Q–We are trying to buy a home in a rural area. Our buyer’s agent told us that obtaining mortgage financing could be a problem because of the home’s distance (about 45 miles) from a town with a bank. She showed us a perfect house on a small lake. It is vacant and has been listed for sale about 90 days. The seller quickly accepted our offer, but the issue is how to finance our purchase.
The house has an existing mortgage at 7.75 percent interest, with mortgage payments we can easily afford; however, if we can find a mortgage lender, we will have to pay around 8.5 percent today because of little competition among lenders. Our buyer’s agent suggests we either buy “subject to” the mortgage or “assume” it. The seller doesn’t seem to care. What is best for us?
A–From your viewpoint, it doesn’t matter if you formally assume that mortgage or buy “subject to” it. Either way, you must make the monthly payments or lose the house by foreclosure.
If you contact the lender, you might be allowed to assume that mortgage obligation, but the lender will probably charge you an assumption fee, such as 1 or 2 percent of the mortgage balance. In addition, the lender might raise the interest rate.
However, if you take a chance and buy that home “subject to” its mortgage, you can take over the payments at the current reasonable 7.75 percent interest rate.
Presuming the mortgage has a due-on-sale clause, as most mortgages do, the lender might demand payment in full. If that happens, you should be prepared to either refinance elsewhere or negotiate with the current lender to pay a higher interest rate, plus a loan fee, just as if you assumed the mortgage.
Many buyers gladly take on the risk of buying homes “subject to” the existing mortgage. I’ve bought and sold properties that way for many years. Only once, during the early 1980s when interest rates were sky-high, did a mortgage lender cause me trouble, but I refinanced with another lender.
Either way, be sure you make the mortgage payments on time and don’t cause the lender any hassle. After a few years, the lender probably won’t bother you.
Q–Recently, you wrote about living trust advantages. My mother has a living trust; however, if she gets sick and has to go to a nursing home, she learned she must use up her money before becoming eligible for Medicaid. She is upset because she thought a living trust protects her money, which she wants her heirs to receive. Should she put everything in our names now?
A–A living trust does not avoid estate taxes, nor does it allow a person to qualify for Medicaid. Please remember Medicaid is designed for poor people who have few assets and need financial help from taxpayers. A living trust only avoids probate costs and delays for the deceased’s heirs.
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Have a question about real estate? You can write to Robert Bruss in care of Tribune Real Estate Features Service, 435 N. Michigan Ave., Suite 1400, Chicago, IL 60611. Answers will be provided only through the column. Please note that laws vary from state to state and area to area. Consult an attorney for specific legal advice.
The new Robert Bruss special report “How to Use Leverage to Buy Your Home or Investment Property for Nothing Down” is available for $4 from Robert Bruss, 251 Park Rd., Burlingame, CA 94010.
