You Must Read Our Newsletter for the Latest Deals

In addition to being realtors we are also mortgage consultants and work directly with wholesale lenders. This is one tier up from a mortgage broker who often gets their loans from us.

No Money Down

There are still people who believe that they will start their real estate empire with a no-money down approach. If you have good credit, you can build a spec home with a construction to perm loan with very little out of pocket cash. The no money down techniques are difficult to put into practice and will get you into trouble. But for about the same amount of money you will waste on seminars, CD's and coaching you could build a $300,000 home and possibly flip it in a year or so for about $350K. Our investors do it all the time. Its really not a big deal.

There are many lenders that will loan out 95% on new construction. We have 95% construction loans with adjustable rates as low as 1%. It takes some money and a financial reserve to make money in real estate. But, you don't have to be rich.

Can I Use My Own Mortgage Broker?

Yes, of course you can. However, your mortgage broker will not be able to build a $300,000 home with a total out of pocket of $4500. So, if you use your broker, you will come out of pocket with a lot more money. Also, the 100% financed loans involve two separate transactions that must be brought together (lot and house) and it must close in less than 60 days. So far, I have not found anyone else who could do them. So, your mortgage broker might be very nice but there is no reason for you to lose money because of it.

If you are going to make your investment your primary residence, you can get 100% financing. You will not need any money down. If you live in it for two years and then sell it, you will not pay a dime in taxes on the gain. The first $250,000 of gain will be exempt if you are single and the first $500,000 if you are married.

Mortgage Brokers - The good, the bad and the ugly

Most of the mortgage brokers I have met were honest, knowledgeable professionals. However, the ease with which an unsuspecting, uninformed consumer can be cheated has drawn a number of less than honorable individuals into the mortgage business. We provide guidance in this area for our clients. But, you are of course free to go anywhere you want for financing.

An unscrupulous mortgage broker can help you buy a house you can't afford and will be only too happy to take it off your hands down the road when the bank is on the verge of foreclosing.

I know a very successful real estate investor who finds more distressed owners than you could ever dream of. His secret - he is a mortgage broker who will be only too happy to put you into a house you can't afford, help you finance a rehab you will get killed on or continue to refinance your property until there is no equity left and you are about to lose it all. Then he comes in for the kill.

As much as I would like to sell you a home or provide a mortgage, I will turn you away if I think that you are biting off more than you can handle. I do not need the commission that bad. I know many of you want to get into real estate investing. Just be careful about how much debt you are assuming. Without a reserve of capital, you could lose it all.

Some Tips on Mortgages

Construction to Perm Loans

We get involved with a lot of spec home building. It is a great way to get into real estate investing and make an excellent profit on a relatively low up-front investment. Currently, we have a lender who will offer 95 - 100% financing to individuals with good credit. Needless to say, this is a no-brainer. They use a construction to perm loan. This means they use a single combination loan, where the construction loan becomes permanent at the end of the construction period.

Construction loans usually run for 6 months to a year and carry an adjustable interest rate that resets monthly or quarterly. In addition to points and closing costs, lenders charge a construction fee to cover their costs in administering the loan. (Construction lenders pay out the loan in stages and must monitor the progress of construction).

When the construction is complete, the loan can convert to a short term ARM so you can keep your payments low until you sell the property.

Adjustable Rate Mortgages (ARM)

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make this decision on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage, for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off where you get a lower rate with an ARM in exchange for assuming more risk.

Since I usually deal with real estate investors, the ARM makes a lot of sense. It means minimum out of pocket while you rent out a new home for a year to grab additional appreciation and favored tax status.

The Index

Indexes are pegged to overall interest rates. Your best choice is an adjustable mortgage that uses an index with relatively low volatility, which means the one that is least vulnerable to frequent or major swings in interest rates. Also, the longer the term of the index, the more the borrower is protected from short-term interest rate fluctuations. For example, an ARM with a six-month U.S. Treasury bill index is more volatile than one with a one-year index. Federal Cost of Funds or the 11th District Cost of Funds indexes (known as COFIs) are considered the least volatile. Other popular indexes include Treasury securities (known as T-bills) and LIBOR (the London Interbank Offer Rate).

Discounts

Some lenders offer initial ARM rates that are lower than the sum of the index and the margin. Such rates, called discounted rates, are often combined with large initial loan fees ("points") and with much higher interest rates after the discount expires.

Very large discounts are often arranged by the seller. The seller pays an amount to the lender so the lender can give you a lower rate and lower payments early in the mortgage term. This arrangement is referred to as a "seller buydown." The seller may increase the sales price of the home to cover the cost of the buydown.

A lender may use a low initial rate to decide whether to approve your loan, based on your ability to afford it. You should be careful to consider whether you will be able to afford payments in later years when the discount expires and the rate is adjusted.

But don't forget that with a discounted ARM, your low initial payment will probably not remain low for long, and that any savings during the discount period may be made up during the life of the mortgage or be included in the price of the house.

Summary

If you are an investor and will be out of the house in less than 5 years, an adjustable rate mortgage can work out very well for you. If you plan to be there longer, there are many other techniques you can use to keep your payments low.

If you want to really learn a lot about mortgages, give me a call. I will help you find the best loan for whatever your purpose is.

Martin Unger
Real Estate Investments

- Pre-Construction
- Spec Homes
- Condos
- New Homes
- Land
- Relocation

954 - 255-5056 (office)
954 - 461-0319 (cell)
775-254-2881 (fax)

(an associate of London Realty Corp)