When you are purchasing real estate, you should always hire an experienced Herriman Utah real estate lawyer who can act as your local counsel. The lawyer can assist you all the way. The lawyer can review your financing options and assist with the documentation.
Ordinarily a home buyer cannot obtain a loan which represents the full amount of the purchase price in any kind of transaction; the purchase of a home is no exception. A down payment is required as a manifestation of the good faith and serious intentions of the borrower and to provide a margin of safety, that is, of value of collateral over debt, for the lender.
The importance of this arrangement to an understanding of the market for homes in fee lies in the fact that, in general terms, credit multiplies the purchasing power of the down payment by a factor which is the reciprocal of the ratio of down payment to the total purchase price. If credit were extended in the full amount of the purchase price, purchasing power would be limited only by the amount which the prospective homeowner could borrow; where no credit is available, purchasing power is limited by the prospective owner’s own resources. If the down payment represents one-half of the purchase price and the other half can be borrowed, the purchasing power of the down payment is multiplied by two; if one-third, by three, etc.
In financing homes, the ratio of the mortgage amount to the purchase price is less frequently used as a criterion by which the mort gage amount is determined than the ratio of the mortgage amount to the appraised value of the home, referred to as the “loan-value ratio.” Most lenders, however, attempt to limit their appraisals to the purchase price, or less, and their loan to a certain percentage of that appraisal. The effect of increasing the loan-value ratio — especially as it approaches 100 percent — upon the purchasing power of the down payment is not generally appreciated. Increasing the loan value ratio from 50 to 75 percent, or from 60 to 80 percent, doubles the purchasing power of the down payment, as do increases from 80 to 90 percent or from 90 to 95 percent. Thus, increasing the loan-value ratio from 60 to 95 percent enlarges the purchasing power of the down payment eightfold. Successive increases in the loan-value ratio multiply the purchasing power of the down payment so greatly, in fact, that when the ratio goes beyond 80 or 90 percent the down payment requirement loses much of its effectiveness as a limitation upon the price which the purchaser can offer.
Generally, all lenders require that their borrowers pay back, by a specific date, the full amount of any principal borrowed and interest incurred during the period of the loan. This due date is referred to as the “maturity date.” The amount of principal and interest that is due on the maturity date will depend on how the loan was amortized. A loan can be fully or partially amortized or not amortized at all. A loan is an amortizing loan if the principal amount of the loan is reduced gradually as a result of periodic payments by the borrower to the lender.
Limitations imposed by mortgage terms
When the down payment is no longer a limitation on the amount of the loan, the amount which the borrower can reasonably be expected to repay determines its size. The prospective homeowner’s ability to repay mortgage debt ordinarily depends upon his future income; and while it is impossible to predict this with certainty, some assumptions as to its amount and stability must be made. Most families find it possible to provide for a minimum outlay on housing notwithstanding income instability, and it is this minimum that must be calculated as necessary to meet debt service and the other outlays occasioned by ownership.
For most people, a mortgage is their biggest and most important personal loan. Mortgages come in many different makes and styles. The most popular mortgage is the one that is amortized over 30 years, at which time it’s paid in full. However, 15-year mortgages offer some attractive advantages, including saving thousands of dollars in interest costs. The monthly payments on 15-year mortgages are higher, but counselors suggest getting the shortest term you can afford to save you money.
Mortgage loans come with either fixed or variable rates. Variable rates by definition vary or change over the life of the loan depending on how they are structured. Fixed rates are harder to qualify for but may be easier to maintain because the payments do not change.
For a $100,000 30-year mortgage at 8%, the borrower would pay $733.77 principal and interest per month. Loans that are repaid gradually over their life are called amortizing loans. The borrower’s money goes largely toward paying the interest in the early years of this loan, and most of the principal is not paid off until the later years.
The total interest paid on this loan would be $164,160. At the end of five years, the borrower would still owe $95,070 of the original $100,000 borrowed. That’s because in those early years, the bulk of each monthly payment goes to interest. It is not until sometime in the fifth year that the amount allocated toward principal repayment tops $100 per month. By around the 20th year of the loan payoff, more of the monthly payment goes toward repaying principal than paying interest. Once that happens, of course, the payoff goes much more rapidly, but by then the borrower has already paid more than $143,000 in interest.
The 15-year mortgage has an obvious advantage if the borrower can afford higher monthly payments. By paying the total loan sooner, the borrower needs less money for less time and pays less interest over the life of the loan. The disadvantage to the shorter 15-year loan is that the monthly payments are much higher than for a comparable 30-year loan and borrowers need to have a higher income to qualify for it.
