Ask Habitat: When Buying Apartment, Is Co-op's Underlying Mortgage Important?
June 23, 2014 — A BUYER ASKS: I want to buy a co-op apartment on the Upper West Side, but when I looked at the building's financial information, I saw that its underlying mortgage is going to expire in two years. Does this matter?
HABITAT ANSWERS: It might, since depending on what the co-op board of directors does about this loan, your monthly maintenance can change.
Briefly, a co-op's underlying mortgage is one of the key elements of the cooperative structure. Because a co-op is a corporation, it can act just like any other corporation: It has corporate shares (which is really what you are buying when you "buy" a co-op apartment) and it has the ability to take out a loan on the building (called an underlying mortgage).
Many co-op boards look at a mortgage's expiration as a time to refinance in order to borrow money from the building's enhanced equity, usually to pay for building repairs. So whatever happens to this loan will affect your monthly maintenance fee.
Item of Interest
Is the interest rate on this underlying loan important? You bet it is. "If an underlying mortgage is coming due in the next 24 months and the current interest rate on the mortgage is less than what the new mortgage will cost, owners will pay considerably more on their mortgage payments," says Steven Birbach, chairman of Carlton Management.
Rest assured that any competent, educated board is probably discussing the effects of a mortgage expiration and a refinancing, because any decision will affect the monthly pocketbooks of everyone in the co-op. And if this particular board is not, you might want to buy an apartment elsewhere.
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