Today's Classified Ads
Unusual mortgages; get all the infoBy James M. Woodard, Copley News Service
I've been receiving an increasing number of inquiries about home mortgage loans that provide borrowers with more than 100 percent of their property's value. But there's more to it than the advertised information might indicate.
For example, one firm in Southern California -- DiTech Funding Corp. -- now offers a 125 percent first mortgage program for buyers of single-family detached homes that will be used as their primary residence. Qualified condo buyers can obtain a loan up to 110 percent of the property's current value.
In the firm's promotional material, an example is shown for a new home currently valued at $250,000. A loan can be obtained in the amount of $312,500 -- providing $62,500 in excess cash.
"These loans are primarily for buyers who are in a negative position with regard to the value of their home," said Paul Reddam, president of DiTech. "With our loan, they can borrow enough to pay off the negative balance of their old home while obtaining a mortgage for a new home.
"This will allow them to take advantage of the improving real estate market without having to simply sit and wait for the values to actually catch up to their own situation. As a result, they can move into a new home now. And our new initial adjustable interest rate is only 6.95 percent."
Sounds great. But let's take a closer look.
First, the borrower pays 2 points (that's 2 percent of the total balance) up front, along with standard closing costs. And that 6.95 percent interest rate is just for six months. It increases by a full percentage point every six months. In just a couple of years, the borrower could be paying about an 11 percent interest rate (more or less, depending on the rate adjustable index).
"Our loans are for a 30-year term, but we don't really expect borrowers to keep them that long," Reddam said. "They'll usually refinance them with a conventional loan when the interest rate gets up to a high level."
The firm does offer one "fixed rate" mortgage loan -- for two years. The interest rate for that loan is 9.3 percent.
At this writing, the firm has about 50 loans "in the pipeline," according to Reddam. When enough of the loans are closed, they plan to pool together and sell them to the public as mortgage-backed securities, he said.
"These are really special-purpose loans for people with very good credit but bad collateral (homes that are overpriced in today's market)," he noted. "Since we're underwriting the loans ourselves, when borrowers default on one of our 125 percent loans before the property's value catches up to the loan balance, we'll have to eat the difference."
He also pointed out that buyers who want to occupy a home for the purpose of improving and selling the home later at a profit could improve the home with no out-of-pocket dollars to create added value. With that added value, plus normal appreciation, the home could then be sold at a profit in a relatively short time, he said.
But the real cost of obtaining and maintaining these loans substantially eats into the extra cash benefit. It might be right for a few people in special situations, but ask a lot of questions before signing up for such a loan -- and read all documents carefully.
|  |
____________ T O D A Y 'S N E W S
Local
Almanac
____________
____________
|
| -Top- | -Home- | -Top Stories- | -Headlines- | -Staff- |  |