For example, a $100,000 15-year mortgage at 8% interest would have a monthly payment of $955.65. Over the life of the loan, the borrower would pay only $72,017 in interest. By the end of the fifth year, the balance on this loan would be just under $79,000, but by the end of the 10th year, it would be down to $47,000. In those last five years, the payoff accelerates because the payments go almost entirely toward principal repayments, not on paying interest.
Another way to save thousands over the lifetime of a loan is to make additional principal payments. Let’s say you cannot afford the higher monthly payments of a 15-year mortgage. So you take a 30-year mortgage. At the same time, purchase an amortization chart or run one on some personal financial software such as Quicken. These charts show precisely how much money is going toward interest and principal for every payment. In this example, initial principal payments range around $70. So when you send in your monthly mortgage payment, add an extra $70 to it and note on the coupon or mortgage voucher that the additional money is to go toward the principal. You still have to pay the mortgage the next month, of course, but what you’ve done is effectively cut one payment off the life of the loan. Do that whenever you have additional money on hand and two things happen: the equity in your home builds faster, and the loan balance decreases. Some mortgagers require that these additional principal payments reflect the exact amount of the next month’s due; others allow borrowers to contribute as much to additional principal payments as they wish.
The equity that you have in your home is the value of the home less the outstanding mortgage balance. The equity begins as your down payment and grows depending on the interest rate and length of the loan. If the home appreciates, or increases in value, equity likewise increases. If you need additional funds for college tuition payments, a home equity line of credit loan is a popular choice. Home equity loans are a line of credit with an adjustable rate you may draw on over time, secured by the equity in a home. Home equity lines of credit and second mortgages are similar in that the interest on both loans is tax deductible. However, a home equity loan is in essence a second lien against your property and must be paid off in full if and when you sell your home. A home equity loan works best for people with good credit who do not need all the money at once. That way they won’t be paying interest on the money until it is actually withdrawn, and pay interest only on the outstanding balance.
In every transaction involving real estate it is usually appropriate to retain an experienced Herriman Utah real estate lawyer. The following matters should be referred to the lawyer:
A. Scope of Document Review. An experienced Herriman Utah real estate lawyer will review the purchase agreement before execution, if possible, to determine if any unusual provisions of state law may affect the agreement. If such review is not possible before execution, have it done as soon as possible thereafter.
B. Local Compliance. An experienced Herriman Utah real estate lawyer will determine if the buyer will be able to hold title to the property, will have to qualify to do business, or will face any tax problems under state law. Special problems may be encountered when the buyer is a trust (e.g., if the trustee is a foreign bank, it may have to qualify to do business in the state where the property is located). In any case, an ancillary trustee is required in some states. Note that even if the real estate lawyer believes that it is not necessary for the buyer to qualify to do business to take title in the state, the title insurance company may require it to do so before it will issue title insurance. If the real estate lawyer determines that qualification is not necessary, we should confirm that the title company agrees with the opinion.
C. Zoning Letters. An experienced Herriman Utah real estate lawyer will should obtain a letter from the appropriate local government authority stating that the property is in compliance with applicable zoning, environmental and other regulations. Written confirmation of such compliance may not always be available, but an effort should be made to obtain the best confirmation possible. Also, keep in mind that such written confirmation is probably not binding on the local agency.
D. Leases. Send to your Herriman Utah real estate lawyer will all documents received for review from seller, including lease forms, to determine whether there are any problems with the documents under the applicable state law and to determine whether the documents should address additional matters. Ordinarily, the real estate lawyer’s review of leases should be limited to matters that might receive unusual treatment under the applicable state law.
E. Taxes. An experienced Herriman Utah real estate lawyer will check state and local tax laws affecting the property. In particular, the real estate lawyer should confirm that the income from the property, when a tax-exempt entity will be the owner, will be exempt from state taxation.
F. Bulk Sales. An experienced Herriman Utah real estate lawyer will should determine whether there will be any bulk sales requirements or any sales taxes applicable to the transaction. Also, ask the real estate lawyer to determine whether documentary transfer taxes or conveyance taxes will be applicable to the transactions and, if so, the amounts.
G. Customary Procedures. An experienced Herriman Utah real estate lawyer will determine whether there are any customary procedures for sales of property in the particular state that are not considered in the purchase agreement.
H. Title Insurance. An experienced Herriman Utah real estate lawyer will review the status of title and provisions for title insurance.
Herriman Utah Real Estate Attorney Free Consultation
When you need help with a real estate case or lawsuit in Herriman Utah, please call Ascent Law LLC (801) 676-5506 for your Free Consultation. We can help you with boundary disputes, easements, title problems, title insurance, contractor litigation, real estate purchase contracts and much more. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506