All Forum Posts by: Jorge G.

@Jorge G.  You said you are a contractor , self employed .    In good times the money flows , in bad times you could be scraping by .  I have been there .

I have a similar property I bought in the early 90's . It fit the same bill , land , large shop , nice house . 

I made sure I could afford it and rates were 8 %  . I put 50% down and got a 30 year note , with a payment I could make driving a trash truck . ( never had too ) .  It is my base of operations . 

I would sell your house , no capitol gains , drop the proceeds against the price and get a loan for $300K .   Rates may drop , they may not . BUT you will be on solid footing from this point on . 

Get situated and then aquire investment properties 

@Jorge G.  aside from what everyone else has stated have you asked for a longer term even say 5 years?    If you are stretching yourself to make this payment rethink it. If you are hedging your bets and could pay principal find out how that would work. A 30 year amortization you would be knocking 5-600 a month off principal to start out. Interest only  you bank on appreciation.

You assume too much. You assume rates will go down, the house will go up in value and that you will be able to get financing. I assume I will learn to fly like superman, but maybe not too.

Realistically, I'm assuming rates will dip for the election, in an attempt to get this group reelected, then rates will go back up. I know prices are high in Idaho right now and I’m assuming they will need to drop because rates will stay high. And I assume it will be even harder to get a loan going forward.

An interest only loan means you owe as much at the balloon date, as when you took out the loan. A 3 year balloon is far too short for the risk you are taking. I'd make it a 10 year balloon minimum. That gives you time to refinance along the way. If your income is seasonal and rates stay high or we go into a deep recession is your income “recession proof?”

The equity in your current house will have capital gains taxes if you move out, are not living there for 2 years and a day and then sell. 

If you sell it while you fit the exemption, you save a lot of capital.  If you sell now or later and pay 6% realtor fee you are paying $30,000 so subtract that from your estimate of “equity”.

Jorge, 

He is offering you a rate well below the market. How does the loan amortize? Is it a 30 YR loan? If there aren't any odd terms to it, an interest only loan at 6% with 10% down is something that most people would never be able to get in this market. 

You would want to likely get all of the terms of the loan laid out for you including fees, prepayment penalty, amortization, term, etc. You also may want to check in to the value of the property to make sure you are not overpaying. If it all adds up to what you are saying, I think most people would take that in a second.

First and most important piece to evaluate - Ignore everything else and determine if the house is actually worth $600,000. I'd actually pay for an appraisal if I were in your shoes. It is not a good plan to pay at or over market value for a house just because the seller is willing to offer seller financing.

Second - Don't count on interest rates being below 6% in 3 years. It's possible (although unlikely) that rates don't go back under 6% in your lifetime. So you shouldn't buy the deal based on this assumption.

Third - Understand the implications of going from an interest loan to a fully amortized loan. If you're putting 10% down that means he's financing $540,000 at 6% which would come with an interest only payment of $2700. Let's say your dreams come true and rates come down to 5.5% in 3 years. Well your fully amortized payment on a $540,000 loan at 5.5% is going to be $3,066. This means that even though your rate is going down, your payment will go up.

As mentioned, the payment should only be $2,700 so I assume you’re paying $500/mo for taxes and insurance? If so expect that to go up. As also mentioned your payment will go into around $3,600 in interest rates drop 2%. 

You are in effect paying $60,000 for the right to pay $3,200 in rent. While being responsible for all repairs, and the right to buy it in the future for $540k. 

I think the downpayment and interest rate are far lower than market or what I would offer. But I hate the interest only portion and lack of details. Find out how long before you have to refinance. Is there a prepayment penalty? Get the payment broken out in writing as to how much is for insurance, taxes and interest. Make sure the seller knows you plan to declare the interest expense so they better report it as income. Figure out a way to make sure your interest is recorded so they can’t sell the property or get a new bigger loan on it. Etc etc etc. 

3 years from now you will have put down $60k and paid $100k in interest/rent (assuming nothing breaks) so that you can buy the property for $540k. So you’re hoping it’s worth way more than $700k in 3 years or you overpaid. (Minus any rental income and the fact  you needed a place to live if you rent out your current home. I just showing that if it’s only worth $660k (10% more in 3 years) you might be making a mistake. 

The big question is why is your credit rating low?  You don't say if you have any debt, but have you not paid bills in the past?  Something had to happen to affect your credit rating.