DOCUMENT RESUME

ED 346 309 CE 061 362

TITLE The Mortgage Money Guide. Creative Financing for HomeBuyers. Updated Edition.

INSTITUTION Federal Trade Commission, Washington, D.C.

PUB DATE 91

NOTE 22p.; Prepared by the Commission's Division of CreditPractices and the Office of Consumer and BusinessEducation.

AVAILABLE FROM Superintendent of Documents, U.S. Government PrintingOffice, Washington, DC 20402 (order no.016-000-00319-8, bulk orders only: 100 copies,

$45.00).PUB TYPE Guides - General (050)

EDRS PRICE MF01/PC01 Plus Postage.DESCRIPTCRS Budgets; Consumer Education; Credit (Finance);

*Housing; *Loan Repayment.; *Money Management; Real

EstateIDENTIFIERS *Mortgages

ABSTRACTThis guide to creative home financing outlines basic

concepts needed in shopping for a home loan. Many plans are described

so that buyers can make their own decisions. The guide contains three

sections: (1) getting startedhighlighting the essentials; (2)

defining terms; and (3) payment tables. The first section summarizes15 financing plans in a reference chart: fixed rate mortgage; 15-year

mortgage; adjustable rate mortgage; renegotiable rate mortgage

(rollover); balloon mortgage; graduated payment mortgage; sharedappreciation mortgage; assumable mortgage; seller take-back;wraparound; growing equity mortgage (rapid payoff mortgage); land

contract; buy-down; rent with option; and reverse annuity mortgage

(equity conversion). Type, description, and considerations areincluded for each plan. In addition to defining the 15 summarized

plans, the second section discusses changing rates, reading the fine

print, and losing ground. The third section includes some financial

tables to estimate the monthly costs for principal and interest of a

specific mortgage or loan. An index and Federal Trade Commissionaddresses and phone numbers are included. (NLA)

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GETTING STARTEDIf you've been thinking about buy-ing a home, you may wonder howto select the right financing for yourbudget and needs. Many types ofmortgages are now available, andnew plans are continually being in-troduced. With all these ;..hoices, youmay wonder what to look for

Some of the mortgages now avail-able are traditional plans, with inter-est rates and payments that remainconstant throughout the loan andpay off your debt over a long period.Others represent a departure fromthe older plans: they can involvemore risk for the buyer and arefrequently tied to changes in themarket. But they also can makehome buying possible and may offerlower interest rates.

So if you want to purchase ahome, you can still find the rightmortgage for your needs. But tomake sure you understand thechokes, you should educate your-self first.

This guide will introduce you tosome of the many plans available.Other sources of information includeyour state, county, or city consumeraffairs office; locel realtors, homebuilders, and lenders; bookstores;and the real estate section of yournewspaper. You may also want tobuy a book of mortgage paymenttables to help you calculate whetheryou can afford a specific loan.

Above all, shop carefully. And. asyou read through this booklet, keepin mind the following:O Don't use yesterday's assump-

tions about today's real estatemarket.The key is affordability. Consideryour total housing costs includ-ing loan payments (now and inthe future), maintenance, prop-erty taxes, and your anticipatedincome changes.

0 Look into several sources offinancing. You may be able tocombine two or more mortgages.

o Ask yeestions. For example, anenthusiastic seller may not he fa-miliar with the tine points ot thefinancing arrangement.

O Negotiate with the seller orlendet Better terms may be avail-able than those initially offered.

O Consider getting an attorney or areal estate broker to representYou. This could be the largestinvestment of your life.

O Study all available materials aboutyour mortgage costs. With loansfrom institutional lenders. thecreditor is required to give you astatement of your loan costs andterms before you sign the agree-ment. This informationinclude the "annual percentagerate" (APR) which nwasures yourtotal credit costs, includinginterest, points, and mortgageinsurance.Finally, if you're thinking about

refinancing your current home mort-gage, you may also find this guidehelpful. When you refinance, youare actually signing a new mortgageand paying off your present one. So.you might save money by switchingto a different type of mortgage. Askseveral lenders what terms andtypes of mortgages are available,and bargain for the deal that hestsuits your needs.

G IGHTING T ESSENTIALS *

Description

Fixed RateMoltgage

Fifteen-YearMortgage

Adjustable RateMortgage

Renegotiable RateMortgage (Rollover)

BalloonMortgage

Graduated PaymentMort?, tqe

Shared AppreciationMortgage

AssumableMortgage

Seller like-back

Wraparound

Growing EquityMorvage(Rapid PayoffMortgage)Land Contract

Buy-down

Rent withOption

Reverse AnnuityMortgage(Equity Conversion)

*Please see the se ctt:m , -Defining Your Thrms" on paps 4-15, for additional discussion of these

conixpts.

5

Offers stability and long-term tax advantages. Interest rates may be higher than other types otfinancing. New fixed rates are rarely assumable.

11111, 1111.

Frequently uttered at slightly reduced interest raw. Otters taster accumulation ot equity thantraditional fixed rate mortgage but has higher monthly payments, Involves paying less interest but

this may result in fewer tax deductions.

tttarting interest rate is slightly below market. but payments can increase sharply and trequentlY itmdex increases. Payment eacm prevent wide fluctuations in payments but may cause negativeamortization (see box. page 15). Rate caps limit amount total debt can expand.

Less frec t lhanges in interest rate otter some stability

Otters low monthly payments but possibly no euuity until loan is fully paid hen due. loan mutnbe paid ott or retmanced. Refinancing poses high nsk it rates

Easier to quality tor Buyers inc.orne must be able to keep paie with scheduled payment increasesWith an adiustabk rate. payment increases beyond the graduated pa% merits can result in additional

negatavy awn-manor' (see box, page 15).

It home appreciates greatly, total cost cit loan lumps It home tails to appreciate proected increasein value may still be due. requiring refinimeing at possii,h- higher rates.

