this I strongly recommend you consult with an experienced real estate professional.
Everyone has different tastes, opinions and risk tolerances and one need’s to look for a mortgage solution that is best suited for them. Again, consulting professionals in their respective fields is always a good thing.