We are providing the following information in an effort to help you better understand the most common methods of financing your property.

Cash Purchase

This is obviously the quickest and easiest method of making a real estate purchase. We advise that you discuss an all cash offer with your tax advisor.

Fixed Rate Mortgage (FRM)

Fixed Rate Mortgages are sold with the interest rate fixed for the length of the loan. They are commonly sold in 10, 15, 20, 25, and 30 year terms, though some lenders are beginning to stretch out the terms to 40 and even 50 years. As a general rule, longer term loans are sold at higher interest rates when compared to shorter term, but they also have lower monthly payments. FRMs are typically sold at higher interest rates than ARMs, as mortgage lenders must account for the unpredictable costs of interest rate changes over the life of the loan.

Advantages of a Fixed Rate Mortgage:

• Monthly mortgage payments are predictable and stable.
• An FRM is less risky in the event market conditions cause interest rates to rise.
• With a FRM, you have locked in your interest rate for the life of the loan.

Disadvantages of a Fixed Rate Mortgage:

• Usually FRMs are offered at a higher interest rate compared to an ARM.
• The mortgage rate is fixed at time of the mortgage, therefore if interest rates drop, the borrower needs to refinance the loan in order to take advantage of lower current rates.

Appropriate Scenarios to Choose a Fixed Rate Mortgage:

• You plan to stay in the home you've purchased for a long time.
• You feel you have a competitive interest rate and therefore you want to keep it for the length of your loan.
• You prefer the security of a fixed payment versus a payment that may change periodically.
• If you want to pay off your mortgage before your children go to college or upon your retirement, a 15 or 20 year FRM will allow you to build equity more quickly, freeing up future income.

Adjustable Rate Mortgage (ARM)

There are a wide variety of ARMs available. ARMs are often sold with an initial interest rate, guaranteed for a pre-specified period of time, after which the interest rate will adjust to reflect market conditions and continue to adjust at pre-specified intervals. They are commonly sold in 1/1, 3/1, 5/1, 7/1, and 10/1 terms. For example, if you purchased a 5/1 ARM, your initial interest rate is guaranteed for five years, after which, your interest rate will adjust and would continue to adjust every year over the course of the loan. ARMs are typically sold with "caps" and "floors" that limit the maximum adjustments as well as establish maximum and minimum interest rates over the life of the loan.

Advantages of an Adjustable Rate Mortgage:

• Lower initial monthly payments
• Lower cost for short-term ownership
• Easier qualification for larger loan amounts

Disadvantages of an Adjustable Rate Mortgage:

• Potentially higher future mortgage payments if interest rates rise
• Future mortgage payment amounts aren't as predictable

Appropriate Scenarios to Choose an Adjustable Rate Mortgage:

• You plan to sell or refinance within a few years
• You are comfortable with less predictable mortgage payments that periodically adjust to reflect interest rates

Interest-Only Mortgages

Interest-Only loans require that you pay only the monthly interest on the mortgage for a fixed term. After that term (usually five to seven years), you may choose to refinance, pay the loan balance in a lump sum, or start paying off the principal, in which case the payments jump skyward. The most common stereotype of a borrower of interest-only loans is an executive whose main income is from bonuses once or twice a year. Any monthly income provides for the lowest possible monthly payments during lean months, yet allows paying off large amounts of principal when bonus time rolls around.

It is simple to compute an interest only payment. Take the unpaid loan balance and multiply it by the interest rate. Divide that number by 12 and you have your monthly interest payment. For example; $200,000 unpaid loan balance/6.5% interest rate = $13,000 of interest divided by 12 months = $1,083 monthly payment.

An Interest-Only Loan might be a good fit if:

Your income is in the form of irregular commissions or bonuses. You expect to earn a lot more in a few years and you plan to invest the savings on the difference between interest-only loans and an amortizing mortgage (and you're confident that the investments will appreciate).

Bridge Loan

As the term implies, these loans "bridge the gap" between times when financing is needed when selling one property and purchasing another. You will also see this term used when a lot loan is converted over to a construction loan in order to complete construction of your home. Other terms you may hear used are "interim financing", "gap financing" or a "swing loan".

Home Equity Line of Credit

A Home Equity Line of Credit gives you access to the equity in your home if you own your home and its value has appreciated over the years. This type of financing acts as a revolving personal line of credit, allowing you to withdraw only what you need, when you need it. The best thing about this type of loan is you only pay interest on the funds you use. A Home Equity Line of Credit can be used for almost any reason from financing your pre-construction costs to applying the funds towards a down payment on a real estate lot for future construction of your dream home.

Home Equity Loan

The simple definition of a home equity loan is a loan based on the current market value of a home minus the outstanding mortgage balance. Home equity is essentially the amount of ownership that has been built by the holder of the mortgage through payments and appreciation. Typically, residential property is bought through a mortgage, which is then paid off over a number of years. After the mortgage has been fully repaid, the property then belongs to the mortgagor, namely the buyer. In the interim, however, the buyer simply builds up equity in the property. This is what a home equity loan borrows against. With tax-deductible interest, the ability to borrow up to 125% of the value of your home at interest rates that are typically much lower than other forms of consumer credit, makes using your home's equity a viable way to borrow money. And as mentioned, there can be tax advantages to using your home's equity to finance a purchase. Again, we recommend you check with your tax advisor.

Self-Directed IRA

A self-directed IRA is another vehicle you can use to purchase investment property. Using a self-directed IRA Administrator, you can make purchases of almost any type of real estate as long as it is not for personal or family use. You can leverage your self-directed IRA if the loan is non-recourse and the property generates cash flow. Otherwise, an IRA property purchase must be an all cash purchase. You can partner your self-directed IRA with other self-directed IRA owners such as a spouse. Your self-directed IRA is responsible for paying all expenses associated with the property, such as property taxes and dues. The Schaffer Realty Group works with an administrator that we recommend who is versed in self directed IRA purchases of real estate. Please refer to the "Partners" Page for a reference in setting up a self-directed IRA.

Construction-to-Permanent Loan

This loan method is really two loans in one. Unlike buying an existing home, financing the building of a new home includes a construction phase and the period of time your new home is being built. Once construction is complete, a permanent mortgage is needed. Usually Construction-to-Permanent Loans include a "one-time" qualification and closing process. Also, during construction, most Construction-to-Permanent Loans will establish an account that is established to pay the estimated interest costs during the construction of your home. This way, no monthly payments are being paid by you unless the interest reserve account is depleted before completion of your home.

Financial Considerations if Purchasing Rental Property

If you are planning to rent your second home, lenders will consider the property investment property rather than a vacation home. In this case, you may need to factor in an additional one and half points in interest rate costs as well as a minimum of a 20% down payment. If you are planning to rent the property when you are not using it, it is important to get comparative rental income. The mortgage lender uses this to determine how much they are willing to lend you, often up to 80 % of the rental income stream. In short, while renting your property is an attractive option, there are definite differences in financing a vacation home versus financing a rental/investment property. Remember to factor in the tax benefits of the second home. Mortgage interest is deductible up to $1 million on first and second homes. Keep that in mind if you are considering turning a second home into a vacation rental, you will forfeit the mortgage interest deductibility of up to $1 million between your first and second home because your second home is now considered a vacation rental. Also, if you rent your vacation home out for only a short time (15 days), there is no tax on the rental income.

The Schaffer Realty Group works with our clients taking into account all these issues when buying property in order to help our clients make the best decision for their individual situation. We also advise our clients to seek counsel from their tax advisor during the purchasing process. We are happy to work in conjunction with our clients' tax advisors as the end result is our clients are well informed and guided on their property purchase.