1.owers monthly payrwrits Max be prohibited it -due on sale- use is in Oruzinal Mortgage iseebox, page 12). Not permitted on most new fixed rate mortgages

\lay otter a below- marko interest rate: may have a balloon payment requiring full payment in a tei%

%ears or refinancing at market rates, w hich couki sharply increase debt .

lender may call in old mortgage and require luiTher rate It buyer default ,. seller frai,n take utai

action to collect debt

rerrbit.s rapid payoff ot debt because pax ment int Teases reduce prIniipal. . income piu-dable to keep up with payment increases.

1.31,7041.

\lay otter no equity until loan is tullv paid. Buyer has few prowitions it conflict are,v, during 4,4.1

Otter a break from higher payments dunng early years Friables buyer with lower income toquality With adiustable rate mortgage. payments may iump substantially at end let subside

Developer may increase selling price

nables renter to buy time to obtain down payment and decide whether to purchase. Locks in prl,dunng inflatwnam times Failure to take option m loss in option tee and rental payments.

Can provide homeowners with nyt'ded t,ash At end ot term bornisir must ha% e money available

10 avoid selling property or refinancing.

DEFINING YOUR TERMSTo buy or sell a home today, it'simportant to know the vocabulary.Don't let terms like "amortization"or "appreciation" scare you. Under-standing the concepts can save youtime and money; it can also preventYou from obtaining a mortgage ill-suited to your needs.

Three important words are: "inter-est," "principal," and "equity."When you first buy a home you'relikely to make a down payment onthe property. But, because you fi-nanced the purchase, you are now indebt and the lender "owns" most ofthe property's value. In traditionalmortgages, the monthly paymentson the loan are weighted. Duringthe first years, they are largely inter-est; in time, more of each payment iscredited to the loan itself, or theprincipal. Gradually, as you pay offprincipal, you build up equity, orownership. Your equity also in-creases if the value of the homeincreases. This process of graduallyobtaining equity and reducing debtthrough payments of principal andinterest is called amortization,

Until recently most mortgages hadfixed monthly payments, a fixedinterest rate, and full amortization(or transfer ot equity) over a periodof 20 to 30 years. These featuresworked in the buyer's favor. Infla-tion made your payments seem lessand your property worth more. So,although the payments seemed hardto meet at first, over time, it becameeasier.

Many home financing plans aredifferent from traditional mortgages.They may help you buy a home youotherwise couldn't, but they alsomay involve greater risks for buyers.For example, the interest rate andmonthly payments may change dur-ing the loan to reflect what themarket will bear. Or the interest ratemay fluctuate while the paymentsstay the same, and the amount ofprincipal paid off may vary Thelatter approach allows the lender tocredit a greater portion of the pay-

4

rnent to interest when rates are high.Some plans also offer below-marketinterest rates, but they may not helpyou build up equity.

In shopping for financing sourcestoday, kcep in mind the terms whichare keys to the affordability of thehome:O the sales price minus your down

payment, or amount you finance;O the length, or maturity of the loan;0 the size of the monthly payments;

the interest rate or rates;0 whether the payments or rates

may change;O how often and how much the pay-

ments or rates may change; and,0 whether there is an opportunity for

refinancing the loan when it ma-tures. if necessary.

These concepts will be discussed ingreater detail as we describe specifictypes of financing.

Fixed Rate MortgageFixed rate mortgages have an inter-est rate and monthly payments thatremain constant over the life of theloan. This sets a maximum on thetotal amount of principal and inter-est you pay during the loan. Tradi-tionally, these mortgages have beenlong-term. As the loan is repaid,ownership shifts gradually fromlender to buyer.

For example, suppose you borrow$50,000 at 13% for 30 years. Yourmonthly payments on this loanwould be $553.10. Over 30 years,your total obligation for principaland interest would never exceed thisfixed, predetermined amount.

Fixed rate mortgages are usuallyavailable at higher rates than manyother types of loans. But, if you canafford the monthly payments, infla-tion and tax deductions may make afixed rate mortgage a good financingmethod, particularly if you are in ahigh tax bracket and need the inter-est deductions.

7

Near nom the Date Loan Vtto Granted

Fixed Rate Mortgage'Traditionally both interest rate andmon thhi payMen tS are fixed tor the life of

the WTI.*

Fifteen-Year MortgageThe fifteen year mortgage is a varia-tion of the fixed rate mortgage that isbecoming increasingly popular. Thismortgage has an interest rate andmonthly payments that are constantthroughout the loan. But, unlikeother plans, this loan is fully paid offin only fifteen years. And, it isusually available at a slightly lowerinterest rate than a longer-term loan.But it also requires higher payments.

Suppose you buy a house for$100,000, and after making a $15,000down payment, you still need toborrow $85,000. You find a 30-yearmortgage for 12%. This means yourmonthly payments would be$874.32. But, another lender offersyou a 15-year plan for a lower rate,11.5%. However, under this plan,your payments would be $992.%$119 higher than the longer-termfinancing.

In the fifteen-year mortgage, youpay off the loan balance faster than aking-term loan. Because of this, asmaller proportion of each of yourmonthly payments goes to interest.So, if vou can afford the higherpayments, this plan will save youinterest and help you build equityand own your home faster. Becauseyou are paying less interest, though,

The harts contanwd thts manual are tor Illustranvrpurpose% only Thev are not intended to he precise wpm-wroahons ot each type of mortgage

you may also have tewer taxdeductions.

Adjustable Rate MortgageAdjustable rate mortgages have aninterest rate that increases or de-creases over the life of the loanbased upon market conditions.Some lenders refer to adjustablerates as .flexible or variable. Becauseadjustable rate loans can have dif-ferent provisions, you should evalu-ate each one carefully.

