Timing the Real Estate Market by Craig Hall;Craig Hall

Author:Craig Hall;Craig Hall [Craig Hall;Craig Hall]
Language: eng
Format: epub
Published: 2008-06-23T18:05:00+00:00

Lenders do not negotiate readily and will often take the "Here is what I'm willing to do-take it or leave it!" approach.

If you're obtaining new financing, the seller needs to understand that after 60 or 90 days of applying for financing, if none has been secured as expected, you have a right to get your deposit or earnest money back and exit the purchase agreement. Make sure to include this provision that protects your earnest money if financing is not obtained.

Understanding Financing

No matter who your ultimate financing provider is, there are certain aspects of loans you should consider. Some of the most important include the following:

1. Fixed Interest Rates vs. Floating Interest Rates. You can borrow money with either a fixed interest rate or an interest rate that changes (or floats). Fixed interest rates tend to be higher than floating rates. The advantages are that the interest rate doesn't change over the term of the loan, so you have assurance of what's required for budgetary purposes. It is usually beneficial to obtain fixed interest rates when you believe that rates are rising or seem quite attractive. Floating interest rates are best when you anticipate that rates will decline over time. These floating interest rates require you to be flexible with regard to interest payment expectations. Floating-rate loans generally have considerably lower rates than fixed-rate loans. These rates float, or change, over the loan's term every 30, 60, or 90 days, or whatever the agreement is between lender and borrower. Usually these floating-rate loans have low or no prepayment penalties, in contrast with fixed-rate loans, which can have substantial prepayment penalties.

2. Amortization. Amortization is the process of gradually paying down a loan's principal until it is paid in full. Typically in the loan's early years, more of each payment is allocated to pay off the interest than the principal. In later years, more principal and less interest are paid. Often loans do not fully amortize, but have a required earlier payoff. For example, you might have a fixed interest rate for 10 years, even though the property has a 25-year amortization schedule. Because the loan term is only 10 years, at the end of the term you would have paid off only a portion of the principal, with the balance being due as a "balloon payment." This is a common lending practice and, in many cases, the balloon payment is subsequently refinanced.

3. Length of Loan. The length of your loan can also vary considerably. Many are in the five- to 10-year time frame. When rates are low, we generally try to obtain financing for 10 years or longer. When we think rates are high and might be on the way down, we try to get five-year financing. The truth is none of us really know where interest rates are going and making these projections is not easy. Unfortunately, educated guesses about interest rate movement can be critical to your overall profits in real estate. Within your real estate portfolio, it is advisable to have a variety of loan lengths.

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