Is 'negative am' real estate loan bad if home values are rising?
Borrowers take gamble with adjustable-rate mortgage

Wednesday, May 25, 2021

By Robert J. Bruss
Inman News

DEAR BOB: My wife and I are really stretching our budget to buy a home in the top school district in our area for our twin 5-year-olds. The problem is the best mortgage for our low-down-payment situation is an adjustable-interest-rate loan with possible "negative amortization" if the interest rate rises faster than our monthly payment, which is locked in for three years. My sales commission income has risen at least 15 percent each year for the last six years so we are confident of affording the monthly mortgage payment. But we are concerned we might wind up owing more than our mortgage's original balance. Homes in the area rose about 10 percent in market value last year. Should we postpone buying the home? – Steve R.

DEAR STEVE: No. However, be sure that mortgage does not have a prepayment penalty. When your finances improve and you have a greater amount of home equity, you can then refinance to a safer fixed-rate mortgage without the "negative am" possibility.

Purchase Bob Bruss reports online.

Most home buyers stretch their budgets to buy a home, especially their first home. With very favorable circumstances, such as your history of rising income, probable future appreciation in your home's market value, and purchasing in your area's best school district, everything is in your favor.

It is quite likely that in the next few years the interest rate on your adjustable-rate mortgage will rise faster than your fixed monthly payment, which is locked in for three years. To prevent "negative am" you can elect to increase your monthly payment to assure your mortgage balance won't grow by the amount of unpaid interest.

However, if your home's market value appreciation exceeds the "negative am," don't worry. When you eventually sell the home, or refinance the mortgage, you will probably benefit from buying your home now.

ADVERSE POSSESSION REQUIRES HOSTILITY

DEAR BOB: You recently had a question about a couple where a parent bought the home and held title for 30 years. Now the couple wants to sell or claim the tax deductions. Because the couple paid the property taxes for more than 30 years, do they not own the home by adverse possession? – Tom M.

DEAR TOM: No. Good thinking, but you forgot all the legal rules to acquire title by adverse possession.

Acquiring title to a property by adverse possession requires "open, notorious and hostile possession" for the required number of years in the state where the property is located. In addition, most state laws of adverse possession require payment of the property taxes by the adverse possessor.

However, in the situation where the house was purchased in the parent's name, but the couple occupied it and paid all the expenses for 30 years, there was no hostility involved. Therefore, they cannot acquire legal title by adverse possession. For full details, please consult a local real estate attorney.

BOOKS ABOUT PURCHASING TAX LIENS

DEAR BOB: I often see an "infomercial" on TV about buying real estate tax liens. While I like the concept, I am not impressed by the hype. Are there any good books on this subject? – Hakeem A.

DEAR HAKEEM: Yes. Save your money. There are two excellent books about investing in real estate property tax liens.

They are "Profit by Investing in Real Estate Tax Liens" by Larry B. Loftis and "Make Money in Real Estate Tax Liens" by Chantal and Bill Carey. Both books are available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

The new Robert Bruss special report, "The 10 Most Important Questions Home Sellers Hope Their Buyers Don't Ask," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center).

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Copyright 2005 Inman News


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