In most adjustable rate loans. yourstarting rate, or -initial interest rate."will be lower than the rate offered ona standard fixed rate mortgage. 'Thisis because your long-term risk ishigher your rate can increasewith the market -- so the lenderoffers an inducement to take thisplan.

Changes in the interest rate areusually governed by a financial in-dex (see box, page 10). If the indexrises, so may Your interest rate. In,iome plans, if the index falls, so mayyour rate. Examples of these indexesare the Federal Home Loan BankBoard's national average mortgagerate and the U.S. Treasury bill rate.Generally, the more sensitive theindex is to market changes, the more

lear from the I late Loan 1,15 Granted

djustable Rate MortgageIf there are no payment or rate nips,interest rate and monthly payments fluc-tuate according to an index.

tem tmm the Pam Limn Oda Granted

Adjustable Rate Mortgage-Rate Caplifith a rate cap. even if the indet rises.incnuses in the rate and monthly pay-ment are limited.

frequently your rate can increase ordecrease.

Suppose your interest rate is tiedto the Bank Board index. Your mort-gage limits rate changes to one peryear, although it doesn't limit theamount of the change. For example,assume your starting interest rate is11% on September 1, 1986. Based orthese terms. if the Bank Board indexrises 2 percentage points by Sep-tember 1, 1987, your new rate for thenext year will be 13%.

Rate CapsTo build predictability into your ad-justable rate loan, some lenders in-clude provisions for "rate caps" thatlimit the amount your interest ratemay change. These provisions limitthe amount of your risk.

A periodic trite cap limits theamount the rate can increase at anyone time. For example. your mort-gage could provide that even if theindex increases 2% in one year, yourrate can only go up 1%. An aggnaterate cap limits the amount the ratecan increase over the entire life ofthe loan. This means that, for exam-ple, even if the index increases2%every yeaz your rate cannot increasemore than 5% over the entire loan.

6

Many flexible rate mortgages offerthe possibility of rates that may godown as well as up. In tome loans, ifthe rate can only inarissel 5%, it mayonly decrease 5%. If no limit isplaced on how high the iste can go,there may be a pmviakra that alsoallows your rate to go down alongwith the index.

Because they limit the lender'sreturn, capped rates may not beavailable through every lender.

Payment CapsIf the interest rate on your adiustablerate loan increases and your loan hasa payment cap, your monthly pay-ments may not rise, or they mayincrease by less than changes in theindex would require.

For example, assume your mort-gage provides fe7 unlimited changesin your interest rate but your loanhas a $50 per year cap on paymentincreases. You started with a 11%rate on your $75,003 mortgage and amonthly payment of $714.24. Nowassume that your index increases 2percentage points in the first year ofyour loan. Because of this, your rateincreases to 13%, and your pay-ments in the second year two should

Year from the Date Loon dim Granted

Adjustable Rate Mortgage-Payment CapIf the mdex increases, so does the interestrate. However, monthly paymentchanges am limited (although the totalamount owed may increase).

9

rise to $828.33. Because ot the pay-ment cap. however, you 11 only pay$764.24 per month in the secondYear.

But remember: it your payment-capped loan results in monthly pay-ments that are lower than your inter-est rate wouki require. You still owethe difference. Negative amortiza-tion ( see box page 15) may take placeto ensure that the lender eventuallyreceives the tull amount. In mostpayment-capped mortgages. theamount of principal paid ott changeswhen interest rates fluctuate. Sup-pose N'ou are paying Sh50 a monthYith ,S5(X) gomg toward interest,ivith Your rate at 12"o. I hen yourrate increases to 13t'a. Fhis means'our monthly payment shouhi in-crease to Sh97.30, but because in a'ap. it increases to only 5075. Be-cause this change in interest ratesincreaSes your debt, the lender Marnow apply a larger portion ot vourpayment to interest. It rates c,at veryhigh, even the full amount of yourmonthly payment (S673) Yon't heenough to cover the interest owed:the additional amount of interestyou Owe Nvill be added to the prin-cipal. This means you now oweand eventually will pay interestOn interest.

VariationsOne variation ot the adiustabk ratemortgage is to tix the interest rate tora period of time 3 to 3 Years, forexample, with the understandingthat the interest rate will then be,e,hvetiated. loans ith periodicallyrenegotiated rates are lso called

mortvg,N. Such loans makemonthly payments more predictablebecause the interest rate is Ited for alonger time.

Another variation is the nickedbind-down morNiNe alth an

.0ustab1v rate. I his plan %vas intro-duced by the Federal National Mort-gage Assoc4ation (Fannie Mae),which buys mortgages trom lendersarid provides a major SOUIVV ot

money for tuture mortgage ottenngs.In this plan, a large initial pay-

ment is made to the lender at thetime the loan is made. The paymentcan be made by the buyer, thebuilder, or anvone else willing to'subsidize the loan. The payment isplaced in an account with the lenderwhere it earns interest. This planhelps lower your interest rate tor thetirst year.

This plan could lower yourrate. tor example, by -Va in the tirstyear. It you borrowed 550,000 at13''a. tor example, this would reduceyour rate to ki"a and Your mnnthlypayments to 5402,31. a savings otapproximately S1.51 monthly. 'then,tor the next 5 Years, Your interestrate would only increase, tor exam-ple, bv I point each year. Atter that.Your mortgage becomes an adiusta-ble rate mortgage with interest rateand payment changes based uponan index.

This plan may not include anypayment or rate caps other thanthose in the tirst years. But, therealso mar not he negative amortiza_non. so possible 111Crease.s in Yourtotal debt may be limited. Because otthe buy-down teature, sortie buyersmay be able to quahiv tor this loan

ho otherwise would not be eligibletor tmancing.

