Many Parents Buying Condos for Students
By Associated Press
Mon March 12, 10:48 PM
NEW YORK - Robert Katz of Palm Beach is taking an unusual real-estate gamble: He's betting his 10-year-old, tennis-playing son will want to attend college in nearby Boca Raton, Fla., home of tennis champ Andy Roddick.
Katz has snapped up two properties, not yet built, for more than $375,000 apiece. Both are in easy driving distance of the town's two big schools, Lynn and Florida Atlantic universities.
"He would have a really nice place to live, in a safe building, and he'd be able to choose his roommate," Katz said.
More parents are viewing their children's college experience as a way to get on the property ladder. As the real-estate market has taken off, so have parents' interest in off-campus housing. And while most wait to buy until the child's sophomore year, some parents, like Katz, figure the earlier, the better.
Historically low rates and flexible financing have driven the trend in recent years. The National Association of Realtors found last year that 6 percent of investment buyers purchased a second home for use by a child attending school, a figure that equates to about 169,000 properties. The association hadn't asked the question before, so a year-to-year comparison isn't available.
"We just started to hear about it," said Walter Molony, a spokesman for the association.
Many parents would rather buy a condominium or house rather than spend the money on campus housing, which has steadily risen.
For 2004-2005, room and board amounted to $7,434 at four-year private colleges and $6,222 at four-year public colleges, according to the College Board.
The real impetus, though, is diversification of the portfolio, financial planners say. Amid bubble concerns, the college market is perceived as more secure because of the steady flow of incoming students.
Parents can write off mortgage interest and property taxes, and either sell the place at graduation or keep it as a rental property.
"I'm seeing more people intrigued about doing it _ more than ever," said David Gatheridge, general manager of the Wealth Enhancement Group's mortgage division in Minneapolis. "It has a lot to do with the fact that their primary residences have increased so much in value."
Parents of college-bound kids are jumping on the opportunity early, often when their child has just sent in applications, Getheridge said.
In Austin, home of the University of Texas, the heaviest buying season for parents is between April and August, said Mark Orr, manager of Texas lender Colonial National.
More than 48,000 students attend that university. "There's always a demand for housing, and a shortage of rental properties," he said. "Parents find it easier to go in and buy a condominium they can expect to appreciate."
A popular purchase for parents is a two-bedroom, two-bath condo, currently selling for about $185,000. Austin's fast-growing population makes it a hot real-estate market, Orr added.
Not as attractive is the smaller city of College Station, home of Texas A&M, where a two-bedroom, two-bath condo sells for $40,000, he said. Parents would have a hard time renting if they need to hold on to the condo longer than expected, he said.
Nicole Persley of Real Estate of Florida helped Katz find the properties for his 10-year-old son and often works with parents who want to buy condos for the Boca Raton schools and the University of Miami.
"The smartest move is if the parents have two or more college-bound kids at the same college," she said. "It's a no-brainer to buy versus rent or live in a dorm."
There are factors to consider, however. "It's not a get-rich-quick scheme," said Nancy Flint-Budde, a financial planner in Salem, N.Y.
For one, parents should factor in a long holding time in the event of a market dip, she said. Taxes and mortgage interest, while a write-off, may cause a cash-flow crunch.
While renting is an option, some parents might be ill-prepared to be landlords.
Parents might need to hire an agent to manage the property, especially if the condo or house is out of state. Parents also should consult a tax adviser about the differences between treating the property as a second home versus an investment property, she says.
And some question whether buying an apartment is the wisest parental choice. "Imagine getting as a high school graduation gift this stunning apartment in the best part of town," said Rebecca Kiki Weingarten, an education consultant and life coach in New York. "It really skews the whole sense of what it is to be on your own."
"The home you looked at today, and want to think about until tomorrow, is the same home someone else looked at yesterday and is coming back to
HOW DOES PURCHASING A HOME COMPARE WITH RENTING?
