High cost of homes generates new financing plans

The increasing cost of buying a home is generating a new breed of purchase and financing plans, Terms such as "shared appreciation," "shared ownership," and "wraparound loans" have entered the homebuying lexicon.

These and other new plans are designed to help families buy a house, despite rapidly rising prices and financing costs.

The idea is to minimize the cash required to acquire a house or to maintain ownership. As a result, a buyer's qualification requirements are reduced.

The new "shared appreciation" mortgage loan, for example, is an innovative plan that can provide home financing at an interest rate far below the prevailing rate for home- mortgage loans. In return for this "helping hand" in financing a house, the buyer agrees to share a portion of the home's future value appreciation (profit) with the lender.

Such plans now are most frequently used in California and Florida, but their popularity is beginning to spread throughout the US.

The first plan of this type to be offered home buyers was a very simple, basic program. The buyer receives a mortgage loan carrying an interest rate that is one-third lower than the currently prevailing rate.

The buyer, in turn, pledges to give the lender one-third of the profits from the future sale of the house. The lower interest rate results in lower monthly payments and helps the buyer qualify for the loan.

Such plans now are being studied by the Federal Home Loan Bank Board, the overseer of all federally chartered savings and loan associations. If the study results in a positive report, all these S&Ls will be authorized to offer the special loans.

"In the last two years, average costs for the home buyers have risen by 42 percent," according to Jay Janis, chairman of the board. "The household income of home buyers has risen at an annual rate of about 11.5 percent."

In the plan now being considered by the Federal Home Loan Bank Board, the home must be sold or refinanced within 10 years. In no case would the lender's share be more than 40 percent.

The "shared ownership" plan is an even newer concept. It is designed to meet the needs of home buyers who generate a good income and can usually handle monthly payments without a problem, but are low on immediate cash.

It involves a third-party investor who becomes a co-owner of the property with the home buyer-resident. The investor pays a large proportion of the cash required for down payment, closing costs, and other purchase- ownership expenses.

For example, a family wants to buy an $80,000 house but lacks the cash to swing the deal -- $16,000 down payment, plus closing costs. This particular family also might have a problem coming up with a payment of $758 every month (payment on a $64,000 mortgage for a 30-year term at 14 percent), plus taxes, insurance, etc.

At this point, the outside investor enters the scene. He pays 75 percent of all acquisition and ownership costs. In other words, he owns a three-quarter share of the property. The buying family owns a one-quarter share and resides in the home.

Result: The family pays $4,000 down, plus one-quarter of all closing costs. Then the family moves into the house and enjoys all its benefits as if it owned it outright. The monthly payment is $189.50.

The family also pays one-quarter of the property taxes, insurance, major maintenance costs, etc. It further pays a modest rent to the investor for living in his 75 percent portion of the property. However, the combination of the family's loan payments and rent does not total the amount of payments required for full ownership.

The benefit to the investor is, of course, receiving 75 percent of the equity buildup (profit) in the property. It is initially agreed that the home will be sold or the family will buy out the investor's equity-interest in five years.

It's an alternative to total home ownership. It allows a family with limited financial resources to enter the world of home ownership. The family at least acquires an equity interest in the house in which it resides and can genuinely express "pride of ownership" in the home.

It can be a viable first step toward total home ownership.

A current hangup has put this plan in a "holding position" at the moment. This type of financial arrangement involves what is legally termed a security and is probably subject to Security and Exchange Commission regulations.

At this writing, SEC officials are studying the plan and soon will issue a report.

The wraparound mortgage loan is still another technique designed to help some families buy a house when they otherwise would be unable to do so.

The wraparound loan, sometimes called an all-inclusive deed of trust, is really a second loan on the property. But as far as the buyer is concerned, he makes one monthly payment on the house, usually at a rate of interest which is below the currently prevailing rate for a new loan.

In many cases, it's the seller who carries back the wraparound loan. He is, in effect, the lender and payments are made directly to him.

The seller, in turn, continues to make payments on the first (primary) mortgage or trust deed on the property.

It's a way for a home seller to sell and a buyer to buy when other financing doors are shut.

Of course, if the first mortgage loan is not assumable, this technique could blow skyhigh. If the first lender has an enforceable "due on sale" clause in his mortgage note, he just might demand a full payoff when the house is sold.

However, such clauses are becoming nonenforceable in an increasing number of states by action of the state supreme courts or the legislatures.

It should be pointed out that a wraparound loan is not always made by the home seller. It can also be made by an unregulated lender, such as life-insurance companies, real-estate investment trusts, and pension funds.

Payments on the wraparound loan are often calculated with a 25- or 30-year amortization term. But, as in the case of other second loans, a payoff of the loan is usually called for in from three to seven years.

At that point, or before, the buyer would refinance the property and pay off the seller or other maker of the wraparound loan.It's a way to defer the necessity of executing a new institutional home loan until interest rates come down again.

Other financing techniques, such as the graduated payment mortgage, are available to home buyers with special needs. Still other plans are on the drawing board.

During the 1980s, home buyers will be able to select the most appropriate purchase-financing plan from a supermarket of possibilities.