SummaryIn shopping tor any t pc ot ad !Lista.He rate loan. renwmber to look torthe following:

the initial Mterest rate:.7, how often the rate may change:

how much the ra: mar change;7= the' initial monthly payments:1. how often paynwnts may

how much the paynwnts maye flange:the mortgage term;how otten the term nay change:

.] how much the term may change;the index that rate, payment, orterm changes are tied to; and .th..' limits, it any, on negativeamortization.

%ex from thy ilatr t.t.intet1

Balloon Mortgageant interest rate; payments are also

flied but may apply onlu to interest.Atter short term, a final payment etprouval is glue.

Balloon MortgageBalloon mortgages have a series otequal monthly payments and a largetmal payment. Although there usu-ally is a fixed interest rate, the equalpayments may be for interest only.The unpaid balance, frequently theprincipal or the original amount youborrowed, comes due in a shortperiod, usually 3 to 3 years.

l'or example, suppose VOU borrow$30,000 for 3 years. The interest rateis 13"i), and the monthly paymentsare only $325. But in this example!,the payments cover interest onlyand the entire principal is due atmaturity ---- in 5 years. 'That meansyou'll have to make 39 equalmonthly payments of $325 cad-. anda final balloon payment of $30,323. Ityou can't make that final payment,you'll have to refinance (if refinanc-ing is available!) or sell the! properti.:

Stnne lenders guarantee refinanc-ing when the balloon payment isdue!, although they do not guaranteea certain interest rate. The rate couldbe higher than your current rate.OtheMenders do not offer automaticretinattoing. Without such a guaran-tee. You could be torced to start thewhole business ot shopping tor

housMg monev once again, as wellas paving closing costs and front-end charges a second time.

A balloon note may also be offeredby a private seller who is continuingto carry the mortgage he or she tookout when purchasing the home. It

can be used as a second mortgagewhere You also assume the seller'sfirst mortgage.

Graduated Payment MortgageGraduated payment mortgages(GPM) are designed for homebuyers vho expect to be able tomake larger monthly pavnwnts inthe near future. During thu earlyYears of the loan, payments are rda-tively low. They arc structured to riseat a set rate over a set period, say 5or 10 years. Then they remaM con-stant tor the duration of the! loan.

Fven though the paymentschange. the interest rate is usually

vor Ihr jImle tx.), t ,v,31)1ci4

Graduated Paynuwt MortgageImed Interest rate: paumehts rise g?adually tor first few iwars theu ort fc,,juratio?; of loan.

fixed. St) during the early years,your payments are. lt,wer than theamount dictated br the interest rate.During the later rears, the difference,is made up by higher payments. Atthe! end of the loan, you will have!paid off your entire debt.

One variation ot the i.;PN1 is the

I

graduated payment, adiustable ratemortgage. This loan also has gradu-ated payments early in the loan. But,like other adjustable rate loans, itties your interest rate to changes inan agreed-upon index. If interestrates climb quickly, weater negativeamortization occurs during theperiod when payments are low. Ifrates continue to climb after thatinitial period, the payments will,too. This variation adds increasedrisk for the buyer. But if interest ratesdecline during the life of the loan.your payments may as well.

)ear from the Date Lam %At. t ;ranted

Growing Equity MortgageFixed interest rate, but payments mayrise according to agired-upon schedule oran index. Tharases are applied to princi-pal, shortening term of hian.

Growing Eluity Mortgage(Rapid Payoff Mortgage)The growing equity mortgage(GEM) and the rapid payoff mort-gage are among the other plans onthe market. These mortgages com-bine a fixed interest rate with achanging monthly payment. The in-terest rate is usually a fewpercentage points below market. Al-though the mortgage term mar runtor 30 years, the loan will frequentlybe paid off in less than 15 yearsbecause payment increases are ap-plied entirely to the principal.

Monthly payment changes arebasee on an agreed-upon scheduleof increases or an index. For exam-ple, the plan might use the U.S.Commerce Department index thatmeasures after-tax, per capita in-come, and your payments mightincrease at a speOfied portion of thechange in this index, say 75%.

Suppose you're paying $500 permonth. In this example, it the indexincreases by 8%, you will have topay 75% of that, or b%, additional.Your payments will increase to $530and the additional $30 You pay will'oe used to reduce your principal.

With this approach, your incomemust be able to keep pace with theincreased payments. The plan doesnot offer long-term tax deductions.However, it can permit you to paoff your loan and acquire equityrapidly

Shared AppreciationMortgageIn the shared appreciation mortgage(SAM), you make monthly pay-ments at a relatively low interestrate. You also agree to share with thelender a sizable percent t usually 30%to 5(1%) of the appreciation in yourhome's value when you sell or trans-fer the home, or after a specifiednumber of years.

Because of the shared apprecia-tion feature, monthlY payments inthis plan are fo..er than in manyother plans. Howevo, You may beliable for the dollar amount of theproperty's apprecia':on even it youdo not wish to 4;tin the property atthe agreed-upon date. Unless youhave the cash available, this couldforce an early sale of the property.Also. it property values do riot in-crease as anticipated, you maN stillIle liable for an additional amount otinterest.

Mere are many variations ot thisidea, Lalled shared equity plans. Somean, offered by knd;ug institutionsand others bv individuals. For exam-

12

r1e -.uprose you V& tound a hometor tkli10,000 in a neighborhoodk, here property alues are rising.

he local .arnigs and loan is k' harg-iz l2".0 on honw inortgages; as-urrung You paid S20.1100 down and

k hose a 30-..ear ternl. Vour monthlypayments would be ..i,82:.t.S44, orabout twice ..yhat you yan attord. huta mend otters to help. Nour mend

ill pay halt ot each monthly pay.-ment. or ',420. tor °, Years. At the endor that time. you both assume theh,nise will be orth at leaq..12; Not) can sell it, and Your

mend t.ifl recover his or her share otthe monthly payments to date plushalt ot the appreciation. or .,12.7,00.to; a total ot S37.7110. Or, you canpay your Mend that Sanw sum %Itmoney and gam increased equitythe house.

