(1) Getting Startedhighlighting the Essentials; (2) Defining Terms; and (3) Payment Tables

DOCUMENTRESUME

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TITLE The Mortgage Money Guide. Creative Financing for Home Buyers. Updated Edition. INSTITUTION Federal Trade Commission, Washington, D.C. PUB DATE 91 NOTE 22p.; Prepared by the Commission's Division of Credit Practices and the Office of Consumer and Business Education. AVAILABLE FROM Superintendent of Documents, U.S. Government Printing Office, 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 Estate IDENTIFIERS *Mortgages

ABSTRACT This guide to creative home financing outlines basic concepts needed in shopping for a home loan. Many plans aredescribed 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 summarizes 15 financing plans in a reference chart: fixed rate mortgage;15-year mortgage; adjustable rate mortgage; renegotiable ratemortgage (rollover); balloon mortgage; graduated payment mortgage; shared appreciation mortgage; assumable mortgage; seller take-back; wraparound; growing equity mortgage (rapid payoffmortgage); land contract; buy-down; rent with option; and reverse annuitymortgage (equity conversion). Type, description, and considerations are included for each plan. In addition to defining the 15summarized plans, the second section discusses changing rates, readingthe fine print, and losing ground. The third section includes somefinancial tables to estimate the monthly costs for principal andinterest of a specific mortgage or loan. An index and Federal Trade Commission addresses and phone numbers are included.(NLA)

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N. GETTING STARTED If you've been thinking about buy- oAsk yeestions. For example, an ing a home, you may wonder how enthusiastic seller may not he fa- to select the right financing for your miliar with the tine points ot the budget and needs. Many types of financing arrangement. mortgages are now available, and O Negotiate with the seller or new plans are continuallybeing in- lendet Better terms may be avail- troduced. With all these ;..hoices, you able than those initially offered. may wonder what to lookfor O Consider getting an attorney or a Some of the mortgages now avail- real estate broker to represent able are traditional plans, with inter- You. This could be thelargest est rates and payments that remain investment of your life. constant throughout the loan and pay off your debt over along period. O Study all available materials about your mortgage costs.With loans Others represent a departure from from institutional lenders. the the older plans: they can involve creditor is required to give you a more risk for the buyer and are frequently tied to changes in the statement of your loan costs and terms before you sign the agree- market. But they also can make home buying possible and may offer ment. This information include the "annual percentage lower interest rates. So if you want to purchase a rate" (APR) which nwasures your home, you can still find the right total credit costs, including mortgage for your needs. But to interest, points, and mortgage make sure you understand the insurance. chokes, you should educate your- Finally, if you're thinking about self first. refinancing your current home mort- This guide will introduce you to gage, you may alsofind this guide some of the many plansavailable. helpful. When you refinance, you Other sources of information include are actually signing a newmortgage your state, county, or city consumer and paying off your present one.So. affairs office; locel realtors, home you might save moneyby switching builders, and lenders; bookstores; to a different type of mortgage.Ask and the real estate section of your several lenders what terms and newspaper. You may also want to types of mortgages are available, buy a book of mortgage payment and bargain for the deal that hest tables to help you calculate whether suits your needs. you can afford aspecific loan. Above all, shop carefully. And. as you read through thisbooklet, keep in mind the following: O Don't use yesterday's assumptions about today's real estate market. The key is affordability. Consider your total housing costsinclud- ing loan payments (now and in the future), maintenance, property taxes, and your anticipated income changes. 0 Look into several sources of financing. You may be able to combine two or more mortgages. G IGHTINGT ESSENTIALS *

Description

Fixed Rate Moltgage

Fifteen-Year Mortgage

Adjustable Rate Mortgage

Renegotiable Rate Mortgage (Rollover)

Balloon Mortgage

Graduated Payment Mort?, tqe

Shared Appreciation Mortgage

Assumable Mortgage

Seller like-back

Wraparound

Growing Equity Morvage (Rapid Payoff Mortgage) Land Contract

Buy-down

Rent with Option

Reverse Annuity Mortgage (Equity Conversion)

*Please see the se ctt:m , -Defining Your Thrms" on paps4-15, for additional discussion of these conixpts. 5 Offers stability and long-term tax advantages. Interest rates may be higher than other types ot financing. New fixed rates are rarely assumable.

1111. 11111,Frequently uttered at slightly reduced interest raw. Otters taster accumulation ot equitythan traditional fixed rate mortgage but has higher monthly payments, Involves paying less interestbut this may result in fewer tax deductions.

tttarting interest rate is slightly below market. but payments can increasesharply and trequentlY it mdex increases. Payment eacm prevent wide fluctuations in paymentsbut may cause negative amortization (see box. page 15). Rate caps limit amount totaldebt can expand.

Less frect lhanges in interest rate otter some stability

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

Easier to quality tor Buyers inc.orne must be able to keep paiewith scheduled payment increases With an adiustabk rate. payment increases beyond the graduated pa% merits canresult in additional negatavy awn-manor' (see box, page 15).

It home appreciates greatly, total cost cit loan lumps It hometails to appreciate proected increase in value may still be due. requiring refinimeing atpossii,h- higher rates.

