School, auto loans affect future real estate purchase

How a borrower's debt-to-income ratio comes into play
By: Ilyce R. Glink: Inman News
Q: I have a friend who is getting ready to go into real estate. He wants to know if he takes out a small personal loan, what impact will it have on his ability to take out future loans on property he wishes to buy?

A: Any time you take out a loan, whether it is personal, credit card, school, auto or a mortgage, it lowers the total amount you can borrow to buy real estate in the future.

Mortgage lenders take a look at your monthly debt service-that is, how much you spend each month to keep all of your loans afloat-and subtract that number from the total amount you have available to pay your total debt service.

So if you're spending $500 per month on your debt service, and your income will allow you to spend $1,500 on your total debt (including a mortgage, real estate taxes and insurance), you'll only be able to spend $1,000 on a conventional loan. If you want to increase that amount, you'll either have to look at some riskier loan programs (like interest-only or option adjustable-rate mortgage (ARM) loans) or consider going with a high loan-to-value ratio Federal Housing Administration (FHA) mortgage.

Q: We are in contract to sell our home. We have a question concerning the term, "built-in appliances." Does that term include the refrigerator, washer, or dryer? The contract says that the house is, "together with all improvements and attached items, including fixtures, built-in furnishings, built-in appliances, ceiling fans, light fixtures, attached wall-to-wall carpeting, rods, draperies and other window coverings." There is a line about other items being included in the purchase, but it was left blank.

We have a normal 25-cubic-foot side-by-side refrigerator that stands alone. It is not built into the kitchen cabinetry. We purchased it ourselves. It did not come from the builder when we bought the house. In fact, we bought all of our own appliances, including the washer and dryer.

Are we obligated to leave our refrigerator, washer, or dryer for the new owner or should they make an offer to us if they are interested in any of these items?

Thank you so much. We really appreciate any advice you can give us.

A: In my neck of the woods, appliances are left in the house. Home buyers typically expect a house to come with appliances-even though your builder did not put them in.

But, depending on where you live, sometimes appliances do not go automatically with the home. Sometimes people take refrigerators, washers and dryers with them. Did the listing for your home include the refrigerator, washer and dryer? If it did, your buyer may be expecting them. If the prevalent practice in your area is that those appliances stay with the home, you may have to leave them behind.

To be safe, if you want to take your appliances with you, you should specifically exclude them in writing in the contract. That way, the buyers won't be surprised when they walk into the house after the closing. However, you might want to talk to your real estate attorney to find out if the refrigerator, washer and dryer are considered appliances that stay with the home.

I called an attorney in Illinois and he indicated that in Illinois, those appliances would not be built-in and could be taken by the sellers. If the buyers had wanted them included in the sale, they should have specifically listed them in the contract. He also said that if the buyers made a mistake and forgot to insert them into the contract, they could argue that the purchase price included these items as they were included in all the marketing materials for the home.

He suggested you tread carefully on this issue: Make sure no one promised the buyers these appliances and the listing sheet did not include them.

Q: I bought a house in August 2004 for $225,000. The mortgage is a seven-year adjustable-rate mortgage (ARM), fixed until 2011 at 5.375 percent. My mortgage balance is $175,188.

I've been noticing that long-term interest rates are going up. I probably won't move in the next five years. When should I refinance and how high will interest rates climb?

A: I'd wait as long as possible to refinance. You have a great rate that's about one percentage point below the current market interest rate. Why pay more now? I'd keep paying at 5.375 percent and start paying down as much of the loan as possible. That way, when you do refinance, and rates adjust, the monthly increase (if any) will be nominal.

I'm following my own advice, by the way. I have a 5/1 ARM at 4.185 percent. And I plan to keep that loan until the last possible minute.

When the loan does adjust, it'll only adjust by two points at the most in a given year. So in year six, the interest rate will rise to a maximum of 6.185 percent. The year after, if interest rates keep rising, it'll be 8.185 percent--still not too bad. In the meantime, I am pouring my interest rate savings into paying down this loan.

I have another two-and-a-half years until my loan adjusts, and with the additional year tacked on, I have three-and-a-half years to see where the economy is heading before refinancing.

In five years when your rate adjusts, or some point in between, interest rates may have fallen again for a variety of reasons. So, take a wait-and-see attitude and enjoy your savings in the meantime.