Anothvr variation may voye yourpartner ta advantages during thetirst years ot the mortgage, ..nterkyhik-h the partnership is dissokAt'u tan I'm out your partner or!Ind a new one. I 'lour partner helpsmake the purchase possible by rut-ting up a swable dow n payment and

CHANGING RATESLenders use indexes to decidewhen b raise or lower the interestrate on an adjustable rate mort-gage. For example, when the fi-nancial index your lender usesrises, the interest rate on yourmortgage may also increase itdepends on how the index isapplied. Fluctuations in the inter-est rate can change your monthlypayments, mortgage length, orprincipal balance.

Some of today's most fre-quently used indexes are:El the rate on 6-month Treasury bills,

or on 3-year Treasury notes (orhow much the U.S. Treasury iswilling to pay on money itborrows);

0 the Federal Home Loan BankBoanfs national average mortgagecontract rate charged by majorlenders on the purchase of pre-viously occupied homes (orhow much people are payingon new mortgages nation-wide): and,

0 the average costs of funds forsavings and loans i ,sured by

the Federal Savings and LoanInsurance Corporation (or howmuch lending institutions arepaying on the money theyborrow).Some indexes reflect what the

market will bear across the coun-try; others reflect local trends.Also, some money indexes arecontrolled solely by individuallenders. The index you selectshould be one that can be verifiedeasily; its past performance maygive you an indication of howstable it is. Have someone withexpertise translate past and po-tential changes into dollars andcents.

Also find out how the index isused. For example, if the indexchanges monthly, is the lenderalso changing the rate on yourloan monthly? Or, are there limitson the rumber of times andior theamount your rate can fluctuate?

Finally, check how much ad-vance warning the lender willgive you before your new rateandior new payments go intoeffect.

10

or helping make the monthly pay-ments In return. 'our partner maybe able to deduct a eertain amounttrom his or her taxable inconw. Be-fore proceeding with this type otplan. check with the Internal Reve-nue' Service to determine the exactrequirements.

Shared appreciation and sharedequity mortgages %very partly in-spired by nsing mterest rates anopartly be the notion that housingvalues would continue to grow overt he years to come. If property valuestall, these plans mar not beavailable.

Assumable MortgageAn assumable mortgage is a mort-gage that can be passed on to a newowner at the previous owner's inter-est rate. For example, supposeyou're interested in a $75.000 home.You make a down payment of"525.0tX), and You still owe S50,000,The owner of the home has paid oh$20.000 ot a $30,0(X), 10% mortgage.You asSurrie the present :Avner'smortgage, which has 5.10.000 out-standing. Thu also make additionaltinancing arrangements tor the re-maining S40,000, tor example. byborrowing that amount from a mort-gage comnany at the current marketrate of 12("0. Your overall interest

is lower than the market ratebecause pai t the money you oweis being repaid at 10"4.

During periods of high rates, mostlending institutions are reluctant topermit assumptions. preferring towrite a new mortgage at the marketrate. some buyers and sellers arestill using assumable mortgages,however. 'This has recently resultedin many lenders calling in the loansunder "due on sale- clauses (seebox, page 12). Because these clauseshave increasingh been upheld incourt, many mortgages are nolonger legAy assumable. Be espe-cially cmeful, therefore', if vou areconsidering a mortgage represented

as "assumable- Read the contractcarefully and consider haying anattorney or other expert check todetermine if the lender has the rightto raise Your rate in this mortgage.

Seller Take-backThis mortgage, provided by theseller, is frequently a -second trust-and is combined with an assumedmortgage. The second trust (or "sec-onu mortgage") provides financingin addition to the first assumedmortgage, using the same propertyas collateral. (In the event of detault,the second mortgage is sanshedatter the first). Seller take-backs tre-quently involve payments for inter-est only with the pnncipal due atmaturity

For example. suppose you want tobuy a $150,000 home. The sellerowes $70,0(X) on a fi% mortgage.You assume this mortgage and makea 530,0(X) down payment. You stillneed $50,000. So the seller gives youa second mortgage, or take-back, tor$50.(XX) for 5 years at 10% (wellbelow the mark''t rate) with pay-ments of i416,67. I lowever, yourpayments are tor interest only, andin 3 years you will have to pay550,000. The seller take-back, inother words. may have enabled youto buy the home. But it may alsohave lett you with a siiable balloonpayment that must be paid oft in thenear future.

Some private sellers are also offer-ing first trusts as take-backs. In thisapproach, the seller finances themajor portion of the loan and takesback a mortgage on the property.

Another development now en-ables private sellers to provide thistype of financing more frequentlyPreviously, sellers offering take-backs were required to carry the loanto full term before obtaining theirequity. I lowever, now. if an institu-tional lender arranges the loan, uses,tandardized forms, and meets cer-tain other requirements. the owner

1 4?11

take-hack can be sold immediately toFannie Nlae. l'his approach enablesthe seller to obtain eqi.ntv promptly

and avoid having to wilt\ t monthlypayments.

READING THE FINEPRINTBefore going ahead with a creativehome loan, you may want to havea lawyer or other expert help youinterpret the fine print. You mawalso want to consider some of thesituations you could face whenpaying off your loan or sellingyour properM Also, make sureyou undehstand the terms in youragreementsuch as acceleration,due on sale clauses, and waivers.

An acceleration clause allows thelender to speed up the rate atwhich your loan comes due. Sup-pose you've missed a payment,and your contract gives the lenderthe right to "accelerate" the loanwhen a payment is missed. Thismeans that the lender now hasthe power to force you to repaythe entire loan immediately.