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

\lay otter a below- marko interest rate: may have a balloon payment requiringfull payment in a tei% %ears or refinancing at market rates, w hichcouki sharply increase debt .

lender may call in old mortgage and require luiTher rateIt buyer default ,.seller frai,n take utai action to collect debt

rerrbit.s rapid payoff ot debt because pax ment int Teases reduceprIniipal. . income piu-d able to keep up with payment increases.

1.31,7041. \lay otter no equity until loan is tullv paid. Buyer has few prowitions itconflict are,v, during 4,4.1

Otter a break from higher payments dunng early years Friablesbuyer with lower income to quality With adiustable rate mortgage. payments may iump substantially atend let subside Developer may increase selling price

nables renter to buy time to obtain down payment anddecide 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 Atend ot term bornisir must ha% e moneyavailable 10 avoid selling property or refinancing. DEFINING YOUR TERMS To buy or sell a home today, it's rnent to interest when rates are high. important to know the vocabulary. Some plans also offer below-market Don't let terms like "amortization" interest rates, but they may not help or "appreciation" scare you.Under- you build up equity. standing the concepts can save you In shopping for financing sources time and money; it can also prevent today, kcep in mind the terms which You from obtaining a mortgage ill- are keys to the affordabilityof the suited to your needs. home: Three important words are: "inter- O the sales price minus your down est," "principal," and "equity." payment, or amount you finance; When you first buy a home you're O the length, or maturity of the loan; likely to make a down payment on the property. But, because you fi- 0 the size of the monthly payments; nanced the purchase, you are now in the interest rate or rates; debt and the lender "owns" most of 0 whether the payments or rates the property's value. In traditional may change; mortgages, the monthly payments During O how often and how much the pay- on the loan are weighted. ments or rates may change; and, the first years, they are largely interest; in time, more of each payment is 0 whether there is an opportunity for credited to the loan itself, or the refinancing the loan when it ma- principal. Gradually, as you pay off tures. if necessary. principal, you build up equity, or These concepts will be discussed in ownership. Your equity also in- greater detail as we describespecific creases if the value of the home types of financing. increases. This process of gradually obtaining equity and reducing debt through payments of principal and Fixed Rate Mortgage interest is called amortization, Fixed rate mortgages have an inter- Until recently most mortgages had est rate and monthly paymentsthat fixed monthly payments, a fixed remain constant over the life of the interest rate, and full amortization loan. This sets a maximum on the (or transfer ot equity) over a period total amount of principal and inter- of 20 to 30 years. These features est you pay during the loan.Tradi- worked in the buyer's favor. Infla- tionally, these mortgages have been tion made your payments seem less long-term. As the loan is repaid, and your property worth more. So, ownership shifts gradually from although the payments seemed hard lender to buyer. to meet at first, over time, it became For example, suppose you borrow easier. $50,000 at 13% for 30 years. Your Many home financing plans are monthly payments on this loan different from traditional mortgages. would be $553.10. Over 30 years, They may help you buy a home you your total obligationfor principal otherwise couldn't, but they also and interest would never exceed this may involve greater risks forbuyers. fixed, predetermined amount. For example, the interest rate and Fixed rate mortgages are usually monthly payments may change dur- available at higher rates than many ing the loan to reflect what the other types of loans. But, if you can market will bear. Or the interest rate afford the monthly payments, infla- may fluctuate while the payments tion and tax deductions may make a stay the same, and the amountof fixed rate mortgage a good financing principal paid off may vary The method, particularly if you are in a latter approach allows the lender to high tax bracket and need the inter- credit a greater portion of the pay- est deductions.

4 7 you may also have tewer tax deductions. Adjustable Rate Mortgage Adjustable rate mortgages have an interest rate that increases or de- creases over the life of the loan based upon market conditions. Some lenders refer to adjustable rates as .flexible or variable. Because adjustable rate loans can have different provisions, you should evalu- ate each one carefully. Near nom the Date Loan Vtto Granted In most adjustable rate loans. your Fixed Rate Mortgage starting rate, or -initial interest rate." 'Traditionally both interest rateand will be lower than the rate offered on a standard fixed rate mortgage.'This mon thhi payMentSare fixed torthe life of is because your long-term risk is theWTI.* higher your rate can increase with the market -- so the lender Fifteen-Year Mortgage offers an inducement to take this The fifteen year mortgage is a varia- plan. tion of the fixed rate mortgage that is Changes in the interest rate are becoming increasingly popular. This usually governed by a financial in- mortgage has an interest rate and dex (see box, page 10). If the index monthly payments that are constant rises, so may Your interest rate. In throughout the loan. But, unlike ,iome plans, if the index falls, so may other plans, this loan is fully paid off your rate. Examples of these indexes in only fifteen years. And, it is are the Federal Home Loan Bank usually available at a slightly lower Board's national average mortgage interest rate than a longer-term loan. rate and the U.S. Treasury bill rate. But it also requires higher payments. Generally, the more sensitive the Suppose you buy a house for index is to market changes, the more $100,000, and after making a $15,000 down payment, you still need to borrow $85,000. You find a 30-year mortgage for 12%. This means your monthly payments would be $874.32. But, another lender offers you a 15-yearplan for a lower rate, 11.5%. However, under this plan, your payments wouldbe $992.% $119 higher than the longer-term financing. In the fifteen-year mortgage, you pay off the loan balancefaster than a king-term loan. Because of this, a smaller proportion of each of your monthly payments goes to interest. lear from the I late Loan 1,15 Granted So, if vou can afford the higher payments, this plan will save you djustable Rate Mortgage interest and help you build equity If there are no payment or rate nips, and own your home faster. Because interest rate and monthly payments fluc- you are paying less interest,though, tuate according to an index.

