On the Record: Capstone President Tim Malburg

When an Appraisal Is Less Than the Purchase Price

Mr. Malburg talks to the New York Times' Jay Romano

By JAY ROMANO
Published: March 20, 2007

Q. What happens if the appraisal on a home being bought using a mortgage comes in at less than the purchase price?

A. "This can be a potential problem for borrowers,” said Tim Malburg, president of Capstone Mortgage Company in Wilton, Conn.

Mr. Malburg said that if an appraisal used in getting a mortgage is less than the purchase price, the lender may reduce the amount of money he is willing to lend. If that happens, the borrower will have to come up with a larger down payment.

For example, Mr. Malburg said, if the buyer of a home that costs $400,000 wants to take out a mortgage for 80 percent, the mortgage would be $320,000 and the down payment $80,000.

But if the appraisal indicates that the property is worth, say, $350,000, then an 80 percent mortgage would be $280,000 and the borrower would have to come up with a down payment of $120,000.

Mr. Malburg noted that while the lender might still be willing to provide a $320,000 mortgage on the property, doing so would mean that the loan-to-value ratio — $320,000 to $350,000 — would be 91 percent instead of 80 percent.

In such a case, he said, the borrower would probably have to buy private mortgage insurance, which is typically required for loans of more than 80 percent of the value of the property.

Mr. Malburg said that the borrower might also be able to take out a home equity loan for the difference in down payment – in this case, $40,000 — but that the interest rate on that loan typically would be one to two percentage points higher than the rate on the first mortgage.

Don't wait until it's too late

No-Interest Credit Lines Save Peace of Mind

Everyone's familiar with the age-old adage concerning the need to save for a rainy day. But have you ever considered how easy it is to borrow for a rainy day?

There's a perception abound that interest rates are sky-high and that the housing market is badly in decline. I wish I could say I didn't know how such perceptions are born, but it's clear for all to witness – mass media.

A little information in the hands of unreliable sources can be a dangerous thing. Interest rates remain far below historical levels while the housing market, compromised to a small degree by ill-advised loans and foreclosures in certain areas, remains strong. The housing market is simply not engaged at the moment in the hyper-growth cycle that it was several years ago.

Instead of talking about doom and gloom – media is more apt to latch onto catchy phrases than to facts – it would be more beneficial to discuss the wisdom of obtaining a line of credit, particularly a line you only pay interest on when you use.

You don't need a line of credit at this time? Glad you mentioned that. Here is exactly why you should establish one:

In all of my 15 years of experience, people have traditionally looked for money when it is most difficult to secure. When they need it, they can't get it. Haste has never made for a healthy borrowing environment.

Don't wait until it is too late. Establish a line of credit today and use it only when you have to, for tuition, for a new family member, to help navigate a new employment situation or small business, whatever the need. What if you find the ideal residential, second home or investment property and need to act quickly upon it? What if there is a medical emergency or if your credit card debt is unmanageable? If you have a credit line in place, there's no such thing as an emergency. Peace of mind will serve you well.

I would be happy to appraise and discuss any borrowing needs you may have.

Kindest regards,

Patty Stout