Here, taken from a mortgagecontract, is a sample accelerationclause: In the event any in tallmentof this note is not paid when due, timebeing of the essence, and such in-stallment remains unpaid for thirty(30) days, the Holder of this Notemay, at its option, without noticedemand, declare the entire principalsum then unpaid, together with se;cured interest and late chargesthereon, immediately due and ivy-able. The lender may withoutfurthernotice or demand invoke the power of

sale and any other remedies permittedby applicable lam'

Note the use of the term "with-out notice" above. If this contractprovision is legal in your state,you have waived your right tonotice. In other words, you'vegiven up the right to be notified ofsome occurrence for example, a

or

missed payment. If you'vewaived your right to notice of de-linquency or default, and you'vemade a late payment, action maybe initiated against you beforeyou've been told; the lender mayeven start to foreclose.

Know whether your contractwaives your right to notice. If so,obtain a clear understanding inadvance of what you're giving up.And consider having your attor-ney check state law to determineif the waiver is legal.

A due on sale clause gives thelender the right to require im-mediate repayment of the balanceyou owe if the property changeshands. Here's an example of adue on sale clause: If all or anypart of the Property or an interesttherein is sold or transferird by Bar-irwer without Lender's prior writtenconsent . . . Lender may, at Lender'soption, declare all the sums secured bythis Mortgage to be immediately dueand payable."

Due on sale clauses have beenincluded in many mortgage con-tracts for years. They are beingenforced by lenders increasinglywhen buyers try to assume sell-ers' existing low rate mortgages.In these cases, the courts havefrequently upheld the lender'sright to raise the interest rate tothe prevailing market level. So beespecially careful when consider-ing an "assumable mortgage." Ifyour agreement has a due on salepnwision, the assumption maynot be legal, and you could beliable for thons-iids of additionaldollars.

12 la

WraparoundAnother variation on the secondmortgage is the wraparound. Sup-pose you'd like to buy a $75,000condor-nium and can make a$25,00t, down payment, but can'tafford the payments at the currentrate (12%) on the remaining $50,000.The present owners he.ve a $30,000,8% mortgage. They offer you a$50,000 wraparound mortgage at10%. The new loan wraps around theexisting $30,000 mortgage, adding$20,000 to it. You make all yourpayments to the second lender orthe seller, who then forwards pay-ments for the first mortgage. You'llpay the equivalent of 8% on the90,000 to the first lender, plus anadditional 2% on this amount to thesecond lender, plus 10% on theremaining $20,000. Your total loancosts using this approach will belower than if You obtained a loan forthe full amount at the current rate(for example, 12%).

Wraparounds may cause problemsif the original lender or the holder ofthe original mortgage is not aware ofthe new mortgage. Upon discover-ing this arrangment, some lenders orholders may have the right to insistthat the old mortgage be paid offimmediately

Land ContractBorrowed from cornnwrcial real es-tate, this plan enables you to paybelow-market interest rates. The in-stallment land contract permits theseller to hold onto his or her originalbelow-market rate mortgage while"selling" the home on an installmentbasis. The installment payments arefor a short term and may be forinterest only. At the end of thecontract the unpaid balance, fre-quently the full purchase price, muststill be paid.

The seller continues to hold title tothe property until all payments aremade. Thus, you, the buyer, acquireno equity until the contract ends. lf

Yzar from the Date Loan %Us Granted

Fixed Rate Mortgage with Buy-downRate and payments are rrlatively low forfirst few years, then jump to reflect fullrate in mortgage.

you fail to make a payment on time,you could lose a major investment.

These loans are popular becausethey offer lower payments than mar-ket rate loans. Land contracts arealso being used to avoid the due onsale clause (see box, page 12). Thebuyer and seller may assert to thelender who provided the originalmortgage that the due on sale clausedoes not apply because the propertywill not be sold until the end of thecontract. Therefore, the low interestrate continues. However, the lendermay assert that the contract in factrepresents a sale of the property.Consequently, the lender may havethe right to accelerate the loan (seebox, page 12), or call it due, andraise the interest rate to currentmarket levels.

Buy-downA buy-down is a subsidy of themortgage interest rate that helps youmeet the payments during the firstfew years of the loan. Suppose anew house sells for $150,000. After adown payment of $75,000, you stillneed to finance $75,000. A 30-yearfirst mortgage is available for 12%,which would make your monthlypayments $771.46, or beyond your

13

num me nate bmn tut, t ;ran sod

Adjustable Rate Mortgage withBuy-downRate and payments are nutzalty low. thenlump and may change throughout loan&vending on changes m the Index.

budget. However, a buy-down isavailable: for the first throe years,the developer will subsidize yourpayments, bringing down the inter-est rate to 9"'0. This means yourpayments are only W3.47. whichYou can afford.

There are several things to thinkabout in buy-downs. First, considerwhat your payments will be after thefirst few years. If this is a fixed rateloan, the payments in the aboveexample will jump to the rate atwhich the loan was originally made

12% and total more than 5770.

If this is an adjustable rate loan, andthe index to which your rate is tiedhas risen since you took out theloan, your payn ents could go upeven higher.

Second, check to see whether thesubsidy is part of your contract withthe lender or with the builder. If it'sprovided separatelv by the builder,the lender can still hold You liable forthe full interest rate (12"i, in theabove example), even it the builderbacks out of the deal or goes out of

business..Finally, that S150,tXX) sales price

may have been increased to coverfie builder's interest subsidy A

comparable home may be selling

14

around the corner for less. At thesame time, competition may haveencouraged the builder to offer you agenuine savings. It pays to checkaround.

There are also plans called con-sumer buy-downs. In these loans,the buyer makes a sizable downpayment, and the interest rategranted is below market. .1 otherwords, in exchange tor a lage pay-ment at the beginning of the loan,you may qualify for a lower rate onthe amount borrowed. Frequently,this type of mortgage has a shorterterm than those written at currentmarket rates.