The harts contanwd thts manual are tor Illustranvr purpose% only Thev are not intended to he precise wpm- wroahons ot each type of mortgage Many flexible rate mortgages offer the possibility of rates that may go down as well as up. In tome loans, if the rate can only inarissel 5%, it may only decrease 5%. If no limit is placed on how high the iste can go, there may be a pmviakra that also allows your rate to go down along with the index. Because they limit the lender's return, capped rates may not be available through every lender. Payment Caps

tem tmm the Pam Limn Oda Granted If the interest rate on your adiustable rate loan increases and your loan has Adjustable Rate Mortgage- a payment cap, your monthly pay- Rate Cap ments may not rise, or they may lifith a rate cap. even if the indet rises. increase by less than changes in the incnuses in the rate and monthly pay- index would require. ment are limited. For example, assume your mortgage provides fe7 unlimitedchanges frequently your rate can increase or in your interest rate but your loan decrease. has a $50 per year cap on payment Suppose your interest rate is tied increases. You started with a 11% to the Bank Board index. Your mort- rate on your $75,003 mortgage and a gage limits rate changes to one per monthly payment of $714.24. Now year, although itdoesn't limit the assume that your index increases2 amount of the change. Forexample, percentage points in the first year of assume your starting interest rateis your loan. Because ofthis, your rate 11% on September 1, 1986. Based or increases to 13%, and your pay- these terms. if the Bank Board index ments in the second year twoshould rises 2 percentage points by Sep- tember 1, 1987, your new rate forthe next year will be 13%. Rate Caps To build predictability into yourad- justable rate loan, some lenders include provisions for "rate caps" that limit the amount your interest rate may change. Theseprovisions limit the amount of your risk. A periodic trite cap limits the amount the rate can increase at any one time. For example. yourmort- gage could providethat even if the index increases 2% in one year, your Year from the Date Loon dim Granted aggnate rate can only go up 1%. An Adjustable Rate Mortgage- rate cap limits the amount the rate can increase overthe entire life of Payment Cap the loan. This means that, for exam- If the mdex increases, so does the interest ple, even if the index increases2% rate. However, monthly payment every yeaz your ratecannot increase changes am limited (although the total more than 5% overthe entire loan. amount owed may increase).

6 9 rise to $828.33. Because ot the pay- money for tuture mortgage ottenngs. ment cap. however, you 11 only pay In this plan, a large initial pay- $764.24 per month in the second ment is made to the lender at the Year. time the loan is made. The payment But remember: it your payment- can be made by the buyer, the capped loan results in monthly pay- builder, or anvone else willing to ments that are lower than your inter- 'subsidize the loan. The payment is est rate wouki require. You still owe placed in an account with the lender the difference. Negative amortiza- where it earns interest. This plan tion ( see box page 15) may take place helps lower your interest rate tor the to ensure that the lender eventually tirst year. receives the tull amount. In most This plan could lower your payment-capped mortgages. the rate. tor example, by -Va in the tirst amount of principal paid ott changes year. It you borrowed 550,000 at when interest rates fluctuate. Sup- 13''a. tor example, this would reduce pose N'ou are paying Sh50 amonth your rate to ki"a and Your mnnthly Yith ,S5(X) gomg toward interest, payments to 5402,31. a savings ot ivith Your rate at 12"o. I hen your approximately S1.51 monthly. 'then, rate increases to 13t'a. Fhis means tor the next 5 Years, Your interest 'our monthly paymentshouhi in- rate would only increase, tor exam- crease to Sh97.30, but because in a ple, bv I point each year. Atter that. 'ap. it increases toonly 5075. Be- Your mortgage becomes anadiusta- cause this change in interest rates ble rate mortgage with interest rate increaSes your debt, thelender Mar and payment changes based upon now apply a larger portion ot vour an index. payment to interest. It rates c,at very This plan may not include any high, even the full amount of your payment or rate caps other than monthly payment (S673) Yon't he those in the tirst years. But, there enough to cover the interest owed: also mar not he negative amortiza_ the additional amount of interest non. so possible 111Crease.s in Your you Owe Nvill be added to the prin- total debt may be limited. Because ot cipal. This means you now owe the buy-down teature, sortie buyers and eventually will pay interest may be able to quahiv torthis loan On interest. ho otherwise would not be eligible tor tmancing. Variations One variation ot the adiustabk rate Summary mortgage is to tix the interest rate tor In shopping tor any t pc ot ad !Lista. a period of time 3 to3 Years, for He rate loan. renwmber to look tor example, with the understanding the following: that the interest rate will then be the initial Mterest rate: ,e,hvetiated. loansith periodically .7, how often the rate may change: renegotiated rates are lso called how much the ra: mar change; mortvg,N. Such loans make 7= the' initial monthly payments: monthly payments more predictable 1. how often paynwnts may because the interest rate is Ited for a how much the paynwnts may longer time. e flange: Another variation is the nicked the mortgage term; bind-down morNiNe alth an how otten the term nay change: .0ustab1v rate.I his plan %vas intro- .] how much the term may change; duced by the Federal National Mort- the index that rate, payment, or gage Assoc4ation (FannieMae), term changes are tied to; and . which buys mortgages trom lenders th..' limits, it any, on negative arid provides a major SOUIVV ot amortization. housMg monev once again, as well as paving closing costs andfront- end charges a second time. A balloon note may also be offered by a private seller who is continuing to carry the mortgage he or she took out when purchasing the home.It can be used as a second mortgage where You also assume the seller's first mortgage.