Theresa Bralish, Certified Residential Specialist.
The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity. Take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.
Owning a home has many benefits. When you make a payment on your house, you are building equity. And that’s an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities-like insurance, Real Estate taxes, and upkeep-which can be substantial. But given the freedom, stability, and security of owning your home, they are worth it.
"WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?"
Keep in mind that your interest that you pay on your home and Real Estate taxes will likely be deductible. A qualified Real Estate Attorney or Tax professional can give you the most current and correct details on Real Estate tax benefits.
Remodeling: Some Common Sense from Bob Vila
How much should you spend on your brand-new kitchen? The renovation guru tells how to navigate the fine line between comfort and indulgence
Photo Gallery: The Cost of Your Dream Kitchen
With a wealth of enticing high-tech and high-design appliances populating the remodeling market, the urge to indulge in a kitchen that will make you look and feel like a culinary master has never been greater. But before outfitting your space with the latest and greatest, you should carefully weigh what functions you or future owners will find practical against what value you are actually adding to your home.
Ask Bob Vila how much money to invest in your brand-new kitchen and he'll tell you: "Put together a budget for a kitchen remodel, then go to the local real estate broker and ask what you could get for your place…tomorrow. Then have the conversation, 'Does it makes sense for me to put in a $50,000 kitchen?'"
The foremost expert on do-it-yourself remodeling and the longtime host of This Old House and Bob Vila's Home Again, Vila continues to provide info and advice to many folks embarking on large home improvement projects. His Web site, BobVila.com—in its seventh year of operation—hosts a multitude of DIY instructional content, including a video archive of Vila's former shows and a recently developed social network of online DIYers dubbed MyProject.
BUYING LEAP. According to Vila, one of the main factors driving extravagant spending in the remodeling market is borrowed equity: "In the past decade, we've had an economy that allowed many people to pull equity out their homes; consequently, they have had the money to buy the high-end appliances."
A lot of these grand investments are made in haste with the assumption that a valuable, attractive kitchen proportionally boosts resale value and buyer incentive if the house should go on the market some time down the road. In the event that a homeowner invests $40,000 on a high-end kitchen remodel, and then has to sell her home for unexpected reasons, it's possible she might only see $20,000 of her original investment reflected in the closing bid.
Because of this risk factor and others, many choose to upgrade to lower-cost kitchen appliances that still emulate some of the more practical characteristics of their costly counterparts. The Miele MasterChef, a high-speed oven with two compartments, combines high-end functionality with a competitive price tag of $2,349. The model's main competitor, TurboChef's Speedcook Oven, comes on the market for about double that price.
CENTERPIECE STRATEGY. If your lifestyle does demand some of the best in culinary hardware—or if you just can't help from splurging a little—pick the one top-of-the-line appliance you feel will have the most impact on both the kitchen's aesthetic and functionality. In a growing number of remodels done in this country, imported European furnishings like cabinets and counters, though costly, strike a surprising balance between form and function.
"In Germany, people buy cabinets and hang them [on metal bars] to create 'arrays' around a kitchen, and when they move, they can just take them with them," says Vila. "The systems that they've developed are very simple, but very beautiful." Cabinetmakers Allmilmö and Poggenpohl, both based in Germany, distribute these types of cabinets in many parts of the U.S. With a little forethought, homeowners looking to spiff up their living space can achieve that blend of the elegant and practical without breaking the bank.
How to Save for Your First Home As Buying One Gets Tougher
How to Save for Your First Home As Buying One Gets Tougher
By Kelly K. Spors,
Wall Street Journal Online
It's a dream of many young adults to buy a first home. But there's an unfortunate reality: Even buying a "starter home" with today's lofty prices can mean saving tens of thousands of dollars for a down payment.
How do you pull it off? The key, obviously, is to save like crazy. Beyond that, here are several suggestions that may make the path to home ownership a bit easier.
