Understanding Coops and Underlying Mortgages

said on June 26th, 2012 filed under: Mortgages and Lending

bigstock-Mortgage-Calculator-5657025 An underlying mortgage is a loan to a cooperative apartment entity which uses its property as collateral. It’s called “underlying” because it comes before (or under) any personal loans which individual shareholders have taken out to purchase their apartments. To be specific, co-op shareholders do not actually own their individual apartments. Rather- they are owned by the cooperative- which then leases the space to the shareholders.

Not all buildings have underlying mortgages, but the majority do. Even if a co-op can afford to pay off the underlying mortgage, many take out loans for the benefit their shareholders get from the interest payments.

Since the entire property co-op is owned by the corporation, it appears on the tax rolls as a single piece of property. The corporation pays the property taxes and then passes along the cost to the tenant-shareholders as part of the monthly maintenance fee.

Property taxes typically run lower in co-ops than in condos. That has to do with the form of ownership. When condos are resold as separate entities, the appraisals and higher sales prices are recorded individually. This generally results in higher assessed values and consequently, higher property taxes. Co-ops (as sales of stock) are not recorded at all; the only way a sale could be reflected in tax rolls is if the entire piece of property were sold, which is quite rare. That’s why you’ll find that an increase in property value usually lags in terms of assessed value and corresponding tax bills.

Co-op fees tend to be higher than those in condos, because in addition to the lawn care, common area maintenance (CAM), insurance and trash removal etc, co-op fees include a portion of the underlying mortgage. If a building requires a major renovation, co-ops can often borrow money for the project. Condos have to impose (often costly) special assessments for similar projects.

Financing a co-op purchase has long been viewed as more difficult than a condo purchase. Some co-ops have structured financing deals with a few approved banks- limiting choices for the buyer. These banks tend to have limited financing options, often have higher interest rates, require larger down payments than most conventional banks, and have stricter lending requirements. They have a stake in the building, after all.

I hope this has helped you sort out any confusion over underlying mortgages. Now, let me know if I can help you find a co-op!

posted by Marcie Sandalow

This entry was posted on Tuesday, June 26th, 2012 at 8:50 am and is filed under Mortgages and Lending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.