Q-The banks and S&Ls have been bombarding us with offers for home equity loans. Since interest on personal loans is no longer tax deductible, my husband and I are thinking we should have a home equity loan to use for a new car, so our interest will be tax deductible. What are the pros and cons of home equity loans?
A-Most home equity lenders will loan up to 75 or 80 percent, sometimes more, of your home`s market value. For example, suppose your home is worth $100,000 and you have an existing $50,000 first mortgage plus a $10,000 existing second mortgage. In this situation you could borrow $25,000 to $30,000 on a home equity loan, but $10,000 would have to be used to pay off your existing second mortgage because most home equity lenders require a second mortgage for security.
Some home equity loans have a fixed interest rate, but most offer adjustable interest rates. Fixed-rate home equity loans are currently around 12 percent and usually require borrowing the maximum amount. But most adjustable rate home equity loans are credit lines, so your loan does not cost any interest until you borrow money, usually by writing yourself a check on your credit line.
A few home equity credit lines are offered at the prime rate. Shearson American Express is the largest nationwide lender offering this type of home equity loan. Other lenders charge 1 or 2 percent higher than the prime rate. But these loans can be dangerous if the prime rate escalates. Since the banks control their prime rate, it usually goes up very quickly, but drops very slowly.
Other indexes used for home equity loans include the cost of funds index and the Treasury Bill indexes. The cost of funds index moves very slowly whereas the Treasury Bill index tends to be much more volatile.
Another home equity loan consideration is the fees you will pay. Some lenders advertise ”no fees,” but they often sneak in various charges for title insurance and documentation. Before signing up for a home equity loan, be sure to compare the terms from at least two banks and two S&Ls because all home equity loans are not created equal.
Q-There seems to be an oversupply of homes for sale in our town. Since my wife and I are starting to look for a home because we are expecting a baby in July, we are thinking it might be best to limit our search to ”for sale by owner” houses, so we can save the sales commission. What do you think of this idea?
A-Not much. The marketplace, not real estate agents, determines the value of a home, which is worth the same whether or not an agent is involved in the sale. If you cut yourself off from homes listed for sale by real estate agents, you will be looking at just a small fraction of available homes.
More important, you will be denying yourselves the services offered by realty agents, such as showing you dozens of homes that meet your needs, helping negotiate the sale, arranging financing and the 1,001 details that are involved in successfully closing the sale. Most home buyers and sellers are not capable of handling their most important purchase without help from a professional agent. Since the agent`s service cost the buyer nothing extra, why not avoid the headaches of buying a home alone?
Q-My husband has just been transferred, but we know the job assignment is only for about three years before he retires. Since we want to return to this area, we plan to rent our home to tenants while we are gone. My sister lives nearby and can handle rent collections for us. But my question is how can we set a fair rent for our house? Our mortgage payment is only $278, but I know the house will rent for much more. Is there any rule of thumb for setting the rent?
A-The old, now-outdated rule used to be a house should rent for 1 percent per month of its market value. For example, using this old rule a $100,000 house would rent for $1,000 per month.
But in most communities it is no longer possible to get such high rents in relation to the home`s value. The reason is home market values outpaced rents. Today the best way to determine the fair market rent for your home is to check comparable rentals of similar nearby houses.
Start with the newspaper classified want ads under ”houses for rent.”
Check out several houses like yours to learn what the owner is actually getting for rent, not what the asking rent is. Another method is to contact local rental agents for their opinion as to what rent your house will command. Incidentally, you may want to list your home for rent with a nearby rental agent who might have a desirable tenant waiting for a house like yours.
Q-We are just starting to look at homes for purchase. A friend says it is important to find out why the seller is selling. I have never heard this before. Is it true?
A-Yes. Then you can tailor your purchase offer to meet the seller`s needs. However, some sellers and their realty agents don`t always tell the true reason for the sale. For example, if you were about to lose your home in foreclosure, would you want the buyer to know? But it won`t hurt to ask why the seller is selling.
Q-Your column is required reading at the real estate brokerage where I am a sales agent. Our Monday morning sales training class usually starts out with a question from your weekend column. We don`t always agree with you, but your articles keep us on our toes. I`ve noticed in recent months you often encouraged buyers to acquire homes on lease-options. But my broker discourages lease-options. She says there isn`t enough money for the sales commission. Is there any way a lease-option can be used by real estate agents, so we get a sales commission?
A-Yes. I`ve acquired many houses on lease-options, including the home where I now live, and the real estate agent always received a sales commission.
For example, when I bought my home I paid a non-refundable $10,000 consideration for the option, plus $1,500 per month rent. The sales agent could have received part of her commission from the $10,000, but she elected to wait until I exercised my option, when she received her full sales commission.
Incidentally, a few weeks ago I heard from real estate broker Mike Bohnen of Sonoma, Calif., with the best lease-option I`ve heard about. He had a luxury home listed for sale at $2 million, but it wasn`t selling. Mike`s buyer wanted to purchase the house, but not right away. So she offered $100,000 non- refundable option money, plus $10,000 per month rent during the one-year option period. From the $100,000 option money, Mike received a $50,000 commission and he will get the balance of his sales commission when the option is exercised.
Q-Our home has been listed for sale almost six months. The realty agent tells us the market for homes is slow in our town. She brought us two purchase offers, which we rejected because they both involved our carrying back a second mortgage for the buyer. But I`ve been thinking about those offers and wonder how risky second mortgages are for home sellers?
A-Second mortgages can be safe, sound investments. Or they can be very risky if not properly structured. For your safety, you should insist the buyer make at least a 10 to 15 percent cash down payment. Also ask the realty agent to run a credit and employment check on the buyer. If everything looks good, carrying back a second mortgage can help sell your home quickly and for top dollar.
But if worse comes to worse and your buyer defaults, you should then promptly foreclose. At the foreclosure auction your loan will either be paid off by a bidder or you will get the house back to sell for a second profit. Rather than fearing a second mortgage, you should view it as a sound investment opportunity.
Q-I rent a small cottage, but I realize I can`t afford to buy a single-family house yet. However, a duplex across the street is for sale. I am thinking of buying it, living in one apartment and renting the other to tenants who would help pay my mortgage. What do you think of this idea?
A-Although I can`t advise on the desirability of a specific property, owning a duplex would be better than continuing to waste money on rent. I hesitate to say a two-family duplex is a great investment, but it can get you started investing in real estate.
The big problem with small residential properties, such as duplexes, triplexes and fourplexes, is the resale market is very limited because few people want to buy this type of property. With a limited resale market, small income properties usually don`t appreciate as rapidly as do most single-family houses.
Q-If we buy a house, how can we be sure we can qualify for a mortgage and how can we be sure the house will appraise for the price we are offering?
A-Your home purchase offer should contain a finance contingency clause. For example, it might read, ”This purchase offer contingent upon buyer and property qualifying for a new fixed interest rate 30-year first mortgage of at least $100,000 with the interest rate not exceeding 9.5 percent, a loan fee not more than 1.5 percent and a monthly payment not exceeding $840.85.”
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