1. Aim for 20% down.
Timothy Wyman of the Center for Financial Planning in Southfield, Mich., says you may be able to get by with putting only 10% of the purchase price down, as long as you are confident your income will remain steady or grow and you plan on keeping the home at least five years.
But Mr. Wyman says buyers should ideally aim to save up 20% or more of the price. The risk of putting down too little: If the home falls in value and you sell at a loss, you'll owe more to the lender than you receive from the buyer.
In addition, many mortgages require buyers who put down less than 20% to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.
Mortgage lender Washington Mutual estimates that a buyer who puts down 5% on a $300,000 home with a 5.88% 30-year fixed-rate mortgage might pay $2,133 a month, including fees and property tax, while a buyer who puts 20% down would likely pay $1,682 a month. (The estimate assumes the 5%-down buyer must pay for mortgage insurance.)
You'll also need extra money set aside on top of the down payment for closing costs such as title insurance and mortgage fees, which can reach up to $5,000. If you want to pay "points" to lower your mortgage rate -- a smart idea for borrowers who expect to stay in a home several years -- you'll want a few thousand dollars more.
To find out the price of local starter homes, so you can estimate what you'll need to save up, you can check out home listings on Realtor.com or compare sales data at Zillow.com.
2. Keep it separate.
Set up a separate account for your down-payment funds, so the money doesn't get intermingled with other savings and so you can keep track of how much you save. This would probably be a taxable account at a bank or brokerage firm.
Mr. Wyman suggests setting up regular automatic deposits from a checking account into the down-payment account to force regular savings. "You want to be moving money to this account before you spend it," he says.
3. Consider your time horizon.
How best to invest down-payment money depends on your time horizon for purchasing a home. Those planning to buy in three years or less should put the money in conservative investments such as short-term certificates of deposit or short-term bond mutual funds to shield themselves from potential market downturns.
If you're waiting at least five years to buy, you can invest more aggressively. A balanced mutual fund that invests in, say, 60% stocks and 40% bonds, such as Vanguard Balanced Index Fund, is a good choice and should perform better over the longer period.
4. Get extra help.
Few first-time buyers pony up the entire down payment on their own. Nearly 23% of first down payments come as gifts from relatives and friends, according to a recent survey by the National Association of Realtors.
While such assistance is great, there are also other places you can look. There are many down-payment assistance programs for first-time buyers that are offered by banks, local governments and charities. Many are open only to low- or moderate-income buyers and some are targeted to specific communities.
Some programs lend buyers a substantial portion of the down payment. For example, the California Housing Finance Agency can provide eligible first-time home buyers in Los Angeles 3% of a home's purchase price as down-payment or closing-cost assistance. The money must be repaid when the buyer sells the home, refinances or pays off the loan.
Many lenders have information about assistance programs that borrowers can seek help from.
5. Clean up your finances.
Your credit history will determine the loan terms and mortgage rates you qualify for. You could be offered a smaller loan or charged a higher rate if a lender is concerned you might not be able to repay.
So before approaching lenders, first-time buyers should give themselves the financial equivalent of a physical exam, says Ellie Deskin, a financial planner in Troy, Mich. This means checking your credit score and credit reports with the three major credit bureaus and fixing any errors. (Consumers can now get one free copy of each report annually by going to Web site annualcreditreport.com.)
Also consider paying down some debt, especially high-interest debt such as credit cards, that might flag you as a riskier borrower.
While some debt is okay, being overloaded will likely tarnish your loan terms.
6. Weigh mortgage tradeoffs.
Lenders increasingly offer creative loans, such as interest-only loans and certain types of adjustable-rate loans, that can reduce your monthly payments -- at least for a while. But these alternative loans can be much riskier than fixed-rate loans, because monthly payments can jump after a few years.
A general rule of thumb is that your monthly mortgage payment shouldn't exceed 28% of your household's gross monthly income. Check out some mortgage calculators at Dinkytown.net to calculate what your monthly payment would be with different types of loans.
