Q-Please don`t laugh at my question, but I would appreciate your explaining what you mean by the term ”equity.”
A-You are in good company. I recently heard about a survey in Los Angeles in which 46 percent of the people questioned could not explain real estate equity.
It is the difference between the fair market value of a property and the total amount of mortgage loans owed against the property.
To illustrate, suppose your home is worth $100,000 and it has a $50,000 first mortgage plus a $10,000 second mortgage. Subtracting the $60,000 total loans from the $100,000 fair market value produces a $40,000 owner`s equity in the home.
Sellers need the cash
Q-As you know, the market for home sales is slow in most cities, including the town where I have been a Realtor about 11 years. Having been through the ups and downs of real estate cycles, I realize the current slow cycle is nothing extraordinary. However, I must question your idea of using lease-options to ”sell” homes. I have six listings, and all my sellers need the equity from their homes to buy another home. The big drawback of lease-options, as I see it, is there isn`t enough cash for the home seller nor is there enough cash to pay the Realtor`s sales commission. When are you going to stop giving false hope to home sellers that lease-options will solve their problems?
A-Lighten up. The purposes of a lease with option to buy are to (1) get a tenant-buyer living in the home producing rental income for the owner, (2)
give the tenant-buyer an opportunity to try oua home will sell in the regular way, there is no need for a lease- option. Lease-options can solve many problems for home sellers, but not all. For example, if your sellers need every dollar of their equity to buy another home, the lease-option is not appropriate. However, if your sellers can add second mortgages to their houses to provide cash down payments for their replacement homes, then they can lease-option the old homes.
Frankly, the biggest obstacle to lease-options is real estate agents. They rarely suggest a lease-option to a buyer or seller. Why? Because agents won`t get most of their sales commission until the buyer exercises the option to buy.
To illustrate, when I bought my home on a lease-option I paid the seller a $10,000 non-refundable consideration for the option. Incidentally, I moved in three days after acceptance because there is no long closing period necessary with lease-options. The two agents could have taken part of their commission up front from this money, but they elected to wait until I exercised the purchase option. But most agents would have insisted on a partial commission. Mine was the first lease-option my agent ever had done, and I had to show her how. That is a too-typical situation. Further details are in my report ”Insider Secrets of How to Earn Lease-Option Profits”
available for $3.75 from NewspaperBooks, 64 E. Concord St., Orlando, Fla. 32801.
Insurance rules vary
Q-Several months ago you wrote that home private mortgage insurance (PMI) usually can be canceled when the loan-to-value ratio drops below 80 percent. I clipped that article and sent a copy to my mortgage lender along with my monthly payment. The lender sent back a printed reply that FHA mortgage insurance never can be canceled. Is this correct? Were you wrong?
A-Yes. No. You have mixed apples and oranges.
A PMI premium is an extra amount added to the monthly mortgage payments of borrowers who obtained a conventional 90 or 95 percent mortgage. If the loan has been sold in the secondary mortgage market to Fannie Mae or Freddie Mac, they generally allow dropping the PMI premium when the loan-to-value ratio drops below 80 percent. However, other lenders do not have to follow this rule unless state law applies. For example, California has a new law requiring lenders to drop PMI when the loan-to-value ratio on any home loan drops below 75 percent.
But FHA home loans do not have PMI coverage. Instead, they have mutual mortgage insurance, or MMI, which generally costs 0.5 percent of the loan`s balance at the beginning of each year. Over the years I have received several angry letters from FHA officials who tell me MMI can be canceled at the lender`s discretion. However, I have yet to learn of any FHA-insured lender allowing a borrower to drop the MMI. But when you make the final payment on your FHA mortgage, you become entitled to a partial refund of your MMI premiums.
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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 280038, San Francisco, Calif. 94128.
