The monthly payment would be $733.76 followed by an balloon of $ 95069.86.
Verify with the
balloon calculator.
Will the borrower be able to re-finance this balloon and pay you off? Maybe.
But it could be just a foreclosure waiting to happen.
How about though if instead the monthly payments started at $733.76 and
increased by $50 a month in the following year and each consecutive year? Then
let the mortgage run for 10 years with a balloon after 10 years.
With this scenario, after 10 years the monthly payment is $1,183.76 and the
balance just $52.516.41. A much easier sum to re-finance as even if the property
has not increased in value, the borrower would have a Loan to Value of just 52%.
Use the free Excel?nbsp;
mortgage
accounting spreadsheet to compute your own scenario.
Pay more for a property but with the seller holding a note at a lower
interest rate.
Here is an example:
Compare these 4 offers for the same house and let us assume it would cost you
8% interest on a mortgage to pay the seller all cash:
| Total offer |
120,000 |
130,000 |
140,000 |
120,000 |
| Down payment |
120,000 |
30,000 |
20,000 |
10,000 |
| Seller financing |
0 |
100,00 |
120,000 |
110,000 |
| Interest rate |
n/a |
4% |
7% |
5% |
| Months |
n/a |
120 |
240 |
180 |
| Monthly payment |
|
1012.45 |
775.30 |
1028.03 |
| Cash value of income stream at your cost above |
120,000 |
113,448 |
112,690 |
117,574 |
As you can see, you're better off to pay the seller $140,000 if they will
give you a 7% mortgage over 20 years.
We wanted to buy a house from a seller a few years ago for $35,000 cash. They
would not accept that. They DID accept $40,000 with $15,000 down and a zero
interest loan for $25,000 for 100 monthly payments of $250 each. At a cost of
funds to us of 8% this was the equivalent of paying $33,204 for the house.
I already hear you saying, I won't do that, I want cash to pay my bills. And
anyway, what if the buyer doesn't pay me?
But what if the listing is about to expire and it's a choice between carry a
note or get zip?
Most agents make the mistake of allowing the commission note to be in 3rd
position, behind the bank and the seller carry back note. Instead, it is
reasonable to require your note is AHEAD of the sellers. See this difference:
| Scenario one |
Scenario two |
$100,000 Sale price
$ 70,000 New first mortgage
$ 10,000 Down payment from buyer
$ 13,000 Second to seller (private seller financing)
$ 7,000 Third mortgage to broker for commission |
$100,000 Sale price
$ 70,000 New first mortgage
$ 10,000 Down payment from buyer
$ 7,000 Second mortgage to broker for commission
$ 13,000 Third to seller (private seller financing) |
The broker's mortgage in scenario two is MUCH more saleable and has a lower
risk.
Here the seller wants more cash than the buyer than the buyer has.
The house is worth $150,000.
| |
Seller
Wants |
Buyer
Wants |
|
Value |
$150,000 |
$150,000 |
|
Price Rec'vd/Paid |
$147,000 |
$150,000 |
|
Down |
$20,000 |
$20,000 |
|
New 1st Loan |
$100,000 |
$100,000 |
|
Seller Holds |
$30,000 |
$30,000 |
All the seller has to do to receive an extra $7,000 in cash is to split the note
he is going to carry into a 2nd of $10,000 and a third of $20,000.
He can now sell his $10,000 note for $7,000 cash at closing and end up with his
$147,000. it makes no difference to the buyer, who will still be paying a total
of $150,000, except he will have to write an extra check every month to the
holder of the second mortgage (that was sold for cash).
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