Sarah Colucci's Mortgage Blog
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A powerful advantage of working in the broker channel is the ability to access many unique mortgage products that can help homeowners who find themselves in a variety of complex situations. Equally as important to having access to these products is the ability and expertise to choose the right one.
I want to tell you about my experience with a man that called me today, and was looking for a line of credit. He is a house-flipper by trade, which means he buys real estate, fixes it up, and then resells it for a profit. He's been using his property's equity to access the funds required to purchase the real estate he successfully flips.
He expressed to me that he rather not break his current mortgage contract as leaving early would trigger a prepayment penalty and would cost him his current interest rate which is quite competitive. Instead, he wants a line of credit in second position, and he’s made it very clear he wants this type of product in lieu of the private loans he’s been borrowing for the last twelve years.
Some strengths of his file include a healthy amount of equity that is available in his property, and an excellent credit score. He is also able to show that despite his claimed income being low, his bank statements for the last six months substantiate a greater income amount.
Some key points to emphasize here...
First, I want to point out how this man successfully leverages his home for investing. For the past decade, he’s been borrowing small loans against his home, and flipping houses, then paying off those loans once those houses sell. He’s a testament to the fact that equity can be used in a purposeful way to earn a living or pursue other investments, and that dormant equity can be harmful to one's financial profile.
Secondly, I want to mention that perhaps out of ignorance and ill-advice, he didn’t know that he truly didn’t require the amount private loans he borrowed for all these years when better (and cheaper) mortgage products were available. Here’s why.
Although private loans will always be required within the real estate market because they service those clients no other lender will, they are the most expensive option and therefore, should be considered the last resort. I can’t emphasize how many times I have spoken to mortgage borrowers who were embroiled in costly private loans when they should have been with alternative lenders, instead. Similarly, I have also met borrowers who were paying alternative lenders when they could have been with prime lenders. It’s situations like these that shine a light on the importance of working with a seasoned professional who keeps business dealings transparent and gets their clients appropriate financing.
Private lenders also charge the highest interest rates that are usually substantially higher than those of alternative lenders that already service borrowers with bruised credit or mortgage servicing limitations. In addition, private lenders have front-end fees like lender and broker fees. The monthly payments also tend to be interest-only which can become a significant financial drain.
In the case of the man who called me, a private loan at this time doesn’t make sense for his situation because:
1. He doesn’t require the funds all at once.
-----> Because he is a house flipper and completes his work in segments, a line of credit is more suitable - only a smaller interest payment will b owing on the balance that he uses.
2. A private loan is advanced all at once, which means monthly payments on the full balance are due immediately even though he doesn't require 100 percent of the money right away.
Fortunately, I was able to introduce the right product to this man which was a second mortgage with an alternative lender at a much lower interest rate than a private loan, and with a small set-up fee. And once completed, he will only be required to make payments on the outstanding balance which provides an excellent solution and puts more money in his pocket.
Are you in a similar situation? Feel free to call or write today! I would be happy to help you!
Sarah A. Colucci
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929