7. Hands off retirement savings.
If you're just shy of saving up enough for a home, you might consider taking a small loan from your 401(k) plan or withdrawing some principal from a Roth IRA. But many financial advisers caution against tapping retirement accounts too heavily for a home purchase.
For one thing, you're going to need your retirement stash, so you don't want to gouge it. Taking a loan from your 401(k) can also be risky, since you may have to pay it back if you leave the company. And if you take money out of your Roth, you can't replace it, so you lose some of the Roth's long-term benefit of tax-free earnings.
It's almost impossible to live debt-free; most of us can't pay cash for our homes or our children's college education. But too many of us let debt get out of hand.
Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. That's one factor mortgage bankers consider when assessing the creditworthiness of a potential borrower.
It's far too easy to spend more than you can afford, especially when you pay by credit card. The average American household with at least one credit card carries nearly a $9,000 balance, according to CardWeb.com, and personal bankruptcies have hit record highs in recent years.
Of course, avoiding debt at any cost is not smart, either, if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not, and then wisely managing the money you do borrow.
Good debt includes anything you need but can't afford to pay for upfront without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.
Bad debt includes debt you've taken on for things you don't need and can't afford (that trip to Bora Bora, for instance). The worst form of debt is credit card debt, since it carries the highest interest rates.
Sometimes the decision to borrow doesn't hinge on how much cash you have, but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense.
Debt is not always a bad thing. In fact, there are instances where the leveraging power of a loan actually helps put you in a better overall financial position.
Buying a home: The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the less you'll pay in interest over time.
Although it may seem logical to plunk down every available dime to cut your interest payments, it's not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning.
Also, don't pour all your cash into a home if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate, you can always refinance later if rates fall.
A 20 percent down payment is traditional and may help buyers get the best mortgage deals although that's become less of a truism as the housing market has boomed along with the mortgage lending market. Many home buyers do put down less - as little as 3 percent in some cases. But if you do, you'll end up paying higher monthly mortgage bills because you're borrowing more money and you will have to pay for primary mortgage insurance (PMI), which protects the lender in the event you default.
Paying for college: When it comes to paying for your children's education, allowing your kids to take loans makes far more sense than liquidating or borrowing against your retirement fund. That's because your kids have plenty of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. What's more, a big 401(k) balance won't count against you if you apply for financial aid since retirement savings are not counted as available assets.
It's also unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.
Your best bet is to save what you can for your kids' education without compromising your own financial health. Then let your kids borrow what you can't provide, especially if they are eligible for a government-backed Perkins or Stafford Loans, which are based on need. Such loans have guaranteed low rates; no interest payments are due until after graduation; and interest paid is tax deductible under certain circumstances.
Financing a car: Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it off the lot. It also depends on how much cash you have on hand.
If you can pay for the car outright, it makes sense to do so if you plan to keep the car until it dies or for longer than the term of a high-interest car loan or pricey lease. It's also smart to use cash if that money is unlikely to earn more invested than what you would pay in loan interest.
Most people, however, can't afford to put down 100 percent. So the goal is to put down as much as possible without jeopardizing your other financial goals and emergency fund. Typically you won't be able to get a car loan without putting down at least 10 percent. A loan makes most sense if you want to buy a new car and plan to keep driving it long after your loan payments have stopped.
You may be tempted to use a home equity loan when buying a car because you're likely to get a lower interest rate than you would on an auto loan and the interest is tax deductible. But before going this route, make sure you can afford the payments. If you default, you could lose your home. And be sure you can pay it off while you still have the car, since it's painful to pay for something that has been consigned to the junkyard.
Leasing a car might be your best bet if the following applies: you want a new car every three or four years; you want to avoid a down payment of 10 percent to 20 percent; you don't drive more than the 15,000 miles a year allowed in most leases; and you keep your vehicle in good condition so that you avoid end-of-lease penalties.
