Interest Only Seller Financing Questions

[David Cherkowsky]

Hi all,

My agent presented an opportunity to me that would use seller financing and I had a few questions. The seller is looking to sell a house he bought and renovated. Based on a conversation with my agent, the seller is looking to be presented an offer and we would negotiate from there. This would be my second REI; I have another house that was purchased with a conventional loan. I've been reading about seller financing the last few days, and there are a few things that I'm still unclear on.

1. If I presented terms for an interest only payment for a term of 5 years, with a balloon payment due at 5 years, could I refinance during those 5 years into a conventional loan if interest rates drop?  My worry is the 5 years pass and the balloon payment comes due, and now I am stuck with whatever interest rate is available at the time. For example, if in your 3, interest rates drop to 3%, could I refinance then into a traditional loan?

2. After 5 years, I will have only paid interest, the principal will not have changed. Would all traditional loan options be on the table? I plan to house hack, so I assume I could move to a traditional loan at 5% down at that point. Is that correct?

Thank you in advance for your help.

[Dan Thomas]

@David Cherkowsky

That doesn't sound like sound logic. Private Money (almost) always costs more. You can certainly offer that rate but it may be laughed off. There is probably little harm in trying and with a very low anchor like that it may help you shave a point or two off. The lender is taking on risk. People who take on risk typically expect to be paid for that risk. If you want a low interest rate, go conventional. If you can't go conventional pay more for private Money.

In my experience (new england) if rates are where they are today I have paid between 9% and 12% for private Money. My goal is ALWAYS to fix the reason for not being able to finance conventionally ASAP and refi into a conventional loan. As mentioned previously you will want to make sure your agreement doesn't have absurd prepayment penalties.