Graduated Payment Mortgage Graduated payment mortgages %ex from thy ilatr t.t.intet1 (GPM) are designed for home buyers vho expect to be able to Balloon Mortgage make larger monthly pavnwnts in ant interest rate; payments are also the near future. During thu early flied but may apply onlu to interest. Years of the loan, payments arerda- Atter short term, a final payment et tively low. They arc structured to rise prouval is glue. at a set rate over a set period, say 5 or 10 years. Then they remaM con- Balloon Mortgage stant tor the duration of the! loan. Balloon mortgages have a series ot Fven though the payments equal monthly payments and a large change. the interest rate is usually tmal payment. Although there usually is a fixed interest rate, the equal payments may be for interest only. The unpaid balance, frequently the principal or the original amount you borrowed, comes due in a short period, usually 3 to 3 years. l'or example, suppose VOU borrow $30,000 for 3 years. The interest rate is 13"i), and the monthly payments are only $325. But in thisexample!, the payments cover interest only and the entire principal is due at maturity ---- in 5 years. 'That means you'll have to make 39 equal vor IhrjImle tx.), t ,v,31)1ci4 monthly payments of $325 cad-. and Graduated Paynuwt Mortgage a final balloon paymentof $30,323. It Imed Interest rate: paumehts rise g?adu you can't make thatfinal payment, ally tor first few iwars theu ort fc, you'll have to refinance (if refinanc- ,juratio?; of loan. ing is available!) or sell the! properti.: Stnne lenders guarantee refinancing when the balloon paymentis fixed. St) during the early years, due!, although they do not guarantee your payments are. lt,wer thanthe a certain interest rate. The ratecould amount dictated br the interest rate. be higher than your current rate. During the later rears, the difference, OtheMenders do not offer automatic is made up by higher payments. At retinattoing. Without such a guaran- the! end of the loan, you will have! tee. You could be torced to startthe paid off your entire debt. whole business ot shopping tor One variation ot the i.;PN1 is the

I graduated payment, adiustable rate Monthly payment changes are mortgage. This loan also has gradu- basee on an agreed-upon schedule ated payments early in the loan. But,of increases or an index. For exam- like other adjustable rate loans, it ple, the plan might use the U.S. ties your interest rate to changes in Commerce Department index that an agreed-upon index. Ifinterest measures after-tax, per capita in- rates climb quickly, weater negative come, and your payments might amortization occurs during the increase at a speOfied portion of the period when payments are low. If change in this index, say 75%. rates continue to climb afterthat Suppose you're paying $500 per initial period, the payments will, month. In this example, it the index too. This variation adds increased increases by 8%, you will have to risk for the buyer. But if interest ratespay 75% of that, or b%,additional. decline during the life of the loan. Your payments will increase to $530 your payments may aswell. and the additional $30 You pay will 'oe used to reduce your principal. With this approach, your income must be able to keep pace with the increased payments. The plan does not offer long-term tax deductions. However, it can permit you to pa off your loan and acquire equity rapidly

Shared Appreciation Mortgage In the shared appreciation mortgage (SAM), you make monthly payments at a relatively low interest rate. You also agree to share with the )ear from the Date Lam%At. t;ranted lender a sizable percent t usually 30% Growing Equity Mortgage to 5(1%) of the appreciation in your Fixed interest rate, but payments may home's value when you sell or trans- rise according to agired-upon schedule or fer the home, or after a specified an index. Tharases are applied toprinci- number of years. pal, shortening term of hian. Because of the shared appreciation feature, monthlY payments in this plan are fo..er than in many Growing Eluity Mortgage other plans. Howevo, You may be (Rapid Payoff Mortgage) liable for the dollar amount of the The growing equity mortgage property's apprecia':on even it you (GEM) and the rapid payoff mort- do not wish to 4;tin the property at gage are among theother plans on the agreed-upon date. Unless you the market. These mortgages com- have the cash available, this could bine a fixed interest rate with a force an early sale of the property. changing monthly payment. The in- Also. it property values do riot interest rate is usually a few crease as anticipated, you maNstill percentage points below market.Al- Ile liable for an additional amount ot though the mortgage term mar run interest. tor 30 years, the loan will frequently Mere are many variations ot this be paid off in less than 15 years idea, Lalled shared equity plans. Some because payment increases are ap- an, offered by knd;uginstitutions plied entirely to the principal. and others bv individuals. Forexam- 12 r1e -.uprose you V& tound a home mend t.ifl recover his or her share ot tor tkli10,000 in a neighborhood the monthly payments to date plus k, here property alues are rising. halt ot the appreciation. or .,12.7,00. he local .arnigs and loan is k' harg- to; a total ot S37.7110. Or, you can iz l2".0 on honw inortgages; as- pay your Mend that Sanw sum %It urrung You paid S20.1100 downand money and gam increased equity k hose a30-..ear ternl. Vour monthly the house. payments would be ..i,82:.t.S44, or Anothvr variation may voye your about twice ..yhat you yan attord. hut partner ta advantages during the a mend otters to help.Nour mend tirst years ot the mortgage, ..nter ill pay halt ot each monthly pay.- kyhik-h the partnership is dissok ment. or ',420. tor °, Years. At the end At'u tan I'm out your partner or or that time. you both assume the !Ind a new one. I 'lour partner helps h,nise will beorth at leaq make the purchase possible by rut- ..12; Not) can sell it, and Your ting up a swable dow n paymentand

