Q-With home mortgage interest rates rising, will it pay to wait to buy a home until interest rates drop? My wife and I badly want to buy our first home, but with rising interest rates the high monthly mortgage payments will take a big bite out of our income. I have heard that interest rates may fall later this year. Should we wait to buy?
A-No. As mortgage interest rates rise, theoretically home prices should drop because fewer people can afford to buy homes. But that rarely happens. Instead, home sellers don`t sell unless they can get their price. However, a few highly motivated sellers such as job transferees and others who must sell quickly may drop their prices slightly, so you may be able to pick up a bargain from an anxious seller.
But when mortgage interest rates drop, more people can afford to buy homes, so home prices go up because supply cannot keep up with increased demand. The result is rising home prices.
Either way, home buyers who wait to buy lose out. Today is always a great time to buy a home. Yesterday was better, but tomorrow will be worse. By buying a home now you lock in today`s price and interest rate. If interest rates should fall significantly you can refinance to reduce your interest cost. Then you also may be able to take out some tax-free cash from your home at the same time.
Q-I am a puzzled real estate broker. What is going on in the upside down mortgage market? In our town fixed rate mortgages are a little over 11 percent interest, whereas adjustable rate mortgages, after the initial 6-month teaser rate around 9 percent, jump to almost 11 percent. I thought adjustables were supposed to be cheaper than fixed rate mortgages, but that doesn`t seem to be happening. Also, most of my home buyers who took adjustables preferred the cost of funds index, but now all that seems to be available are adjustables tied to the volatile Treasury bill index.
A-As you know, local S&Ls, banks and mortgage brokers have been selling most of the mortgages they originate to the secondary mortgage market buyers, such as Fannie Mae and Freddie Mac. But in the last few months these major buyers have discovered that the cost of funds index is moving very slowly upward, whereas the Treasury bill index changes much faster to reflect rising interest rates.
For example, in the last year the cost of funds index has risen only about 1/2 percent, whereas the Treasury bill index has gone up around 3 percent. Adjustable rate mortgage borrowers with loans tied to the cost of funds index, as I have been recommending, need not worry about massive monthly payment increases. But ARM borrowers whose loans are tied to Treasury bill indexes are often shocked to receive big payment increases.
The result is lenders have switched suddenly from originating ARMs tied to the cost of funds index to ARMs tied to the faster rising Treasury bill indexed loans.
To complicate matters, a few adventurous ARM lenders now offer loans tied to the LIBOR index, the London interbank rate, which has nothing to do with U.S. interest rates and is not understandable to most borrowers. This mortgage market confusion is causing higher interest rates, limited mortgage availability and borrower difficulty obtaining mortgages.
Q-At a Sunday open house the realty agent handed us a listing information sheet about the home. It said stove, refrigerator, washer, dryer, barbecue and drapes were included. After some heated negotiation we bought the house. But when we received the keys we were shocked to discover that the house was bare. The realty agent refuses to help us get the items we thought were included because they weren`t listed on the purchase contract we signed. However, we presumed that they were included because they were on the information sheet. Do you think we are entitled to these items?
A-Yes. Shame on that realty agent for failing to be certain the personal property items on the information sheet were not listed on the sales contract. The general rule is that a real estate sale does not include personal property on the premises. From a strictly contractual viewpoint, the seller was correct in removing the personal property since it was not included in the sales agreement. But as novice buyers you were relying on the truth of the information sheet and the honesty of the agent to deliver what was promised. I suggest you try to settle the matter with the agent`s broker, but if that is not possible don`t hesitate to go to court. Consult a real estate attorney for further details.
Q-I have an opportunity to buy an option on some land that I think I can get rezoned for a shopping center. The option price is only $5,000. Should I record the option?
A-Yes. Since you are not living on the property, an unscrupulous owner might sell the land to another buyer who would not have to honor your option if he were not aware of it. Recording the option, or a memorandum of it, gives constructive notice of your option rights to anyone dealing with that property. Ask your attorney to explain further.
Q-My wife and I have about $25,000 for the downpayment on our first home. We have looked at both single-family houses and small rental properties such as duplexes, triplexes and fourplexes. If we bought rental property, we would live in one unit. Do you think such property should make a good first real estate investment?
A-My first real estate investment was a triplex; I lived in one unit and received rental income for the two rentals. This was a wonderful way to get started in realty investing because the rental income helped pay the expenses. However, many owners do not like to live so close to their tenants. I was fortunate to have tenants who were mostly quiet and noncomplaining, so we got along great. But a troublesome tenant could drive the owner crazy because of the proximity.
As for appreciation in market value, you usually will find that single-family houses go up in market value faster than do small income properties. There is nothing wrong with investing in small rental properties as long as you are aware of their pros and cons.
Q-I think you should warn condo renters about ”equity skimmers.” I rent a condo for which the owner has been accepting my rent but has not been paying the mortgage company, which is foreclosing. As a result I will have to move out because the owner has not been paying the monthly condo fees either. Is there anything I can do, other than move, to recover my expenses?
A-Thank you for sharing your situation, which can happen to renters of any type of property, but it happens mostly with condos. I`ll bet your landlord bought the condo for little or nothing down by offering to take over the previous owner`s mortgage. Then he rented the condo to you for whatever he could get and never made any mortgage payments.
Interestingly, he may have no legal liability to the mortgage lender if he never assumed the mortgage obligation.
If you want to buy the condo, contact the foreclosing mortgage lender to see if you can work out a nothing-down deal. Otherwise, it may be wise to move out so you don`t get caught in the middle between the condo owner`s association and the mortgage lender.
Q-We are buying a home that is being sold because of a divorce. The husband has left town, and the wife says she doesn`t know where he is. Before he left the wife says he signed the purchase contract, but we and the realty agent think his signature is forged. We are ready to close the purchase, but the husband can`t be found to sign the deed. Our loan commitment expires soon, and we don`t want to have to pay a higher interest rate. How can we buy this house without the husband`s signature?
A-Unless the wife has a power of attorney form signed by her ex-husband I don`t know any way to overcome the requirement that the husband sign the deed, if his name is on the title. The ex-wife can bring a partition lawsuit to get a court order for the sale, but such action will take time. I suggest you and the ex-wife consult a real estate attorney.
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Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Robert Bruss will answer inquiries addressed to Tribune Real Estate Features Service, P.O. Box 6710, San Francisco, Calif. 94101.
