Private Money Pay Off

[Jordan Ward]

I am knew to investing and have some pretty basic questions about paying back private money. Here are two scenarios...I would love it if someone could walk me through how much my monthly payment would be and how I would get all the money back to my private money partners. 

1. Lets say I buy a property through private money for $100,000 at 6% for 14 months. After 14 months refinance through bank. During the 14 months what would I pay my investor monthly and how would he receive his full amount back with interest?

2. Same scenario except this time the terms are for 5 years. Payments? Payment back in full? After 5 years is it possible to have the property free and clear? 

Sorry if this seems pretty basic. I've never done this before though. 

Thanks!!!!

[MJ S.]

Hi @Jordan Ward!

In your scenario, you would have to determine (along with your private lender) if you are paying monthly interest, or if you are able to wait until the refinance to pay any interest. Some private lenders require monthly interest, but others don't. 

If you are paying your lender monthly, you would pay $500 per month ($100,000 x 6% = $6000 / 12 = $500), and then $100,000 at the refinance. I am assuming that the lender will have a Deed of Trust or Mortgage so the payoff will actually go through the title company. Prior to your refinance, the title company will send a request for pay-off to the lender. When your refinance closes, the title company will pay the required funds directly to your lender.

If your lender allows the interest to ride until the refinance, then it will be the same scenario as above, except you won't pay monthly interest, and the payoff will be $107,000 at refinance. (14 months of interest at $500 per month = $7000 + $100,000 original loan) I think you've probably already figured out that, due to the time value of money, waiting until the refinance is a better deal for you, but most lenders will require monthly payments.

Keep in mind, it's unlikely that your refinance date hits exactly on the 14 month mark so the exact pay-off amount will be determined by the date your refinance closes. It may vary a few dollars one way or the other, depending on that date, but you get the idea.

In your second scenario, you question the possibility of paying off the loan in full within 5 years. To accomplish that goal, the loan will be amortized. For $100,000 at 6%, your payments would be 1993.28 per month. And while your payment is higher with an amortized 5 year loan, your interest is actually less because as you pay down the loan, you're paying interest on less principle. 

Of course, there are multiple options... by amortizing for longer time periods, you can lower your payment while still paying down some of the loan. I could run through endless scenarios, but in the interest of time (and to keep from completely boring you), I won't. Keep in mind that your options will be determined by your lender. Many private or hard money lenders prefer interest only so you would need to discuss if they are open to amortized loans.

Hope that helped more than confused.