CHANGING RATES

Lenders use indexes to decide the Federal Savings and Loan when b raise or lower the interest Insurance Corporation (or how rate on an adjustable rate mort- much lending institutions are gage. For example, whenthe fi- paying on the money they nancial index your lender uses borrow). rises, the interest rate on your Some indexes reflect what the mortgage may also increase it market will bear across the coun- depends on how the index is try; others reflect local trends. applied. Fluctuations in the inter- Also, some money indexes are est rate can change your monthly controlled solely by individual payments, mortgage length, or lenders. The index you select principal balance. should be one that can be verified Some of today's most fre- easily; its past performance may quently used indexes are: give you an indication of how stable it is. Have someone with El the rate on 6-month Treasury bills, expertise translate past and po- or on 3-year Treasury notes(or tential changes into dollars and how much the U.S. Treasury is cents. willing to pay on money it Also find out how the index is borrows); used. For example, if the index 0 the Federal Home Loan Bank changes monthly, is the lender Boanfs national average mortgage also changing the rate on your contract rate charged by major loan monthly? Or, are there limits lenders on the purchase of pre- on the rumberof times andior the viously occupied homes (or amount your rate canfluctuate? how much people are paying Finally, check how much ad- on new mortgages nation- vance warning the lenderwill wide): and, give you before your new rate 0 the average costs of funds for andior new payments go into savings and loans i ,sured by effect.

10 or helping make the monthly pay- as "assumable- Read the contract ments In return. 'our partner may carefully and consider haying an be able to deduct a eertain amount attorney or other expert check to trom his or her taxable inconw. Be- determine if the lender has the right fore proceeding with this type ot to raise Your rate in this mortgage. plan. check with the Internal Reve- nue' Service to determine the exact Seller Take-back requirements. This mortgage, provided by the Shared appreciation and shared seller, is frequently a -second trust- equity mortgages %very partly in- and is combined with an assumed spired by nsing mterest rates ano mortgage. The second trust (or "sec- partly be the notion that housing onu mortgage") provides financing values would continue to grow over in addition to the first assumed t he years to come. If property values mortgage, using the same property tall, these plans mar not be as collateral. (In the event of detault, available. the second mortgage is sanshed atter the first). Seller take-backs tre- Assumable Mortgage quently involve payments for inter- An assumable mortgage is a mort- est only with the pnncipal due at gage that can be passed on to a new maturity owner at the previous owner's inter- For example. suppose you want to est rate. For example, suppose buy a $150,000 home. The seller you're interested in a $75.000 home. owes $70,0(X) on a fi% mortgage. You make a down payment of You assume this mortgage and make "525.0tX), and You still owe S50,000, a 530,0(X) down payment. You still The owner of the home has paid oh need $50,000. So the seller gives you $20.000 ot a $30,0(X), 10% mortgage. a second mortgage, or take-back, tor You asSurrie the present :Avner's $50.(XX) for 5 years at 10% (well mortgage, which has 5.10.000 out- below the mark''t rate) with pay- standing. Thu also make additional ments of i416,67. I lowever, your tinancing arrangements tor the re- payments are tor interest only, and maining S40,000, tor example. by in 3 years you will have to pay borrowing that amount from a mort- 550,000. The seller take-back, in gage comnany at the current market other words. may have enabled you rate of 12("0. Your overall interest to buy the home. But it may also is lower than the market rate have lett you with a siiable balloon because pai t the money you owe payment that must be paid oft in the is being repaid at 10"4. near future. During periods of high rates, most Some private sellers are also offer- lending institutions are reluctant to ing first trusts as take-backs. In this permit assumptions. preferring to approach, the seller finances the write a new mortgage at the market major portion of the loan and takes rate. some buyers and sellers are back a mortgage on the property. still using assumable mortgages, Another development now en- however. 'This has recently resulted ables private sellers to provide this in many lenders calling in the loans type of financing more frequently under "due on sale- clauses (see Previously, sellers offering take- box, page 12). Because these clauses backs were required to carry the loan have increasingh been upheld in to full term before obtaining their court, many mortgages are no equity. I lowever, now. if an institu- longer legAy assumable. Be espe- tional lender arranges the loan, uses cially cmeful, therefore', if vou are ,tandardized forms, and meets cer- considering a mortgage represented tain other requirements. the owner

11 1 4? take-hack can be sold immediately to and avoid having to wilt\ t monthly Fannie Nlae. l'his approach enables payments. the seller to obtain eqi.ntv promptly

