DEAR BOB: I am a retired Realtor who began his real estate career in 1946. I have enjoyed your columns since they started in the paper many years ago. You write about current, practical topics I enjoy reading about. Recently, you wrote about “interest-only mortgages.” Back when I started selling homes, interest-only mortgages were strongly blamed for the many realty foreclosures during the Great Depression. The problem then was the value of the security often fell below the mortgage balance. That’s why the FHA was created to provide monthly amortized mortgages to slowly reduce mortgage balances. Do you think American borrowers (and lenders) are setting themselves up for a financial foreclosure debacle? — Guy C.
DEAR GUY: No. Most of today’s “interest-only” home mortgages, often called “option mortgages,” give borrowers the choice of paying (1) interest-only, (2) fully amortized, (3) partially amortized, and even (4) negative amortization (less than interest-only, with the unpaid interest added to the principal balance).
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But after the first 10 years, most of these mortgages are “recast” and become fully amortizing for 20 years. More likely, the borrower will sell the home and pay off the mortgage.
Interest-only mortgages allow first-time home buyers to get started building home equity. They are also ideal for home buyers who expect to stay in their homes less than 10 years.
As a real estate investor, I love interest-only mortgages because (1) the monthly payment is rock bottom and (2) the payment is fully tax-deductible as interest expense.
I hope today’s versions of interest-only mortgages won’t have the same sad result that occurred during the Great Depression. Home mortgage money is much more abundant today than it was then. Also, Fannie Mae and Freddie Mac create secondary mortgage market liquidity that was not available in the 1930s. Frankly, I’m not worried.
AN ALTERNATIVE TO A REVERSE MORTGAGE
DEAR BOB: I am not yet 62 so I am not eligible for a senior citizen reverse mortgage. Is there any alternative to help me with my money problems? My house is free and clear, worth approximately $365,000 — Carol P.
DEAR CAROL: There is no other mortgage program of which I am aware that does not require monthly repayments to the lender. If you have adequate income, you might consider a home equity credit line, which costs nothing until you use it.
For example, suppose you need to pay off credit cards and put a new roof on your house. A home equity credit line will be ideal. Most banks and other lenders should easily approve a home equity credit line for 50 percent to 75 percent of your home’s market value if you have decent income and credit.
When you become 62 (or later) you could then obtain a reverse mortgage to pay off the home equity credit line and be free of monthly payments as long as you stay in your home.
GETTING RID OF RENTERS PAYS OFF FOR CONDO COMPLEX OWNERS
DEAR BOB: I want to thank you for recommending, several years ago, that condominium-building owners restrict the percentage of renters. That’s what our homeowner’s association did about two years ago. We changed our CC&Rs to prohibit additional rentals (although existing rentals were “grandfathered”). At that time we had about 30 percent rental occupancy and the building was poorly managed. Gradually, we got our renter percentage down to about 10 percent today. The results have been amazing to have owner-occupants who care about properly maintaining the property. Also, our building is more attractive to condo buyers and their realty agents so prices are rising nicely — Everett H.
DEAR EVERETT: It’s good to hear the results of limiting rentals in your condo complex. The big problem of having more than 20 or 25 percent rentals is many mortgage lenders either refuse to make new loans or they charge higher interest rates.
The reason is the default rate on mortgages in condo complexes with a high percentage of renters is greater than where most of the units are owner-occupied. Also, condo owner-occupants usually have greater “pride of ownership” and take better care of the facilities than do absentee landlords.
The new Robert Bruss special report, “How to Earn Up to $250,000 (or more) Tax-Free Profits Every 24 months Buying and Selling Houses,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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