Loan Questions- Need a Break from Politics????

[barkalot]

We are looking out of state at a 1000 square foot home with two bedrooms and one bathroom. It needs work but is livable as is. It is in town on a large lot. They are asking $45,000.

I am out of work right now, so our goal was to move and have a house free and clear to keep our cost of living low in case all I can get are minimum wage, part-time jobs. If things go well, we would also be able to retire our consumer debt, too.

Initially we thought we might be able to get the sellers to lower the price to where we could purchase the home for cash, but the seller supposedly does not "need" the money (this is likely true, since the family owns many rentals, probably outright).

The real estate agent suggested we offer the following:

$22,500 down
6.5% interest for 10 years
Balloon payment in three years

According to him, our payment on the house would be $255 a month, which is less than half what we would pay in rent for the same sized house in that area with no equity being earned.

If we did this, I would have $10,400 left to supplement income if needed and to use to fix up the home (or retire consumer debt). By April 2009, I would likely have another $9000 in tax return money.

I don't know much about this sort of thing. What do you all think?

A bank loan is out of the question since although my credit is still golden, I am out of work.

[School Cop]

If it's a place you want to live in, then it's a good deal. If not, it's not.

If you got those terms, it could work out good. Some things to consider, though:

1. Balloon payments scare me. I would try to do it without one. You can always plop down a chunk if you come into it and want to. Make sure there's no prepayment penalty.

2. Will the house be big enough for you? If you're going to move up in a few years, will you be able to sell it? You might be stuck with keeping it as a rental. Just keep in mind that just because you have, say, 60 grand in a house, that doesn't mean you can find a buyer at that price. It's no good building equity in something if you can't get it out. Of course this is a moot point if you will stay there forever.

3. Be very very careful doing private financing. It needs to be very official; I wouldn't have the first clue how to do it, but I know you don't want a situation where the guy just says, "Oh, just send me a check every month for X dollars." Get a lawyer to draw it up, or use your realtor; he'll know what to do.

Good luck! I just moved from a house I owned for three years and I made a KILLING on it. I caught the market good, but the main thing was, it was a solid house but hadn't been updated since the 70s. In any way! I did a lot of work myself and it really paid off. It can be fun to do it just how you want it.

Post here some more, I'm curious what you will end up doing.

[L-1]

$22,500 down
6.5% interest for 10 years
Balloon payment in three years

According to him, our payment on the house would be $255 a month, which is less than half what we would pay in rent for the same sized house in that area with no equity being earned.

Something smells here big time. If the house is $45,000 and you are putting $22,500 down, that leaves a balance of $22,500.

The total monthly principal and interest payment on a 10 year mortgage of $22,500 at 6.5% is only $255.48 per month. So if he is telling you that you are gaining no equity and have to make an additional balloon payment after three years, you are being take to the cleaners.

Go to http://www.mortgage-calc.com/mortgage/simple.php to calculate mortgage payments.

[barkalot]

Something smells here big time. If the house is $45,000 and you are putting $22,500 down, that leaves a balance of $22,500.

The total monthly principal and interest payment on a 10 year mortgage of $22,500 at 6.5% is only $255.48 per month. So if he is telling you that you are gaining no equity and have to make an additional balloon payment after three years, you are being take to the cleaners.

Go to http://www.mortgage-calc.com/mortgage/simple.php to calculate mortgage payments.

I don't think I was clear. He just stated the terms and I pointed out that what I would be paying would be half than what I would be paying in rent. In addition, if I was renting, I would not be gaining equity. If I bought, I would be.

What I don't understand was why the need for a balloon payment at three years on a ten year loan? From my limited understanding, balloon payments come at the end when the loan matures. Someone on another forum suggested the balloon payment was to retire the loan early if I could do so, but that I should include a no penalty clause for early payment.

Anything I do will be in writing through an attorney or the agent. We have used him before and he has always done well for us, except in this case he is working for the buyer.

Our thinking in this is to get a very low mortgage and pay off some consumer debt, so that our overall cost of living is low enough to be covered by part-time jobs. If I get back into LE there, then it won't be a problem, but that could take some time for something to open up. There is a low turnover in the area.

Thanks for all the replies.

[L-1]

At the rate you are paying, there should be no balloon payment on a 10 year mortgage. You should be paid in full at the end of 10 years.

Reading between the lines I think this is what he offered you: You are getting a three year mortgage on $22,500 with payments structured at the 10 year mortgage rate. At the end of three years, the remaining balance of roughly $16,000 comes due. If this is the case, I would give considerable thought to it. $16,000 doesn't sound like much. But this is a small town and if you are worried about not being able to get more than a minimum wage job, raising an extra $16,000 over three years is going to be a burden. Before taxes and Social Security, that's going to represent an extra 55.5 hours of work per month for the next three years. Factor in deductions for those items and you are looking at more like 70 hours per month at minimum wage. This type of creative financing (finance cheaply now and hope you can refinance just as cheaply when the loan comes due) is what got the real estate market into the trouble its in now. It sounds like they are hoping to collect a chunk of change from you now and in a couple of years, have you default the house back to them so they can sell it all over again.

OTOH, if you can afford a three year mortgage at 6.5% with full paymnents, your payments will be $670 per month and you will be paid off in 36 months.

[Tex4720]

The three year baloon payment is the sellers right to say. "I dont want to carry your loan for seven more years I want my money now". I'v had one with a bank and they never asked for it and just kept the regular payments up. Banks do this so they can call in loans on delinquint late payers.

It would scare me with an individual. He will probably call it the first day he can.

[Looker]

If I were you (and I've thought about doing this too), I'd go all in and own the house outright. Don't make a payment to anybody if you don't have to. In the end, the interest will take money out of your pocket and put it directly into the lenders pocket by the thousands.

According to the Navy Federal Credit Union mortgage calculator...

* If your interest rate is 6.5% on a $22,500.00 loan over 10 years
* and your property taxes annually were $300.00
* and your homeowners insurance premium was $400.00 annually

Your payment will still be about $314.00 per month.

Here's the kicker.... you'd be paying a total of over $8,100.00 in interest for a loan you didn't really need after the loan is paid off. That averages out to be $810.00 per year, or almost $70.00 per month. Working minimum wage, that would take you two to three hours (after taxes) just to pay the interest off. Money thrown away. For what? Saving?

If you had a money market account that got you 3% interest, and you put the whole $22,500.00 into it, you'd make around a whopping $56.00 per month in interest. You'd still be in the red $14.00 per month because the interest on the house.

Now... if I were you and had enough cash, I'd buy a second house outright and rent it out instead of paying off other debts, depending on how large those debts are. There's a great source of income provided the demand for rental property is decent where you are going. Those other debts are also temporary, property ownership is an investment you can pass on to new generations.

My .02

P.S. If yer gunna do a loan, don't do anything but a fixed rate loan... no balloons, no ARM's... those are no bueno.