If you’re in the real estate market you might be considering a condominium or townhouse over a single-family house in order to save some money, but are you really saving any money by purchasing a condo when it comes to interest rates and additional fees?
Condominiums may have hidden fees that don’t necessarily show up right away when you’re searching for a condo. They may actually come with higher mortgage rates as well as homeowner or condo association dues, which need to be factored into your monthly outgoing payments. Depending on the type of condo association you’re planning to be a part of, many of these association fees can actually be more expensive than monthly mortgage payments, so you’ll definitely want to include them in your monthly housing costs when looking at different condos.
[Read more: How Much Home Can You Afford?]
Many mortgage lenders may also charge 0.75% mortgage rate pricing adjustment for condominiums once the loan-to-value ratio exceeds 75%. Many people that are buying a condominium do so with a low down payment program such as an FHA program, which naturally would require this additional 0.75% fee. Government mortgage institution such as Fannie Mae and Freddie Mac charge a loan level price adjustment for condominiums. This is usually passed on in the form of higher closing costs for the buyer. In order to avoid this additional cost, condo buyers need to either choose a 15-year mortgage (or shorter) or keep the loan-to-value ratio at 75% or lower. In order to do this, many condo buyers with low down payments may also choose a combo loan.
A condo loan is where a borrower will need to take out to loan simultaneously in order to finance the purchase. Most banks and mortgage lenders will only allow a loan to value ratio of 80% in typical single-family homes. Loans with a ratio greater than 80% will be required to have private mortgage insurance or PMI, which is a more expensive option as well.
However, if the borrower breaks up the mortgage into two separate loans, a lot of times they can avoid paying this mortgage insurance.
The bottom line is, if you can’t put down 25% or more on a condo purchase, you should expect a slightly higher interest rate or a higher cost loan.
So why is this the case?
Condos are part of a larger condominium complex, unlike a single detached house. Each unit affects the entire complex so if many owners are unable to make their payments, other units will lose value as well. Also, the condo association may not get all of its dues as well, which puts the entire complex at risk. It’s important to note that investment properties within the complex may mean more risk as well for lenders. If there are too many units that are currently rented out, a lender may not loan on the property at all.
[Read more: 5 Mortgage Tips for First Time Buyers]
When it comes to FHA loans on condominiums, there are few complexes that are actually approved for this type of financing. The FHA has a tough set of rules and eligibility standards for condominiums including zoning rules and policies where a certain number of units must be owner occupied instead of investment properties. If you’re looking for condominiums you may come across a listing that says “FHA approved”, which is a great marketing tool that may attract a lot of condo buyers not able to put down 25%.
Buying a condominium is a great investment but you do have to look at all the costs involved. For information on financing for condominium throughout Orange County California contact my office today.