Whatever route you choose, shop for the best deals. Remember, it's in the car dealer's best interest to finance at the highest rate possible, so look at what you'll pay overall, not just the monthly amount. If you tell your car dealer you can spend $400 a month, you could end up with a new car for $400 a month based on a noncompetitive interest rate.
BORROWING FOR OTHER EXPENSES A HOME-EQUITY LOAN OR HOME-EQUITY LINE OF CREDIT IS SMART IN SOMEINSTANCES.
Besides life's big ticket items home, car, and college -- you may be tempted to borrow money to pay for an assortment of other expenses such as furniture, appliances and home remodeling.
Generally speaking, it's best to pay upfront for furniture and appliances, since they don't add value to your home and are depreciating assets. If you do finance such purchases, however, read the fine print.
Retail stores often charge high interest rates. And even if they offer a low-interest or no-payment period for several months on a purchase, you may be required to pay for the item in full at the end of that period or risk being charged a high interest rate dating back to the day of sale.
Taking a home equity loan or home-equity line of credit makes sense if you're making home improvements that increase the value of your house, such as adding a family room or renovating your kitchen. The interest you pay in many cases is deductible and you increase your equity.
If, however, a home project doesn't boost your house value, consider paying cash or taking out a short-term, low-interest loan that will be paid off in five years or less.
If you're saddled with a lot of high-interest credit card debt, you might be tempted to pay it off quickly by borrowing from your 401(k) or taking out a home-equity loan.
There are two key advantages to home-equity loans: They typically charge interest rates that often are less than half what most credit cards charge. Plus, the interest you pay in most instances is deductible. (Note, however, when you use a home equity loan for non-housing expenses, you may only deduct the interest paid on the first $100,000 of the loan, according to the National Association of Tax Practitioners.)
But there is one potential and very significant drawback when you borrow against your house to pay off credit cards: if you default on your home equity loan payments, you may lose your home.
Borrowing from your 401(k) is even less advisable. That's because you lose out on two of the biggest advantages to workplace retirement plans: tax-deferred compounding of your money and tax-deductible contributions. Sure, you pay yourself back with interest, but that interest is paid with after-tax dollars and it will be harder for you to make new contributions while you're repaying your old loan.
Also, if you quit or lose your job, you'll probably have to repay the entire borrowed amount within three months. If you aren't able to do that, you'll owe income taxes on the money, plus a 10 percent penalty if you're under 59-1/2.
One other word of caution if you take any kind of loan to pay off your credit cards: Once your credit card debt is paid off, you have to be vigilant about not running up your balance again, because you still will have big loan payments to make.
If you're having chronic trouble paying off your credit card debt, it may be time to consult a debt counseling service for help managing your finances in the future.
Outside of fixed monthly bills such as your housing or car payment, you probably don't have a precise idea of how you spend most of your money.
If you want to get your debt under control, start by figuring out your spending patterns and identifying unnecessary expenses. "People who don't want to quantify where they're at are in the danger zone," said CFP Paul Weiner of Los Angeles.
For one month, write down every cent you spend. "Every" means "every," including that $2 cup of coffee that starts your workday or that $4 magazine you buy on a whim. That will clarify in black and white how much of your spending is fixed and how much is variable (and hence easier to curb).
Tally the expenses on the list and compare the sum to your monthly income.
How much do you bring in after taxes? How much do you have left at the end of the month after paying fixed expenses? How much do you spend on variable items like that $2 cup of coffee every morning?
Consider, too, whether there's any way to boost your take-home pay. If you get a big tax refund every year, that means you're having too much withheld from your paycheck. If that's the case, you can reduce your withholding by changing your W-4 at work.
Next, make a list of all your debt obligations and the interest you're charged for each.
Once you've done all that, you're ready to start lightening your debt load.
The basics of debt reduction are simple: Cut down on your variable spending and put the extra money toward your debt payments. Once you determine the maximum amount you can pay off each month, pay down the debt with the highest interest rate first -- that usually means your credit card balance -- while paying at least the minimum monthly amount due on all other revolving bills.
