Q–I know you advocate buying a home with the largest available mortgage. Would that still be your advice to a middle-age couple who can afford to pay cash? We just sold our old home and are looking for a larger one. I received a large company bonus for 1996 sales. We would like to own our home without a mortgage, but then we wouldn’t have tax deductions. Should we get a big mortgage?
A–Yes. Please don’t put all your eggs in one basket. Save your cash for emergencies and investments. A 20 or 25 percent down payment and 80 or 75 percent mortgage is ideal for your situation.
In addition to the income tax deduction for mortgage interest, you’ll enjoy leverage advantages too. With mortgage interest rates so affordable today, you’ll be missing a great opportunity if you don’t finance your home purchase.
Q–I plan to buy a home in the next six months. I asked a Realtor if I needed a lawyer and she said no. But I’m afraid I might get swindled. Other than looking in the Yellow Pages, how can I find a real estate lawyer?
A–As an attorney, I agree most home buyers don’t need a real estate attorney. But if you feel you need one, the best way to find an attorney who specializes in real estate is to phone the local Association of Realtors to get the name of their attorney.
He or she is usually an excellent realty attorney. If that person is too busy, ask for a referral to another real estate attorney in the community.
Q–We want to refinance our home loans to combine first and second mortgages into one mortgage at a lower interest rate. But we’re very confused as to the best place to borrow.
We contacted our current first-mortgage lender, a big, impersonal bank, and were very badly treated, so we definitely will not refinance there. A friend told us mortgage bankers are the best source of home loans, but I see newspaper ads for mortgage brokers. We don’t necessarily need the lowest interest rate, but we want minimum refinance hassle. Are mortgage brokers or mortgage bankers our best source?
A–Banks and S&Ls used to have the home mortgage market virtually to themselves. But in the last 10 years, mortgage brokers and mortgage bankers have become the primary originators of home loans. The result is that home loans are far more widely available than ever before.
Mortgage bankers originate home loans with their own funds (which are often borrowed). They then usually sell these loans in the secondary mortgage market to Fannie Mae, Freddie Mac and other investors. But borrowers often don’t know their mortgages were sold because the mortgage banker almost always continues servicing the loan.
Mortgage brokers, however, are middlemen between lenders and borrowers. They don’t loan their own funds. Instead, they have contacts with dozens of lenders. They “shop” borrower loan applications to match the borrower with the best available mortgage terms. Mortgage brokers earn their fees from both borrower loan fees and lender payments.
Banks and S&Ls still make direct loans to borrowers. But many prefer to originate loans through mortgage brokers, who assemble the loan packages at lower costs than direct lenders can. It usually costs no more to borrow through a mortgage broker than to go direct to the lender.
Compare the best mortgage offerings of mortgage bankers and brokers. Recommendations to experienced and honest mortgage brokers should be valued highly. They can often arrange otherwise impossible loans, especially if your credit is less than perfect. But beware of mortgage brokers who make promises they can’t deliver.
Q–I am the process of trying to buy a home, but I find some of the realty agents I encounter at the Sunday afternoon open houses to be major obstacles. They have such negative attitudes when I tell them I have only a 10 percent down payment. Aren’t realty agents supposed to help buyers? I’ve only been looking at homes for about a month, but I’m really turned off by some of the hostile agents I’ve met.
A–Please be aware the realty agents you met at those Sunday afternoon open houses represent the sellers. They can also represent you as a “dual agent,” but they are primarily looking out for their seller clients.
I suggest you find a “buyer’s agent” to represent you. But I do not recommend you sign a formal contract, just in case you later decide the agent isn’t right for you.
By the way, I very strongly recommend you get preapproved for a 90 percent mortgage. A local bank, mortgage broker or mortgage banker can arrange your written preapproval. Then you will be in a strong position to buy a home and should be warmly welcomed when you visit a Sunday open house.
Q–We own rental property in Southern California that we would like to exchange for rentals near our new home using the “Starker exchange” law you mentioned several times. But we cannot find a local bank to handle the funds. How should we go about this?
A–Internal Revenue Code 1031(a)(3) authorizes Starker delayed tax-deferred exchanges. The first step is to find a buyer for your rental property. Then have an attorney prepare an exchange agreement.
Many bank trust departments now specialize in holding Starker exchange sales proceeds beyond your constructive receipt. Some title insurance companies also now have Starker exchange subsidiaries.
Your next step is to designate, within 45 days after the sale closes, the “like kind” property you want to buy with the sales proceeds. You then have 180 days following the sale date to complete the tax-deferred acquisition.
Details are in my special report “How to Profit from Starker Tax-Deferred Exchanges” available for $4 from Robert Bruss, 251 Park Rd., Burlingame, Calif. 94010.
