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REAL ESTATE Q&A

What It Means When the Seller 'Carries Back a Second'

October 08, 2000|ROBERT J. BRUSS | SPECIAL TO THE TIMES

Question: I don't understand how "seller financing" and "carrying back a second mortgage" works. If the home is for sale, why would the seller want to take out an additional mortgage?

Answer: The home sales term "seller financing" means the seller helps finance the buyer's purchase by loaning the buyer part of the seller's equity, instead of receiving all cash from the buyer at the time of sale. Seller financing does not mean the seller takes out an additional mortgage before selling.

For example, a few years ago, I sold a rental house to my lease-option tenants. They made a $30,000 down payment (from their lease-option rent credit), obtained a new first mortgage from a bank at 8% interest, and I carried back a second mortgage for the balance of the sales price at 9% interest. They didn't have to come up with any cash except for closing costs.

The happy result is that I received the cash from their new first mortgage that they obtained at a bank, and I have been receiving monthly payments, plus 9% interest, on my second mortgage ever since.

In other words, when I carried back that second mortgage for my buyers, I loaned my buyers part of my equity that I had in that house at the time of sale. I also created an excellent, safe investment for myself.

If they should default, I can foreclose and either get paid in full at the foreclosure sale or take back the house to sell it again for another profit. However, foreclosure is unlikely because the buyers now have built large equity in their home.

Some New Tips About When to Refinance

Q: The interest rate on our mortgage is 8.5%, but our equity has grown to about $200,000 during the last few years. I started shopping around on the Internet and learned our interest rate can probably be reduced to around 8% if we refinance.

Because I am self-employed, we will have to supply tax returns, profit and loss statements, bank account statements and a bunch of other paperwork, which I dread. Do you think we should refinance just to save half of 1% interest? Will the money we take out be taxable?

A: Forget the old rule that says homeowners should refinance only when they can reduce the interest rate by at least 2% and recover their refinance costs within 36 months from loan payment savings.

Don't confine your refinance search to Internet lenders. Local banks, mortgage brokers and mortgage bankers are also eager to make loans. Inquire about "no cost" mortgages for which you don't have to pay upfront fees (on a refinance, those fees must be amortized over the life of the mortgage). Compare the annual percentage rate of each loan offered.

Your refinance "cash out" proceeds will be tax-free for a good reason. Because it is borrowed money, it must be repaid, so Uncle Sam doesn't tax it. For more details on the tax aspects, please consult your tax advisor.

Something's Fishy With These Termite Reports

Q: We recently bought our first home. At the time of purchase, we were told the same termite inspection company had inspected the house two years ago, and then again two months before we bought it. Both reports said there were no termites.

About two months after we moved in, we found evidence of termites and called the same termite inspector. He said it looked like the termites had been in the house for three to four years. I asked him how this could be since both of his reports stated there were no termites. He said not to worry and that he would take care of everything at no cost. He put a small amount of spray in a hole in the ground and said he would be back to monitor the situation. That was about a month ago. I have not heard from him since. What should we do?

A: Read the termite inspection report you received. It should give you the name, address and phone of the state agency that regulates that termite inspection firm. Give them a call to be sure that termite inspector is properly licensed and in good standing. They might also be able to give you more specific advice for your situation.

If it were me, I would hire another termite inspection firm to completely reinspect the house. It sounds like your termite inspector could be incompetent and there might be extensive termite damage that he is trying to avoid having to repair at his expense.

With a report from another inspection firm, you have some leverage to get the first inspector to make repairs and to be certain there really are no termites in your home.

Quoted Deposit Price Is in the Stratosphere

Q: My wife and I are in the market to buy a larger house. We've been looking, off and on, for about five months. Last weekend we saw a house we both really liked. When we talked with the listing agent about making an offer, she said we had to make a deposit of 10% of the purchase price. Since the asking price is $275,000, that means our deposit would be $27,500. Isn't that rather high?

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