Borrowing for the sake of borrowing in order to build up a reserve or to simply prolong an inevitable assessment are near the top of the bad idea list when it comes to reasons a condominium or homeowners association may choose to borrow money. On the other hand, improvements, taking advantage of low interest rates, or amortizing one-time assessments, are potentially good reasons to take out a condominium or HOA loan. Additionally, when an unforeseen event, like emergency repairs, causes a reserve fund to be depleted, seeking external help may be a smart decision.
Traditionally, condominiums and HOAs impose special assessments to raise cash. However, special assessments can be tricky due to bylaw limitations or member discontent. Loans have the benefit of minimizing the impact of large, one-time assessments. Instead, there can be smaller increases spread over a longer time horizon. This places less burden on homeowners who may be on a fixed income, or simply unable to afford an especially large special assessment.
Another thing to consider is that depending on economic circumstances, upside down homeowners may default on not only their loans but their dues and special assessments as well. Although these obligations may all hold the same position in a default situation, attaching debt to a foreclosed property may be more palatable than trying to impose a large lump sum lien. In many states, the board may actually have a fiduciary duty to find the best solution for their capital needs.
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