The Effects of Cooperative Loans

Cooperative loans, or co-op loans, are relatively new loan products -- they entered the market in the 1960s. These types of loans are most common in urban areas where residents are interested in laying claim to a piece of real estate, but cannot afford to purchase an entire unit on his or her own. It's important for a buyer to understand the differences between co-op loans and standard mortgages.

Traditional Secured Loans

Traditional secured loans, or mortgages, are loans used to purchase an entire piece of real estate. These loans buy buildings and land, as well as any other structure or byway on the surveyed property, in cluding driveways and walkways. These loans are often granted to individuals or couples and are repaid on a predetermined schedule. The property owners then have the option to adjust and make improvements to the property.

Co-op Differences

When a borrower accepts a co-op loan, he is simply buying shares in a co-op agreement. The shares he purchases give him the right to occupy a unit--usually a condominium-- and use all the services in the building (driveways, hallways). The co-op board, a group elected by members of the co-op community, makes decisions for the group concerning improvements and rules.

Advantages

A member of a co-op has the backing of an organization. This means that events like natural disasters and fires will not affect a co-op member's ability to recoup losses. In addition, the payments on shares in a co-op are often far less than monthly payments on a condo mortgage. Also, co-op members usually pay far less in closing costs.

Disadvantages

A co-op member has fewer options when it comes to improving her home. She must first petition a co-op board to get approval on any project involving shared property. Also, issues of "rights" come up frequently in co-ops. Sometimes members try to take advantage of shared spaces, resulting in conflicts personal and legal.

Younger Borrowers

Co-ops can be ideal places for young borrowers and young couples to begin setting up lives. While co-op shares will not be worth as much as an entire condo, shares can appreciate in value. Therefore, if a young family moves in, sees their shares appreciate, they can sell, make a small profit, and put down money on a new home.