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Updated 7 months ago,

User Stats

634
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513
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AJ Wong
Agent
#1 Real Estate News & Current Events Contributor
  • Real Estate Broker
  • Oregon & California Coasts
513
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634
Posts

Three alternative creative financing solutions to get a lower mortgage rate

AJ Wong
Agent
#1 Real Estate News & Current Events Contributor
  • Real Estate Broker
  • Oregon & California Coasts
Posted

Historically, residential US mortgage rates are near their long term averages. I remember in 2003 when rates were in the 5-6-7% range, albeit with more aggressive mortgage terms available to almost any and all borrowers. The challenge for present day investors is with elevated mortgage rates and record high housing prices, the carrying costs and incentive to invest now can be restrictive. 

Here are three creative financing solutions to offset of improve investment attractiveness and returns:

- Assumable mortgages. For those with higher capital reserves and down payment percentage, assuming a pandemic era mortgage (typically from 2-3-4% can dramatically reduce carrying or mortgage costs. The primary hurdle for investors is that most homes have appreciated significantly during the past 3- years and the difference in the current mortgage balance and purchase price is required as a cash down payment. For example: $650k sales price with an assumable mortgage balance of $350k, the new borrower would require a down payment of $200k plus closings costs. 

- Seller carried financing or seller 'carry back.' Although infrequently an option, often in Oregon sellers have a low cost base and a zero or smaller existing mortgage balance. Occasionally this presents investors with an opportunity to avoid a formal mortgage qualification process and obtain their mortgage privately from the seller(s) directly. Typically the duration of private mortgage notes is for 2-3-5 years with a ballon payment (full note balance minus any principal payments) due at the end of the term. Often borrowers can obtain lower than market rates or more flexible terms such as interest only for the initial fixed period. An example of a recent seller carried transaction was a $335k purchase with $35k down payment $300k loan amount at 5% interest only on a 3 year ballon. This means the buyer has a monthly interest payment of $1250/mo for the next 36 months and would need to refinance the balance at (or before) the end of the 36 months term. Comparatively a conventional mortgage of $300k @ 6.75% P&I would equal a monthly payment of $1945 with approximately $10,275 TOTAL paid towards principal during the first three years. 

- Close Cash & Refinance. Borrowers with higher capital reserves or equity in other properties could explore an all cash purchase. Cash offers are usually more competitive and provide investors with slightly more room to negotiate on listing price. Although cash out refinances or second liens typically carry a higher rate of interest, the advantages of a lower LTV purchase can greatly reduce the qualifying interest rate. Investors will want to assess and analyze the combined/blended interest rate and payments compared to conventional purchase financing. Very well qualified borrowers can often obtain favorable terms from their existing banking relationship and sometimes even borrow against non-real estate related capital assets such as money market, life insurance or investment accounts. There is also the strategic advantage of offers that do not require an appraisal or can close more expeditiously. A recent example includes a competitive condo closing. The options were a higher LTV conventional mortgage or a 35% cash out refinance on a free and clear SFR and a 50% LTV conventional first mortgage on the condo purchase. The lower LTV for the acquisition qualified for a significantly lower rate that allowed the borrower to reduce the amortization to 20 years. The new second mortgage on the subject property was also below the proposed qualifying rate on the higher LTV subject purchase. The net blended or payments were comparable (to a single 1st mortgage) but the net interest paid is nearly 20% lower over the duration of the loans.

For borrowers or investors interested in properties that sellers will not carry or without an assumable loan or accessible reserves, my suggestions would be to try and secure a seller concession towards closings costs or an interest rate buy-down. Many lenders will offer a seller paid contribution that can be utilized as prepaid interest to reduce the borrowers initial interest rate by 3-2-1% over the first few years of the loan. The difference in interest due between the qualifying mortgage rate and the introductory rate is effectively rolled into the loan. In other words, the interest is paid (upfront) and financed but the borrowers payment is reduced proportionally. A $10k price reduction usually equates to around $35-50 in monthly savings (on a $250-300k loan amount) but a $10K interest rate buy-down can reduced monthly installments by $250/mo or more on a   

What are you seeing in your portfolio or real estate/mortgage business? Any creative stories or solutions of creative financing in 2024?

  • AJ Wong
  • 541-800-0455
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Fathom Realty
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