Creative Financing

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Creative Financing

Published by sam - 05/09/07 - 04:09:19 am

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Creative financing, which differs radically from the conventional types of home financing, tends to become popular when there are high interest rates, high housing prices, a recession, or a population shift and potential buyers cannot afford housing or potential sellers cannot find buyers. In such situations, creative financing, although hazardous, may be the only route to home ownership. When interest rates and the housing market are normal, it is wise to avoid this option.

Creative financing is available in the four distinct forms describes below, all of them in one way or another linked to change in interest rates or property values. They promise the borrower some very attractive advantages if interest rates should fall or housing prices should rise. But, unfortunately, interest rates are almost completely unpredictable over the long term, and the value of a specific community may, for a variety of reasons, fall sharply even though housing in general is appreciating steadily.

For these reasons, instead of optimistically assuming that the conditions governing both interest costs and housing values will worst-case scenario when considering creative financing. This kind far safer—or that current market conditions make the purchase of a home simply not feasible.

Graduated Payment Mortgages Graduated payment mortgages enable you to buy a house sooner than you can afford to by making the monthly payments low at the outset and increasing them gradually for five to ten years before stabilizing them at the higher level.

The rationale behind the mortgages is that your income will rise during this period and thus make the increasingly higher payments affordable. But if, in fact, your income does not rise, you are still faced with payments that inexorably increase. Because payments are low at the outset, the total interest cost will also be higher than with a traditional mortgage.

If you are anticipating a gradually rising income, you would be wiser to choose a conventional fixed rate mortgage with a prepayment clause. Under this arrangement, you can, if you wish, use that additional income to prepay the principal but you retain in a comfortable level of monthly payments and the freedom to spend or invest your income in other ways.

Graduate-Equity Mortgages Like a graduated payments mortgage, the graduated equity mortgage involves a steady increase in the size of the monthly payment. Under this arrangement, however payments begin at the level of a conventional fixed rate 30 year mortgage and the payment increments are applied against principal. As a result, your equity in the home increases more rapidly, total interest cost is lower, and the mortgage is paid off sooner than would be the case with the conventional mortgage. In addition, because the term of the mortgage is shorter, banks tend to charge an interest rate somewhat below that charged for conventional mortgages.

This kind of mortgage is advantageous only if income arises at a rate sufficient to meet the increasing payments. Although the increases in mortgage payments are automatic and predictable, however increases in your earnings are not. Here, too, a conventional mortgage with a prepayment clause offers you much greater flexibility.

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