Once the debt with the highest rate is wiped out, put your money toward paying the debt with the next highest rate. One exception: If you have a credit card with a low teaser rate that will go up after a fixed amount of time, strive to eliminate that balance before the low rate expires.
You might also consider moving some of your high-interest credit card balances to a card with a lower interest rate. But read the fine print on any invitation to transfer balances. Sometimes such low-interest-rate offers are only in effect for short periods of time, after which the rate skyrockets. What's more, consolidating your debt on one card may lower your credit score if your debt-to-available-credit ratio worsens.
For many people, reining in discretionary spending for a few months goes a long way toward tackling debt. But if that's not enough, try to reduce your fixed expenses. Take steps to lower your household bills; refinance your mortgage to get a lower interest rate; or, if you have a good payment history, ask your credit card company to lower the interest rate you're charged.
Six Mortgage Myths That
Can Cost You Money
By Holden Lewis
September 5, 2005
Do you believe that you can't borrow money to buy a house if you have some dings on your credit? Do you think it's always best to pay off the mortgage early, if you can? If so, you subscribe to mortgage myths that can cost you money. Here are six common myths.
Myth 1: A 30-year fixed is always the best way to go.
Adjustable-rate mortgages, or ARMs, constitute one-third of home loans these days. Yet rates on 15- and 30-year fixed-rate mortgages are very low by historical standards. ARM rates are even lower, but they could rise when it's time for them to adjust.
"You're going to hear a lot of financial journalists who say these ARMs are dangerous, you're putting your house at risk, you're crazy to take an ARM at this time of historic lows," says Bob Walters, senior vice president for Quicken Loans. "There's a lot of emotion involved. As with any emotional argument, there's some truth in it."
It's true, Walters says, that a long-term, fixed-rate mortgage is the right loan "if somebody says, 'I'm going to be in that house forever.' That's an automatic 30-year fixed."
But the average homeowner stays in the house about nine years. First-time home buyers, who usually are young and have expanding families and growing incomes, are likely to remain in their starter homes for just a few years before moving on and up.
Adjustables, especially the popular hybrid adjustables that carry an introductory rate that lasts three, five, seven or 10 years, are appropriate for those whom Walters calls "upwardly mobile people, people who are transient, people for whom a payment increase wouldn't be the end of the world."
Myth 2: Pay off that mortgage as soon as possible.
Accelerating mortgage payments is another area where emotion often trumps reason, Walters says. "We're not talking about finances; we're talking about psychology, or at least where the two meet," he says.
Walters advises people to imagine a scenario where they have a 5- percent ARM and are able to deduct the interest from their federal income taxes. That lowers their effective interest rate to somewhere in the neighborhood of 3.75 percent. Instead of paying extra principal on such a mortgage, it makes more sense to pay down higher-interest debt, such as for credit cards and auto loans, or to invest the money where it can earn a return greater than the mortgage interest rate after taxes.
"The way people deal with money and risk is often irrational, and they put much more of a premium on security and safety than they do on getting a return," Walters says.
It's perfectly fine to pay off a mortgage early if doing so satisfies a long-term financial goal. Doug Perry, senior vice president of Countrywide Home Loans, says a lot of aging baby boomers want to eliminate their mortgage debt so they can retire debt-free. That makes sense, especially for retirees who won't exceed the standard deduction on their income taxes and therefore won't be able to deduct their mortgage interest.
Myth 3: You need a down payment of 20 percent or at least 10 percent.
"The perception out there -- that you need 10 percent down at least, maybe 20 -- that's completely incorrect," Perry says. Many lenders have lots of loan programs for people who can afford to pay 5 percent down or less -- including zero down. In the mortgage industry's horse-and-buggy days, the only zero-down loan was available from the Veterans Administration. That's no longer the case.