READING THE FINEPRINT Before going ahead with a creative missed payment. If you've home loan, you may want to have waived your right to notice of de- a lawyer or other experthelp you linquency or default, and you've interpret the fine print. You maw made a late payment, action may also want to consider someof the be initiated against you before situations you could face when you've been told; the lender may paying off your loan or selling even start to foreclose. your properMAlso, make sure Know whether your contract you undehstandthe terms in your waives your right to notice. If so, agreementsuch as acceleration, obtain a clear understanding in due on sale clauses, and waivers. advance of what you're giving up. An acceleration clause allowsthe And consider having your attor- lender to speed up the rate at ney check state law todetermine which your loan comes due. Sup- if the waiver is legal. pose you'vemissed a payment, A due on sale clause gives the and your contract gives thelender lender the right to require im- the right to "accelerate" theloan mediate repayment of the balance when a payment is missed. This you owe if the propertychanges means that the lender nowhas hands. Here's an example of a the power to force you to repay due on sale clause: If all or any the entire loan immediately. part of the Property or an interest Here, taken from a mortgage therein is sold or transferird by Bar- contract, is a sampleacceleration irwer without Lender'sprior written clause: In the event any intallment consent ...Lender may, at Lender's of this note is not paid whendue, time option, declare all the sums secured by being of the essence, and suchin- this Mortgage to be immediately due stallment remains unpaid for thirty and payable." (30) days, the Holder of thisNote Due on sale clauses have been may, at its option,without noticeor included in many mortgage con- demand, declare the entire principal tracts for years. They arebeing sum then unpaid,together with se; enforced by lenders increasingly cured interest and late charges when buyers try to assume sell- thereon, immediately due and ivy- ers' existing low rate mortgages. able. The lender may withoutfurther In these cases, the courts have notice or demand invoke the powerof frequently upheld the lender's sale and any other remediespermitted right to raise the interest rate to by applicable lam' the prevailing market level. So be Note the use of the term"with- especially careful when consider- out notice" above. Ifthis contract ing an "assumable mortgage."If provision is legal in your state, your agreement has adue on sale you havewaived your right to pnwision, the assumption may notice. In other words, you've not be legal, and you could be given up the right to benotified of liable for thons-iids of additional some occurrencefor example, a dollars.

12 la Wraparound Another variation on the second mortgage is the wraparound. Sup- pose you'd like to buy a $75,000 condor-nium and can make a $25,00t, down payment, but can't afford the payments at the current rate (12%) on the remaining $50,000. The present owners he.ve a $30,000, 8% mortgage. They offer you a $50,000 wraparound mortgage at 10%. The new loan wraps around the existing $30,000 mortgage, adding $20,000 to it. You make all your Yzar from the Date Loan %Us Granted payments to the second lender or Fixed Rate Mortgage with Buy-down the seller, who then forwards pay- Rate and payments are rrlatively low for ments for the first mortgage. You'll first few years, then jump to reflect full pay the equivalent of 8% on the rate in mortgage. 90,000 to the first lender, plus an additional 2% on this amount to the time, second lender, plus 10% on the you fail to make a payment on remaining $20,000. Your total loan you could lose a major investment. These loans are popular because costs using this approach will be lower than if You obtained a loan for they offer lower payments than mar- the full amount at the current rate ket rate loans. Land contracts are also being used to avoid the due on (for example, 12%). sale clause (see box, page 12). The Wraparounds may cause problems buyer and seller may assert to the if the original lender or the holder of the original mortgage is not aware of lender who provided the original mortgage that the due on sale clause the new mortgage. Upon discover- does not apply because the property ing this arrangment, some lenders or will not be sold until the end of the holders may have the right to insist contract. Therefore, the low interest that the old mortgage be paid off rate continues. However, the lender immediately may assert that the contract infact represents a sale of the property. Land Contract Consequently, the lender may have Borrowed from cornnwrcial real es- the right to accelerate the loan (see tate, this plan enables you to pay box, page 12), or call it due, and below-market interest rates. The in- raise the interest rate to current stallment land contract permits the market levels. seller to hold onto his or her original below-market rate mortgage while "selling" the home on an installment Buy-down basis. The installment payments are A buy-down is a subsidy of the for a short term and may be for mortgage interest rate that helps you interest only. At the end of the meet the payments duringthe first contract the unpaid balance, fre- few years of the loan. Suppose a quently the full purchase price, must new house sells for$150,000. After a still be paid. down payment of $75,000, you still The seller continues to hold title to need to finance $75,000. A 30-year the property until all payments are first mortgage is available for 12%, made. Thus, you, the buyer, acquire which would make your monthly no equity until the contractends. lf payments $771.46, or beyond your

