All Kinds of Loans – Part IV

This is the fourth and final column in a series describing the various types of real estate loans. While you must have some way to repay the loan, you really do have a huge variety of options when it comes to buying real estate.

CalVet – These are intended for active service members or military veterans who choose to purchase an owner-occupied home in California. All veterans who served on active duty a minimum of 90 days are eligible. These loans require low or no down payments and a fixed-rate, 20 or 30-year term. Interest rates are typically better than conventional loans.

Veterans Administration (VA) – These are loan guarantees available to active service members, military veterans or eligible surviving spouses. The terms are similar to Federal Housing Administration loans (low down payments and competitive, fixed interest rates), but they do not require mortgage insurance. There are limits to the size of the loan guarantee. The borrower works with a lender and the VA guarantees the loan.

Agricultural – As the name suggests, this is a loan made to people whose livelihood depends on farming. Typically the loan requires one annual payment, which comes due shortly after harvest—when the borrower receives payment for their crop. In our area, we’re usually talking about grapes and pears. While any lender can make this type of loan, American Ag Credit in Ukiah does agricultural loans exclusively.

Step Loan – This is a close cousin to the adjustable rate mortgage (with an interest rate that changes during the life of the loan). The difference with a step loan is that the rate changes are not tied to an index, but rather they’re predetermined. The original interest rate goes up or down by the specified amount on a strict schedule. The amount of variation and the schedule are negotiated between lender and borrower. This is frequently used in seller carry backs, especially if the seller wants the buyer to pay off the loan sooner rather than later. By increasing the interest rate over time, the borrower has an incentive to pay back the loan as soon as possible. And, if the borrower cannot repay the loan quickly, at least the seller is compensated for the additional time with the higher interest rate.

Line of Credit – A line of credit can be secured by any kind of real estate or other assets (or sometimes by nothing at all). The loan can be arranged when the borrower doesn’t have a specific need for the money, but wants to have cash available, should the need arise—for an investment opportunity, repairs or emergencies. These loans allow the borrower to have access to cash on a very short notice. Lines of credit virtually always have adjustable interest rates (prime plus) and they usually include a modest annual fee. The borrower only pays interest on the credit they use. Let’s say you have a line of credit of $50,000. If you don’t withdraw any money, you don’t pay any interest. If you use $10,000, you pay interest only on that amount. I highly recommend that everyone get a line of credit set up as soon as possible, it costs very little and gives a great deal of flexibility for emergencies or opportunities.

I have a line of credit that allows me to keep my money invested and working for me. Recently, I attended a foreclosure auction. I planned to bid on a property, using my line of credit for the payment. Then I would have refinanced and paid off the line of credit. As it happened, the auction was cancelled, so I was especially pleased I hadn’t pulled my money out of a long-term investment, only to have lost the earnings on it for no good reason.

If you or someone you know is interested in purchasing a residence or an investment property, call your Realtor and ask about which loan would work best for you.

If you have questions about real estate or property management, please contact me at or call (707) 462-4000. If you’d like to read previous articles, visit my blog at Dick Selzer is a real estate broker who has been in the business for more than 40 years.

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