Question: We have been looking at smaller properties now that we are empty nesters. Our choices include individual houses and condo units. The condo units have more features such as a pool while you can get a bigger house for the same dollars. We checked with our lender the rates for a house and a condo were different. Why pay more for condo financing?
Answer: When it comes to individual properties, they are not all the same. Some properties simply represent more risk to lenders and for that reason justify a higher interest rate. In this case we have a single-family home and a condo. The house sits on its own ground and is owned “fee simple.” One way to look at fee simple is to say it offers the largest “bundle of rights” to owners.
A condo is different, the bundle of rights is smaller. With a condo you own the unit and have access to common areas. If a number of unit owners don’t pay their monthly fees, that could reduce the value of your unit if the pool must be closed. To lenders this looks like the value of your property can be impacted by the actions – or non-actions – of other unit owners. While the mortgage is with you and secured by the unit, the value of the condo is less clear because the lender has no way to check the credit of other unit owners.
Lenders are often leery with other forms of property. With a co-op you own shares in a corporation and have the exclusive right to use your unit and a non-exclusive right to use common areas. What you don’t own is your property outright.
An investment means more risk simply because it’s not your prime residence. If your finances sag, you’re likely to pay the mortgage on your home before you pay the investment lender.
Jumbo loans are often cheaper than conforming loans because lenders do not have to pay assorted fees to Fannie Mae and Freddie Mac because they do not handle larger mortgages.
Speak with lenders regarding their pricing policies. The odds are good that most homes will qualify for mortgages without any ups or extra charges, but not always.
Are differing costs a reason to choose one property over another? Sometimes yes, sometimes no, depending on the numbers and the alternative options available for the property.
Peter G. Miller is author of “The Common-Sense Mortgage.” Have a question? Please write to firstname.lastname@example.org.