Ask the seller and lender to cooperate with a refi blend

Some years back, Patrick O'Brien had his home up for sale. His listing price was $110,000. He owed around $72,300 on his old mortgage, which carried an interest rate of 7 percent. Mortgage interest rates at that time were 12.5 percent. These high market rates discouraged buyers who would have liked to buy Patrick's home but couldn't qualify for new financing. To solve this problem, Patrick talked to his mortgage lender. He persuaded the firm to refinance his home with an assumable fixed-rate mortgage of $88,000 at an interest rate of 10 percent. In effect, this 10 percent rate blended the seller's existing interest rate of 7 percent with the then-current market rate of 12.5 percent.

The mortgage lender profited because it got the old money-losing 7 percent mortgage off its books. Patrick (the seller) gained because he could now offer his property to prospective buyers with attractive (relatively speaking) financing. At 12.5 percent, an $88,000 mortgage requires a payment of $939 per month. At a rate of 10 percent, an $88,000 mortgage requires a payment of $772 per month. Three weeks after his blended refinance, Patrick sold his property for $112,000. With their income of $35,000 a year, the buyers easily qualified to assume Patrick's mortgage. At the then-current rate of 12.5 percent, the buyers would have needed an income of $40,000 or more in order to qualify.

In some future climate of high interest rates, find a seller like Patrick who has a low-interest mortgage that's nonassumable; approach the lender and try to negotiate a refi blend. It's another way to beat the affordabil-ity problem in times when mortgage interest rates have risen. Or switch perspectives—if in some future period of high interest rates when you're the seller who holds a below-market mortgage, you could approach your lender as did Patrick. This technique works best with portfolio lenders.

Lenders (or mortgage servicing companies) who have sold their mortgages into the secondary market may not be able to modify rate or terms-depending upon the security agreements that apply to the relevant secu-ritized mortgage pool. Still, you can inquire.

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