"A lot of people are caught in a cycle where they're paying a lot every month for rent and are paying bills on time, and they don't have a lot of money to save," Perry says. "They think they're trapped in the renting cycle with no way out, but they have several options." That takes us to the next myth.
Myth 4: You have to pay mortgage insurance if you don't have enough money for a 20 percent down payment.
"What's called 'piggyback financing' is now almost 50 percent of home purchases," says Peter Bonnikson, senior vice president for E-Loan. A piggyback loan lets you avoid paying for mortgage insurance.
Piggyback financing consists of two loans. The first is for 80 percent of the purchase price. Then there's a second "piggyback" loan for the rest of the purchase price, minus the down payment. An 80-10-10 mortgage has a 10 percent down payment and a 10 percent piggyback loan; an 80-15-5 has a 5 percent down payment and a 15 percent piggyback loan; and an 80-20 doesn't have a down payment at all.
The piggyback loan has a higher rate than the primary mortgage for 80 percent of the price. But for people with good credit, piggyback financing usually costs less than getting one mortgage for more than 80 percent of the price and then paying for mortgage insurance.
Bonnikson favors piggyback loans because "one, they can maximize the house that they can buy, but two, they also maximize the tax deduction." That's because the mortgage interest on the piggyback loan is tax deductible, whereas mortgage insurance premiums are not. (An attempt this year to extend the tax deduction to mortgage insurance failed in Congress.)
Walters says: "There's two reasons why some lenders would push people to take PMI" -- private mortgage insurance. The first reason is that the lender doesn't offer piggyback loan programs, "so limited options make for clear choices." Other lenders have investments in mortgage insurance companies, so they profit from increased business, he says.
Myth 5: You can't get a mortgage if you have blemishes on your credit.
"This is a country that believes in redemption," Bonnikson says. "More and more lenders are finding ways to lend to people" with flawed credit histories.
The word "subprime" is used to describe loans to people who have credit problems that are serious enough to justify charging higher rates. The lender demands a higher rate to compensate for the higher risk. About one-third of households fall into the subprime category, says David Herpers, director of consumer affairs for mortgage lender Amerisave.
One or two 30-day-late credit card payments won't push you into subprime territory, but bankruptcy, foreclosure, repossession, a habit of paying bills late, and even eviction from an apartment can turn you into a subprime customer. A short, sparse credit history -- a recent immigrant or a college grad -- might be counted as subprime, too.
"Most people start out with prime credit and something goes awry and they're considered a subprime candidate," Herpers says. "Many of the customers we deal with today are subprime and they know they're subprime and they're seeking a subprime lender today."
About one-quarter to one-third of Amerisave's customers fall into the subprime category, and the company's goal is to increase that share to more than half of its business in 2005. There is a benefit to applying for a loan from a company that does prime and subprime loans: You're less likely to be steered into a mortgage with a higher rate than you deserve to pay.
When a consumer applies at Herpers's company and acknowledges having credit problems, "we will pull their credit and analyze their credit, and if they can be approved for prime, we will approve them for prime," Herpers says. And someone with several late credit card payments will get a better mortgage rate than someone with a recent bankruptcy.
Bonnikson says, "Lenders are looking for ways to help people who have had financial difficulties. If you have damaged credit, there are a lot of lenders who are willing to help you. My advice is you really need to do your homework and you need to talk to several lenders."
Myth 6: The term of the mortgage has to be the term on the note.
Lots of borrowers are reluctant to refinance because they don't want to start all over again with a new loan that's due to be paid off in 15 or 30 years. But you can ask the lender to set you up with a shorter payment schedule.
Take the example of someone who got a 30-year mortgage in 1998 and wants to refinance in 2004 at a lower rate. It's a simple matter to ask the lender to amortize the payments so the new loan will be paid off in 2028, when the original loan would have been retired.
"Your payment will be lower than it was before, and you'll save monthly -- and over the same period of time," Walters says.