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Q. We have an interest-only mortgage at 5% interest with a balance of $900,000. We also have a home equity loan at 8.25% with a balance of $125,000. Our home was appraised at $1,125,000 in July of 2005. Our goal is to have just one loan with one mortgage company at a fixed rate without changing our monthly payment too much. Is this possible?
A. It will be very hard because you’ve been enjoying a below-market interest rate and an interest-only loan.
Assuming you’re paying only the interest charges for both loans, our calculation show your monthly payments must be about $4,610 -- $3,750 on the primary mortgage and $860 on the HELOC.
Looking at our mortgage tables we found a million-dollar, 30-year, fixed-rate loan in your area for a very reasonable 6.125%. Yes, a few lenders offered slightly lower rates, but they wanted as much as $7,000 in fees. This loan charged only $625 in fees and looked like the best deal to us.
Borrowing $1,025,000 at 6.125% over 30 years would cost $6,228 a month – $5,232 in interest and $996 to begin repaying the principal for your first payment.
That’s a hefty $1,618 more than you’re paying now. But we doubt you’ll find a fixed-rate loan for much less than that they’ll all require you to begin paying back the principal.
An alternative is to refinance with an adjustable rate mortgage. We found an ARM with a three-year initial rate of 5.5% that would charge about $3,000 in fees. But the monthly payments would still be $5,819, or about $1,200 more than you’re spending now.
If you don’t have mortgage insurance now, a new loan will almost certainly require you to buy it until you build 20% equity in your home. Mortgage insurance, which protects the lender in case you default, typically costs $40 to $60 a month for every $100,000 you borrow. That would add another $400 to $600 to each payment.
Q. Is there an FHA loan that would allow a college student, my son, to get into a house if we co-signed the loan agreement? He has three school loans totaling $16,000 that are deferred until July, 2008. He was in a credit counseling program for about nine months but paid all of that off about nine months ago. He has a good payment record with his apartment and a small guaranteed credit card that he has paid on time. He will not be employed while in school. Our credit scores (parents) are 781.
A. What you're looking for is covered under a little-used and not well-known paragraph in the FHA rule book. Here's what a Department of Housing and Urban Development spokesman in Washington told us:
"HUD does not have a 'kiddie condo' program per se. Nevertheless, as the text from our mortgage credit handbook will attest, parents may indeed buy a house near campus with their college-aged children. The child doesn't have to have a job but must sign the mortgage and the note and, of course, occupy the property at least during the school year."
HUD's rules says that two or more people can get an agency-backed loan even if one or more them will not be living in it as long as all the borrowers are "related by blood, marriage or law (spouses, parent-child, siblings, stepchildren, aunts-uncles/nieces-nephews, etc.)." Even if the borrowers are not related by blood, they can still qualify for it as long as they "can document evidence of a family-type, longstanding, and substantial relationship not arising out of the loan transaction."
The house itself must be FHA approved and the usual down payment is 3%, with closing costs on top of that.
Just because HUD will guarantee the loan doesn’t mean that every lender who deals with FHA loans will give you one.
Lenders tend to specialize. It is cheaper and safer that way. As soon as you add a complication or something new and different to the mix – such as the lack of an income for one of the co-signers – you are breaking routine and creating potential confusion. People will also have to spend more time assembling and underwriting the loan package, which adds to the actual cost of producing the loan and reduces the profit. And, as we all know, there is more of a tendency for people to make mistakes when doing something that is not part of their established routine.
One lender who specializes in FHA loans suggested to us that the simplest thing for you to do is just buy the house and have the child's name added to the deed. The problem with that is that the new condo would have to be treated as either a second home or investment property, both of which mean a higher interest rate.
And your son would not get any credit on his credit report for "making" his payments on time.
Even though it might not be as simple, you'd probably be better off getting a kiddie condo loan. That way the home would be considered owner-occupied and qualify for an owner-occupied interest rate.
An Internet search for "kiddie condo mortgages" produced a number of companies that offer them.
And while you'll be making the mortgage payments, you'll also be buying your son a better credit rating since he'll be a co-borrower. (Assuming you don't miss any payments, of course. If you do, then his credit and your credit will suffer.)
Finally, be aware that this kind of loan creates all sorts of tax issues. You are entitled to deduct the mortgage interest from two homes. If you do own more than two, however, you can choose which two to deduct the interest on.
Will anyone other than your son be living there? If they are, will they be paying rent? To whom? Do you have to report that rent as income? Who reports it? You or your son? Could problems develop if it is not reported? Can you rent it out when school is out for the summer? If you do, does it become "rental property" at that point? Who collects and reports that money?
These are all questions you need to discuss with your tax preparer.
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