Financial Creativity Counts When it's Time to Sell a House
Q Our house has been on the market for some time, and even though interest rates are favorable, market conditions appear to be working against us. We have to sell and have heard about a concept called "creative financing.Û Can you explain what this means and how it works?</br></br>A Although ÛÏcreative financingÛ probably started when the first homeowners sold their house, the modern concept began in the early 1980s, when interest rates throughout the United States skyrocketed. Lenders and sellers began looking for new kinds of mortgage financing, which would offer attractive incentives so that reluctant buyers would go forward with the sale.</br></br>From the lenderÛªs perspective, one of the most creative loans was the adjustable-rate mortgage (ARM). Under such a transaction, the interest rate fluctuates at regular intervals, typically once a year. Although the most common ARM is the one-year transaction, there are many varieties on this, including six-month ARMs, three-year ARMs and five-year ARMs. With any ARM, the rate will be considerably lower than the rate for a 30-year, fixed-rate loan, although the longer the term of the adjustment on the ARM the higher the interest rate will be.</br></br>But this was not enough to entice buyers into the marketplace. Sellers also began to look for their own creative types of financing, and here are a number of ideas that may assist you in marketing your house. b Seller takes back first trust. Let us assume that your house is worth $250,000. If you have no mortgage on the property, you can take back all of the financing, and you in effect will be the bank.</br></br>Under no circumstances can I recommend that you make more than an 80 percent loan, and in our example, you should not lend more than $200,000. That means that your buyer will have to come up with $50,000, which may be a significant deterrent. However, if you were to lend the buyer as much as $230,000, for example, you run the risk that if your buyer becomes delinquent, and you have to foreclose, the house may have depreciated in value. This is a business, not a legal, decision that only you can make.