March 8, 2011 Newsletter

As the real estate market tries to heat up, it’s become apparent that new strategies will emerge in the coming years to assist buyers and sellers in their quest to put a deal together. One strategy which time is coming is the good old assumption. Back twenty years ago, when rates were up in the teens, we saw many transactions where the existing loan on the property was either a VA or FHA loan and therefore assumable to a new buyer at the existing rate. So if a seller had such an existing loan with a 7% rate and the buyer was willing to come up with the down payment, they could assume that 7% rate rather than getting a new loan at 12%. At the same time we saw wraparound mortgages wherein the buyer borrowed the down payment in the form of a second at 10%, assumed the first at 7%, creating a “blended” rate of possibly 8.5%. With rates today at the still unbelievable rate around 5%, but the probability of it going higher, people selling their home with an existing FHA or VA loan have a distinct advantage by letting their potential buyer assume that 4.5% rate they got last year.

A new wrinkle on the assumption is the seller approaching their existing lender and getting approval allowing their buyer to become a co signer on the existing loan. This has not been approved in the past, however lenders may be more amenable to such an arrangement as opposed to the current owner going into default and generating a loss. Major drawback is that the initial borrower, now seller, is still obligated under the terms of the original note. Watch this column for further updates on this new concept.

Rates have been climbing and 5% and above appear to be what we will see in the future, but there are other programs which can still keep you below 5%. Some lenders are offering a fifteen year balloon, at a rate below 5%. Basically it’s a loan with a 30 year amortization, which is fixed and balloons at the end of fifteen years. Since it’s highly probable that most buyers, especially first time home buyers will not remain in their first home fifteen years, it is essentially the same as getting a 30 year fixed rate loan, with a better rate than 30 yr. fixed. Call us for details.

Tough market conditions call for innovations and new thinking. We want to be your title company and law firm. For questions call me at 410 884 1160 or email me at tee.tillman@colonytitle.com.