by Winnie Saunders
Buying a home is probably the largest investment you and your family will ever make.
Unless you’re wealthy, few people buy homes and pay cash. Rather, they make a small down payment and obligate themselves to a financial lender for a term of usually 30 years. In this case, the lender determines the interest rate and gives you a thorough financial background check.
There are at least two other ways to buy the home of your dreams and probably save money: assuming the existing mortgage or owner financing. Either method usually saves you time, trouble and money.
If you’re trying to assume a mortgage first make sure it’s assumable and transferable. Many mortgages have a due on sale clause that states if the owner sells all or part of a house the entire balance becomes due and payable on demand. A lender may be willing to overlook a non assumable mortgage is you’re able to make good any overdue payments and agree to do further business with the existing lender.
If a house is selling for $100,000 and the owner still owes $60,000, you could pay the owner the equity of $40,000 and assume the debt of $60,000 with the existing lender.
This is good for the buyer if the existing interest rate is equal or lower than the current rates for a home loan. A second mortgage may be needed for the equity payment.
There are different ways to assume a loan. You can, as a buyer, assume the legal obligation for payments and usually pay an assumption fee of 1% of the loan balance.
Or, you could take over the payments leaving the seller still legally obligated for payment if you default. If this happens, you lose the property and the seller’s credit is harmed unless he makes payments as scheduled.
Seller (owner) financing is good if a buyer can’t qualify for a traditional loan and if the owner has had trouble selling and is in a hurry to unload the house. In this case, it would be wise to find out the need for the rush selling or why the home has not sold previously.
For the agreed upon price you would begin making monthly payments to the seller usually at a lower interest rate than is being offered at institutions. There is little risk as the home is collateral. If you default, the seller regains possession of the house.
The seller may also need to have an additional stream of income each month instead of getting it in one lump sum. And, he could save on some of the capital gains tax. With owner financing, you as a buyer can avoid some (not all) costly administrative fees and private mortgage insurance (PMI).
Assuming an existing mortgage or obtaining owner financing are two great ways to become a homeowner and save money at the same time. No matter what the current status of the real estate market is or if interest rates are high or low, there are always creative ways to obtain financing.