You just got a notice from your condominium board of trustees that they need to spend $3,250,000 on major projects that have been put off for many years. In theory, everyone has agreed to put off the repairs in favor of "saving" on the monthly condo fees. For the past several years, the roofs, windows and paving have been neglected and now it's time to pay the piper. This is the situation that a unit owner in a 75-unit complex now faces.

The amounts that have been set aside in the reserve fund for these projects total only $250,000. The project needs to be done starting in the spring of 2008 and completed by the end of summer to avoid additional costs. How does the board handle the problem and how does it impact you as a homeowner?

This situation is occurring all over the Northeast as we speak and the financing for these projects vary widely and with differing results.

The board is very concerned that unless all funds are available before the project's start, they will not be able to negotiate the best prices. The board has also been told by multiple lending institutions that they are not in the financial position to finance the projects internally using monthly and/or annual funding sources. This is in part due to the "savings" that the Board has voted for over the past few years. So you are now faced with the following letter and financial dilemma from your association: "Dear homeowner, you have been assessed the sum of $40,000. These funds must be received on or before December 31."

How can you best finance this without being taken advantage of by unscrupulous lenders?

We have all read stories of sub-prime lenders and the high foreclosure rates that are occurring all around us. How can you obtain financing for this assessment? Do you refinance your total mortgage, get a second mortgage, get an equity loan, or pay the assessment with your own savings? Let's explore the options you have and the obstacles that will be encountered during this process.

Understanding the Terms

When looking into financing you need to understand the terms outlined in most loan documents. Many unscrupulous lenders will impose many of the following lending tactics:

• Imposing high costs to the consumer, in terms of filing fees and the additional expense of arbitration proceedings. You may get a lower rate, but a higher than normal closing cost and or fees. These fees add to the cost of your overall financing.

• Allowing arbitrators, who may not have proper training and are often selected by the lender, to decide complicated financial cases without allowing the borrower a right to appeal.

• Limiting the availability of counsel, therefore eliminating traditional procedural protections.

• Imposing prepayment penalties. In sub-prime loans, these penalties create a financial trap that may cost four to seven percent of the loan balance when a refinance is attempted. Prepayment penalties are common in up to 80 percent of subprime loans, while less than two percent of prime loans contain them. You should not work with a lender who imposes these costly prepayment penalties. It is not in your best interest.

So what is a sub-prime lender? A sub-prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders. Some are independent, but increasingly they are affiliates of mainstream lenders operating under different names. Be leery of lenders offering good rates today with a variable rate change that can become very costly later. You may be able to afford the loan today but be in default tomorrow due to the changes in the rates.

In understanding the terms and conditions of your loan, you can better understand the process and the total costs of the debt. Your condominium is the collateral for your first mortgage and will most likely be the collateral for a second and/or an equity loan.

Play the Numbers Game

So how does one determine which is the wisest path to follow? You need to do the math. Just because the monthly payment today is the lowest does not mean that it is the best debt instrument for you. You need to take into account all possible data and work it out. Let's work through the following example:

Lender 1 offers you a $40,000 loan at 7.5%, Closing costs are equal to 250 basis points, with an adjustable rate mortgage and a 3.5% prepayment penalty if paid within the first 5 years. The adjustments have a maximum 3% per period change based on various indices. The term of the note is 10 years.

Lender 2 offers you a $40,000 equity loan at 8.25% to be paid back over 10 years.

Simple decision? Take lender 1, you say? Sorry. Wrong answer.

The closing costs alone add $1,000 in up-front costs (a basis point is equal to 1/100 of a percent). In addition, the current trends are for rising interest rates, so in two years the rates will probably go up and be higher than today. And if you think you can refinance before the first adjustment —sorry, again. That will cost you an additional $1,200 (approximately).

But can't the rates actually go down after two years? Yes, but with many lenders even if the rates stay the same or go down, the underlying indexes and margins can still result in a spike in your rates.

Therefore, Lender 2, offering a straight 8.25% rate, no points, closing costs, prepayment penalties or rate adjustments, will be the least costly transaction.

Decisions to refinance, or take a second or an equity loan each need to be reviewed in the same light. In all cases, be cognizant of your current and future, realistic financial positions. You can't assume that you will be getting a 20% increase in pay each year or that your long-lost aunt is going to leave you her wealth. Your lender will not be counting on this and neither should you when deciding on what type of debt you need to take on to pay for this needed special assessment.

Maybe now you will run for that board position to protect and pre-serve the new structures of your association.