Creative Mortgage Financing

Susan Weber
Creative financing can make buying a house more affordable.

With creative mortgage financing you may be able to purchase a home that you would not have qualified for with a traditional mortgage loan. There are several options, but be sure to do your research to make sure that you are finding the right loan to best suit your financial situation.

Creative versus Traditional Mortgages

The mortgage loan market includes many types of mortgage loans. In addition to fixed and adjustable rate morgtages, consumers also have the choice of a variety of terms and conditions that can provide major impacts on the monthly payment and the total cost of the mortgage. There are also mortgages designed for consumers with needs such as as down payment grants and mortgage subsidies for women who are first time homeowners and mortgages for buyers with bad credit.

A mortgage broker can offer many of these mortgages as well as a variety of other creative mortgage options.

Examples of Creative Mortgage Financing

Creative mortgages rethink the way the mortgage is constructed. The length of the loan may be longer or shorter. The monthly payment may change against a predetermined formula, even if the interest rate does not change. Here are few examples:

Graduated Payments

A graduated payment mortgage loan is good for an individual whose income is rising each year.

This type of loan financing gives you the opportunity to have lower monthly payments at the beginning of the loan, with the payments increasing each year. After a specific number of years you can pay off the loan by refinancing the loan with any type of loan.

Here's an example: A $100,000 mortgage loan with an 8% interest rate would have a monthly payment starting at $733.76. Let's say your loan agreement was that your monthly payment would increase by $50 per month in the second year and each year thereafter. At the end of ten years your monthly payment would be $1,183.76 and the balance would be $52,516.41, which you could then refinance.

Seller Carries the Mortgage

If the seller will not come down on the selling price, the seller may be willing carry the mortgage for the buyer on a short-term loan at a higher interest rate than the buyer would have usually paid. This lets the buyer have a lower mortgage payment, even though they paid the seller's preferred price on the home.

Here's an example: A seller refuses to lower the price of the house from $140,000 to $130,000, but the seller is willing to carry a 7% mortgage for twenty years. The buyer accepted the deal instead of the 4% market interest rate that had been offered on a ten year loan. The buyer's monthly payment was only $775.30, not the $1,012.45 monthly that they would have paid with the $130,000 loan at 4%.

Monthly Payment Comparison
Price of Home $130,000 $140,000
Down payment $30,000 $20,000
Seller financing $100,000 $120,000
Interest rate 4% 7%
Months 120 240
Monthly payment $1,012.45 $775.30

50 Year Mortgage

Bankrate.com, a leading financial information website, rates the 50 year mortgage as a financially-sound alternative to an interest-only loan which home buyers might consider if they are looking for lower monthly payments. The reasoning is that with a 50 year loan the principal continues to decline because part of the payment goes to the principal and part goes to the interest owed. With an interest-only loan, all of the payment goes to the interest owed and nothing has been paid on the loan's principal.

Community Land Trust

A community land trust is a fund of federal, state, county, municipal and private money that is used to provide grants to low and moderate income home buyers. The trusts were established about thirty years ago to provide affordable housing for creditworthy, moderate-income, first-time homeowners who work in the community like policemen, fireman, teachers and public employers. Some community land trusts also provide access to special mortgage financing from government-sponsored programs.

Here's how they work:

  1. The first-time homeowner applies to a community land trust for grant money.
  2. The buyer owns the house, but the community land trust owns the land and leases it to the buyer.
  3. The homeowners must live in the house as their primary residence.
  4. Buyers receive education and information on home buying.
  5. When owners want to sell, they can either:
  6. *Sell the house to the community land trust.
  7. *Sell the house to another qualified, first-time buyer at a below market price.
  8. The owners will receive one-quarter to one-third of the home's appreciation as well as total reimbursement for most capital improvements.

Here's an example: A house is on the market for $300,000. The approved community land trust buyer agrees to buy the house for $150,000 - 50% of the market price - and to receive 25% of the appreciation. In five years, the house has appreciated to $400,000. The buyer had agreed upfront to sell the house for 50% of the market price, so the house is sold for $200,000 to another community land trust buyer. The buyer receives the $200,000 plus 25% of the $100,000 appreciation - a total of $225,000.

There are over 200 community land trusts in the United States. For more information and links to community land trusts throughout the United States, see National Community Land Trust Network.

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Creative Mortgage Financing