Q: We are looking to buy a three-family new home for $700,000. The lender that is giving us the loan says that they could do it in two parts.
They would cut the loan in half and give us an interest rate on the first part of 6.75%. The second part of the loan would be 11.7 percent. What should we do?
A: The extra high interest rates that you’re being quoted tell me a couple of things: Either you do not have very good credit, or you are trying to borrow way more than you could ever hope to repay, or your lender is ripping you off.
Which is it?
It is possible to do a loan that would give you an 80 percent first mortgage and a 15 or 10 percent second mortgage at the same time. These are typically called “Piggy-back loans” or “80/10/10” or “80/15/5” depending on whether you put down 10 percent or 5 percent on your loan. But the interest rate on the 80 percent part of the loan would be a lot closer to the current market rate.
You can even get a piggy back loan with close to a zero down payment.
But when 30-year fixed rate mortgages are at 5.5 percent, and you are being quoted 6.75 percent for the main part of your mortgage, it smells a bit off.
Do you have two other families that will be buying this property with you? Do you have two other families that are going to rent the other two units from you? Does the lender think this is an income property?
I think you should shop around further for a different mortgage lender and try to understand why the interest rates you’re being quoted are so much higher than the norm.