Rent With Option to BuyIn a climate ot changing interestrates, some buyers and sellers areattracted to a rent-with-t.7tion ar-rangement. In this plan, you rentproperty and pay a premium for theright to purchase the propertywithin a limited time period at aspecific price. In some arrange-ments, you may apply part of therental payments to the purchaseprice.

This approach enables you to lockin the purchase price. You can alsouse this method to "buy time" in thehope that interest rates will de-crease. From the seller's perspective,this plan mar provide the buyer timeto obtain sufficient cash or accept-able financing to proceed with apurchase that may not be possibleotherwise.

Reverse Annuity MortgageIf you already own your home andneed to obtain cash, you might con-sider the reverse annuity mortgage(RAM) or "equity conversion.- Inthis plan, you obtain a loan in theform of monthly payments over anextended period ot time, using Yourproperty as collateral. When the loancomes due, you repay both the prin-cipal and interest.

A RAM is not a mortgage in the

17

conventional sense. You can't obtaina RANI until you have paid oft yourtinginal mortgage. Suppose youown your home and you need asource ot money. NOu could draw upa contract with a lender that enablesYou to borrow a given amount eachmonth until you've reached a max-

imum ot, tor example, s:410.ii00\tthe end ot the term. you must repaythe loan. But remember. it you donot have the cash available to repaythe loan plus interest. you will haveto sell the property or take out a newloan.

LOSING GROUNDRepaying debt gradually throughpayments of principal and inter-est is called amortization. Today'seconomic climate has given rise toa reverse process called negativeamortization.

Negative amortization meansthat you are losing not gaining

value, or equity This isbecause your monthly paymentsmay be too low to cover theinterest rate agreed upon in themortgage contract. Instead ofpaving the full interest costs now,you'll pay them later either inlarger payments or in more pay-ments. You will also be payinginterest on that interest.

In other words, the lenderpostpones collection of themoney you owe by increasing thesize of your debt In extremecases, you may even lose theequity you pturhased with yourdown payment, leaving you inworse financial shape a few yearsafter you purchase your homethan when you bought it.

Suppose you signed an ad-justable rate mortgage for $50,000in 1978. The index establishedyour initial rate at 9.15%. It nearlydoubled to 17.39% by 1981. Ifyour monthly payments had kept

pace with the index, they wouldhave risen from $408 to $722. Butbecause of a payment cap (seepage 6), they stayed at $408. By1981 your mortgage had swelledfrom $50,000 to $58,350, eventhough you had dutifully paid$408 every month for 48 months.In other words, you paid out$20,000 but you were $8,000 morein debt than you were three yearsearlier. During the next few years,despite the fact that the index fellgradually, you were still payingoff the increases mdde to yourprincipal from earlier years.

Certain loans, such as gradu-ated payment mortgages, arestructured so that you regain thelost ground with payments thateventually rise high enough tofully pay off your debt. And youmay also be able to pay off theextra costs if your home is gainingrapidly in value or if your incomeis rising fast enough to meet theincreased obligation. But if it isn't,you may realize a loss if, for ex-ample, you sign a below-marketadjustable rate mortgage in Januaryand try to sell the home in Au-gust when interest rates are higher.You could end up owing morethan you'd make on the sale.

PAYMENT TABLES8% Annual Percentage Rate

Amountf In *fiord

5 2_5.00030.000

35,00040 000

45.000;0.000

00 000

00.1100

740.000

00.03(I

100010

Monthly Paymente4Principal and !airmail*. _

5 10 13 20 23 30

Years Want tram Years Years Years

103 32 238.01 2l49 11 102 90 103 44

t401.214 343 ifti 28h.10 250 93 231 54

7119 07 424.65 334.4$ 202.75 27014141106 4145 31 326 104.58 3(14 73

012 44 45 07 430 04 376 40 347 32

1013 14:2 bob 64 477 83 410.22 165 91

073 39 011 F6 463 00

o614* 585.53 010.27

744.52 too0 15 or 45

WI 04 702.80 040 63

1216 00 777 417

01/11 30 tie

10= 11 kro 62,

1624 Ss 1091 414

2027,64 1213 000 05 036 44 771 $2

9% Annual Percentage Rate

220 13

2..C6

,243 51

330 10166 88

440 26

5/3 04

067 01

88039

733 76

Monthly Payments 1Principal and Intermit*

AmountFinanced leant

5 25 000 5174 96

30.000

35 0170 72t.

401300 AV 33

45.000 434 13Num Tor krzwo('t) 1245 50_ _70,000 1453 08

. _

r02 70

10Viars

316.69380.03

441 )6506 711

570 (14

031 36

7150

086 73

ISYears

253 57301 28

154 484405 71

4% 42077 13

AO%

09 99

20Wars

2.24 03NA 42

114 90300 00

404 $8449 So

439 84

620 81

1.1.030 1601 67 1013.41 011 41 719 78

00 000 IRO 25 1140 1.18 012 64 7409 75

100.000 2075 144 1206 76 1014 V $99.73

25Years

200 80251 .00

703 72315 04

477 04

414 80

5[1.3 52

567.44

6,71 36

CC 214

83420

Want

201 16241 39

2.81 62321 145

lo2 00440 31

482.77

581 24

643 70

724 16

1404.62

10% Annual Percentage RateMonthly Payments tPrincipal and Interest)*

Amount 5 10 15 20 23 30

P inanced Years Years Years Years Vesili Years

42311 ;31 3S 330 3$ 004b5 241 26 22718 219 30vow kr 41 406 45 322 38 289 51 272 81 283 27

35 000 743 65 400 53 376 11 337 76 3114 05 307 1

40 MO 849 814 528 t41 420 144 306.01 363 48 351 03

45 A411 005 12 5%4 04 483 57 434.28 408 92 394 01

00 000 1002 35 060 '5 537 30 482 sl 454 35 438 79

00,(03) 1274 142 702.00 04400 079 01 45 n 526 54. . _

woo 1047 29 025 06 752 2,1 675 52 Nib Ow 614 30

NO OM 1644 76 1057 al 8C4 6$ 772 02 726% 702 ,(6.