13 around the corner for less. At the same time, competition mayhave encouraged the builder to offer you a genuine savings. It pays to check around. There are also plans called consumer buy-downs.In these loans, the buyer makes a sizable down payment, and the interest rate granted is below market. .1 other words, in exchange tor a lage payment at the beginning ofthe loan, you may qualifyfor a lower rate on the amount borrowed. Frequently, num me nate bmn tut,t ;ran sod this type of mortgage has ashorter Adjustable Rate Mortgagewith term than those written at current Buy-down market rates. Rate and payments are nutzaltylow. then lump and may changethroughout loan Rent With Option to Buy &vending on changes m the Index. In a climate ot changing interest rates, some buyers andsellers are budget. However, a buy-down is attracted to a rent-with-t.7tion ar- available: for the first throe years, rangement. In this plan, you rent the developer will subsidize your property and pay a premiumfor the payments, bringing downthe inter- right to purchase the property est rate to 9"'0. This means your within a limited time period at a payments are onlyW3.47. which specific price. In some arrange- You can afford. ments, you may apply partof the There are several things tothink rental payments to the purchase about in buy-downs. First,consider price. what your payments will beafter the This approach enables you tolock first few years. If this is afixed rate in the purchase price. You canalso loan, the payments in theabove use this method to"buy time" in the example will jump to the rate at hope that interest rates will de- which the loan was originallymade crease. Fromthe seller's perspective, 12% and total more than5770. this plan mar provide the buyertime If this is an adjustable rateloan, and to obtain sufficient cash oraccept- the index to which your rateis tied able financing to proceed with a has risen since you took outthe purchase that may not bepossible loan, your payn entscould go up otherwise. even higher. Second, check to seewhether the with Reverse Annuity Mortgage subsidy is part of your contract and the lender or with thebuilder. If it's If you already own your home provided separatelv by thebuilder, need to obtain cash, youmight con- the lender can still hold Youliable for sider the reverse annuity mortgage in the (RAM) or "equity conversion.-In the full interest rate (12"i, the above example), even itthe builder this plan, you obtain a loan in backs out of the deal or goes outof form of monthly payments over an extended period ot time, using Your business.. property as collateral.When the loan Finally, that S150,tXX) sales price both the prin- may have beenincreased to cover comes due, you repay A cipal and interest. fie builder's interest subsidy in the comparable home may beselling A RAM is not a mortgage

14 17 conventional sense. You can't obtain imum ot, tor example,s:410.ii00\t a RANI until you have paidoft your the end ot the term. you must repay tinginal mortgage. Suppose you the loan. But remember. it you do own your home and youneed a not have the cash available to repay source ot money. NOu coulddraw up the loan plus interest. you will have a contract with a lender thatenables to sell the property or take out a new You to borrow a given amounteach loan. month until you've reached a max-

