Bridge the assumable gap with a seller second

Let's return to the preceding example. Say that Patrick's pre-blend $72,300 mortgage could be assumed. Qualified buyers could take advantage of that low 7 percent interest rate, but with a price of around $110,000 the buyers would have needed close to $40,000 cash to pay Patrick enough to cover his high amount of equity. Many buyers would find it tough to raise $40,000.

As another possibility, Patrick (or a mortgage lender) could finance some or all of that $40,000 as a second mortgage. For instance, if the buyers had $20,000 cash, they could offer Patrick a price of $110,000 to be paid as follows: $72,300 mortgage assumption; $20,000 in cash; and a seller-second mortgage of $17,700.

The question becomes, "What interest rate and repayment schedule will apply to this $17,700 second mortgage?" The answer: whatever terms the buyer and seller negotiate. No hard and fast rules. I have seen second mortgages with interest rates as low as 6 percent and others as high as 16 percent. Sometimes a second mortgage is paid back in monthly payments over a period of three years or less. Sometimes it is structured over a term of 15 to 20 years. The terms of a second mortgage typically evolve according to what you can afford and what the sellers can be persuaded to accept.

Just remember, a second mortgage can move you closer to affordability. Or if you are an investor, it increases leverage and ideally magnifies your return on the cash you have invested in the property. Use it when you need to cover the gap between the available first-mortgage financing (assumed or newly originated) and your property's purchase price. Recall, too, that it sometimes pays to use a second mortgage along with new financing to keep the loan-to-value ratio of your first mortgage at or below 80 percent. With a less than 80 percent loan-to-value ratio, the lender isn't likely to require private mortgage insurance.

0 0

Post a comment