I am currently confused on how I would exit a seller financing deal that has a 5 year balloon in the P&S agreement. For example let's say the terms state that the purchase price is $380,000, DP is $19,000, Amortization is 30yrs, interest is 4% and seller wants a 5yr balloon. At the end of the 5yrs I would have paid off a total of $72,200 (not including property tax and insurance) leaving me with a net balance owed on the property of $288,800. If I were to use a cash-out refinance of up to 80% on the property and the property value didn't change so the loan would be $304,000 would the loan be paid to the seller? What happens to the left over amount of money? Would I have to put 20% down since the loan only covers 80% of the assessed value of the home?
Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
5y
In a refinance, assuming the new lender will go up to 80% LTV, you will keep any additional money that's left after the balloon payment and closing costs are paid. You likely will not need to bring any cash to the table unless property values go down and the new appraisal doesn't support the loan amount that you are seeking at that time.
I would double check an ammoritization schedule because your balloon payment seems wrong to me. Based on the terms you mentioned, I calculated a balloon payment of approximately $326,500 at 5 years.
Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
5y
In a refinance, assuming the new lender will go up to 80% LTV, you will keep any additional money that's left after the balloon payment and closing costs are paid. You likely will not need to bring any cash to the table unless property values go down and the new appraisal doesn't support the loan amount that you are seeking at that time.
I would double check an ammoritization schedule because your balloon payment seems wrong to me. Based on the terms you mentioned, I calculated a balloon payment of approximately $326,500 at 5 years.
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
5y
@Derek Dombeck I think hits the nail on the head on all points.
I think where you are getting the wrong balance is counting the interest, which is roughly 2/3 of each payment at the start, as going towards reducing the 'principal', which is incorrect. I come up with the same figure as Derek using a simple loan calculator.
Your balance after 5 years is $326,516, borrowing $361,00 at 4%, 30 year amortization. Assuming you qualify for an 80% refi, your seller gates his loan balance, you get whatever is left over above that.
Your balance after 5 years is $326,516, borrowing $361,00 at 4%, 30 year amortization. Assuming you qualify for an 80% refi, your seller gates his loan balance, you get whatever is left over above that.
You need to use an amortization table/calculator. Since the mortgage payment is constant, the amount of the payment that goes towards principal and interest is constantly changing...
@David M. Ok thanks and I was also wondering when a buyer and seller do a VTB does the seller pay for property taxes and insurance separately from the principal and interest?
I haven't done one so not entirely sure. But, I would think the buyer would be paying the property taxes and insurance since they would be holding Title. The seller should just be holding the Note. Whether the taxes and insurance are put into an escrow account is I guess up to them.