LOSING GROUND Repaying debt gradually through pace with the index,they would payments of principal and inter- have risen from $408 to $722. But est is called amortization. Today's because of a payment cap (see economic climate has given rise to page 6), they stayed at$408. By a reverse process called negative 1981 your mortgage had swelled amortization. from $50,000 to $58,350, even Negative amortization means though you had dutifully paid that you are losingnot gaining $408 every month for 48 months. value, or equity This is In other words, you paid out because your monthly payments $20,000 but you were $8,000 more may be too low to coverthe in debt than you were three years interest rate agreed upon in the earlier. During the next few years, mortgage contract. Instead of despite the fact that the index fell paving the full interest costs now, gradually, you were still paying you'll pay them later either in off the increases mdde to your larger payments or in more pay- principal from earlier years. ments. You will also be paying Certain loans, such as gradu- interest on that interest. ated payment mortgages, are In other words, the lender structured so that you regain the postpones collection of the lost ground with payments that money you owe by increasingthe eventually rise high enough to size of your debt In extreme fully pay off your debt. And you cases, you may even losethe may also be able to payoff the equity you pturhased with your extra costs if your home isgaining down payment, leaving you in rapidly in value or if your income worse financial shape a few years is rising fast enough to meet the after you purchase your home increased obligation. But if it isn't, than when you bought it. you may realize aloss if, for ex- Suppose you signed an ad- ample, you sign a below-market justable rate mortgage for $50,000 adjustable rate mortgage in January in 1978. The index established and try to sell the home in Au- your initial rate at9.15%. It nearly gust when interest rates arehigher. doubled to 17.39% by 1981. If You could end up owing more your monthly paymentshad kept than you'd make on the sale. PAYMENT TABLES 8% Annual Percentage Rate 12% Annual Percentage Rate Monthly Payssenb tPrintipal andIntermit* Monthly Paymente4Principal and !airmail* . . . _ S 10 15 20 23 30 Amount 5 10 13 20 23 30 Amount Years Ware Wan Years f In *fiordYears WanttramYearsYearsYears Financed Year*Years _ 506 37341 88300 05273 28003 31257 In 5 2_5.000 103 32238.012l49 11 102 90103 44 f 25.0110 220 13 30,133*) 4007.33430.42360.06130 33315 97308 59 30.000 t401.214343 ifti28h.10 250 93231 54 778 56502 10420 06085 393158.63300.02 35,000 7119 07 424.65 334.4$ 202.75 27014 2..C6 35,000 40.000 000 78573.844 4140 074140 44421.29411 45 40 000 1411064145 31 326 104.583(14 73,243 51 _ _ . 1001 00 645 6240 08494149473.96*2.08 45.000 012 44 45 07 430 04 376 40347 32330 10 45.000 00.000 1112.23717 36601300550 55526.62514.11 ;0.000 1013 14:2bob 64 477 83 410.22165 91166 88 .. 707 11660.05631 93617 17 00 0001216 00 777 417073 39011 F6 463 00440 26 80.000 1334 67 MO 83 040.127713 77737- 26-720.00 010.275/3 04 70.000 10.57 111004 iO . 00.110001/11 30 tie o614* 585.53 . . 880 87842_58022.03 kro 62, too0 15 or 45067 01 83.000 1774 56 1147 77'1'60 14 740.00010= 11 744.52 . - 441000 20132.00 1291 241000 1590199947.20 gn 00.03(I1624 Ss 1091 414WI 04 702.80 040 6388039 1200.171101.091003 2310213.82 1000102027,64 1213 000 05 036 44771 $2733 76 100.000 2224 44 1434.71 9% Annual Percentage Rate 13% Annual Percentage Rate Monthly Payments 1Principal and Intermit* Mranthly Payments (Principal and Interepi) . 13- 20 29 30 10 IS 20 25 Amount S 10 Amount WarsYearnYears Wan FinancedleantViarsYearsWarsYearsWant Financed YearsYears 10.0400 448 03373.29 5 25 000 5174 96316.69253 572.24 03200 80201 16 8$e. 60447 94379 58151 48 338.36331 66 30.000 r02 70380.03301 28NA 42251 .00 241 39 30 WU 796 36522 50442.04410.06 394 75 387 17 72t. 441 )6154 484114 90703 722.81 62 35 0(0 35 0170 00000910 13407 25006 10 468 64 451.14 442 401300 AV 33506 711405 71300 00315 04 321 145 . . . 071 00500 16 927 21 007 53 497 79 45.000 434 13570 (144% 42404 $8477 04lo2 00 450E0 1023 644 1.32 5* 79 063 92553 10 440 31 30011 1137* 740 St4 _ Num Tor krz031 36077 13449 So414 80 . 702.95 676 7160.72 5[1.3 52 482.77 60.0001365 19895 87700 15 wo('t)1245 507150 AO% 439 84 . .0_ _ _ 567.44581 24 70.000 1592 72 1645 114045 67 820 11 789 49 774 34 70,0001453 08086 7309 99620 81 . . . _ 81(U) 1820.20 1104 44 1012 20 937 27 402 27 $84 1.1.0301601 67 1013.41011 41719 786,71 36643 70 _ 90.000 2047 78 1343 80 1138 72 1054.42 1015.05 095 58 00 000 IRO 25 1140 1.18012 647409 75 CC 214 724 16 1t10,000 2275 31 1403 11 1205 25 1171 58 112784 17015 834201404.62 . 100.0002075 144 1206 76 1014 V $99.73 _ ...... 10% Annual Percentage Rate 14% Annual Percentage Rate Monthly Payments tPrinetpal and Interest)* Monthly Payments tPrincipal and Interest)* _ . 30 20 23 30 Amount 5 10 IS 20 ZS Amount 5 10 15 Yram Wars YeatsYeats P inancedYearsYearsYearsYears Vesili Years Financed Vein Wane 42311;31 3S 330 3$ 004b5 241 2622718 219 30 25 (.00 081 71388 17332 94 310 NO 3(1195 24b 30.007 es*.034E6 le)390 03373.06 361 355 47 vow kr 41406 45322 38289 51 272 81283 27 _ 814 39043 444640 II435 24 421 32414 71 35 000 743 65 400 53376 11337 763114 05 307 1 3c 1E0 070 74021 07532 70 497 41481 51473 00 40 MO 849 814528 t41420 144306.01363 48351 03 40 OCU 45 1.1301047 00004 7004144 29 500 59 541 713533 20 45 A411 005 125%4 04 483 57434.28408 92394 01 1183.42776.34bb5 08 621 77 601 89 002 44 00 0001002 35 060 '5537 30482 sl454 35 438 79 10(1(1] 711193. 45 n 526 54 1441. 0013 1391. 10Q:41 tO;taill 0.5 746 12 722 26 00,(03)1274 142702.00 04400 079 01 . . _ 1120 42 woo 1047 29 025 06 752 2,1675 52Nib Ow 614 30 .70.13011004.70 1006 87 932 22 870 40 842 64 11461 4-7 .1242-14 .1000 417 0% 142683.01947 90 NO OM 1644 76 1057 al8C4 6$772 02 726% 702 ,(6. 01 0113 2004 14.1397-40 7-10$ 571179 17 11023 28. 11164 410(111412 23 1184 36467 14 *8 52817 /43 789_ .141 440.100 2326.83 1552 87 1131 75 1243 53 1203.77 11t44 88 11111 RV 2124 17 3321 51 107410 44s5 02008 713077 57 1130.00U 11% Annual Percentage Rate 15% Annual Percentage Rate _ . Monthly Pay monft Weincipal and Intermit Monthly Payments trrincipal and Interest, 30 taunt 5 10 15 20 23 30 Amount 5 10 LS 20 25 'need Ivan Wan Yeats Year* YearsYears FinancedWarsWarsYearsYearsYearsYears 316 12 _MO 93 * An284 15238 05 245 ill218 25 010 044 70403 .4 340 *1 320 20 320 21 109 tob294.03 045 70 00 00 713 704144 014144 06 395 04184 20370 14 30.012! 652 27413 25340.04 _ _ . 1000 710) 402 04 397 $1 .11.1 27341 iM333 31 150337 1.32.00AM nr44149 * 460 8144414 30442 5is WO 70 05140 44 64 412 t41419e it',180 93 101W 4.1 n0 9. 34 ;54 M 26 72512 34905 78 40 ton _ . _ . 004 00 45.01%) 478 41 619 80011 47464 4$441 05 42$ 05 45 WO 1011 55 720 01 020 1425442 56076 38 01t, 104400 00 470 lb 541) if04699 tiO4500 40 040 42 NC 23 50.1311 1"4 on11 75004317 010001780 50 _ 614 11 sw .07571 39 14 '7 40 *44 017430 76 70110$780 50751467 070011304 54005 50 NO 040 00.1017 . . 70 MO 1521 417*04 25 795 62-723...53016 OS 056 03 700111 0 5 30 1120 35 979 77 021 76 098 50885 12

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