410(11 1412 23 1184 36 467 14 *8 52 817 /43 789_ .141

11111 RV 2124 17 3321 51 107410 44s5 02 008 713 077 57

11% Annual Percentage RateMonthly Pay monft Weincipal and Intermit

taunt 5 10 15 20 23 30'need Ivan Wan Yeats Year* Years Years

_MO 93 * An 284 15 238 05 245 ill 218

30.012! 652 27 413 25 340.04 109 tob 294.03 045 70_

1000 710) 402 04 397 $1 .11.1 27 341 iM 333 31

40 ton WO 70 05140 44 64 412 t414 19e it', 180 93_ .

45.01%) 478 41 619 80 011 47 464 4$ 441 05 42$ 0550.1311 1"4 on11 75 004317 01t, 104 400 00 470 lb

07001 1304 54 005 50 NO 040 614 11 sw .07 571 39

70 MO 1521 417 *04 25 795 62 -723...53 016 OS 056 03

K11.000 1710_30 ,1102.1)o 009 025 70 044_09 76000

000.100 1956141 1239 75 1022* 921 4 97 882. 10 057 00

100.000 2174 24 1377 50 133600 1032 19 040 II 4402 32

*For loam that Nay pat, oft the MR thiv the kun term

16

12% Annual Percentage RateMonthly Payssenb tPrintipal and Intermit*

. .

Amount S 10 15 20 23 30Financed Year* Years Years Ware Wan Yearsf 25.0110 506 37 341 88

30,133*) 4007.33 430.42

35,000 778 56 502 1040.000 000 78 573.844

45.000 1001 00 645 6200.000 1112.23 717 36

. .

80.000 1334 67 MO 83

70.000 10.57 111004 iO. .

83.000 1774 56 1147 77. -

441000 20132.00 1291 24

100.000 2224 44 1434.71

300 05 273 28_003 31 257 In

360.06 130 33 315 97 308 59

420 06 085 39 3158.63 300.024140 07

_4140 44 421.29 411 45_ .

40 08 494149 473.96 *2.08601300 550 55 526.62 514.11

707 11 660.05 631 93 617 17

040.12.

7713 77 737- 26 -720.00

'1'60 14 880 87 842_58 022.03

1000 15 90199 947.20 gn

1200.17 1101.09 1003 23 10213.82

13% Annual Percentage RateMranthly Payments (Principal and Interepi) .

Amount S 10 13- 20 29 30

Financed Years Years Wars Yearn Years Wan

10.0400 448 03 373.2930 WU 8$e. 60 447 94 379 58 151 48 338.36 331 66

35 0(0 796 36 522 50 442.04 410.06 394 75 387 1700000 910 13 407 25 006 10 468 64 451.14 442

. . .

450E0 1023 644 071 00 500 16 927 21 007 53 497 7930011 1137* 740 St4 1.32 5* 79 063 92 553 10

. _

60.000 1365 19 895 87 700 15 702.95 676 71 60.72. .0_

70.000 1592 72 1645 114 045 67 820 11 789 49 774 34. .

81(U) 1820.20 1104 44 1012 20 937 27 402 27 $84_

90.000 2047 78 1343 80 1138 72 1054.42 1015.05 095 58

1t10,000 2275 31 1403 11 1205 25 1171 58 112784 17015_ . . . .......

14% Annual Percentage RateMonthly Payments tPrinetpal and Interest)*_ .

Amount 5 10 IS 20 ZS 30

Financed Vein Wane Yram Wars Yeats Yeats

25 (.0030.007

3c 1E040 OCU

45 1.130

10(1(1]

1441. 0013

.70.1301

01 0113

440.100

1130.00U

081 71 388 17 332 94 310 NO 3(1195 24bes*.03 4E6 le) 390 03 373.06 361 355 47

_

814 39 043 44 4640 II 435 24 421 32 414 71

070 74 021 07 532 70 497 41 481 51 473 00

1047 00 004 70 04144 29 500 59 541 713 533 20

1183.42 776.34 bb5 08 621 77 601 89 002 44

1391. 10 Q:41 tO ;taill 0.5 746 12 722 26 711193.

1004.70 1006 87 932 22 870 40 842 64 1120 42

11461 4-7 .1242-14 .1000 417 0% 142 683.01 947 90

2004 14.1397-40 7-10$ 57 1179 17 11023 28. 11164

2326.83 1552 87 1131 75 1243 53 1203.77 11t44 88

15% Annual Percentage Rate_ .

Monthly Payments trrincipal and Interest,

Amount 5 10 LS 20 25 30

Financed Wars Wars Years Years Years Years

25 010 044 70 403 .4 340 *1 320 20 320 21 316 12

00 00 713 70 4144 01 4144 06 395 04 184 20 370 14_ .

150337 1.32.00 AM nr4 4149 * 460 814 4414 30 442 5is

101W 4.1 n0 9. 34 ;54 M 26 72 512 34 905 78_ .

45 WO 1011 55 720 01 020 142 5442 56 076 38 004 00

01000 1780 50 541) if04 699 tiO 4500 40 040 42 NC 23_

00.1017 14 '7 40 *44 01 7430 76 70110$ 780 50 751467. .

700111 0 5 30 1120 35 979 77 021 76 098 50 885 12

84.11101) 1003 20 1200.406 1110 07 1050 44 1024 67 1011 58

*7.007 2141 09 1452 01 1250 63 118.5 11 1152.75 1138 RI. . . . . _ .

100123) 0100 fr 1873 ,35 1399 99 1316.79 1280 84 12t4 45.

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*US 0000ANMEN1 PRINTING OFFICE 1991- 307478 150811

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