Now that interest rates are rising, are more banks going to the trouble of calling loans due on sale? We are looking into the Sub2 option to purchase homes for rehabbing, but do not know whether this technique will still work in the current climate. Any honest advice?
Howdy Jacobs4:
Not to worry about rates yet. Maybe if they get to 12 or 15% again. Especially if you are buying to rehab and resell with a new loan to a buyer. Your time as a sub2 owner will be short, at lease you hope so and that way you will have less carrying costs.
…and it’s unlikely, if you’re selling with 2 year owner financing, that the rate on the underlying mortgage is going to go from 5.25% to 15% in two years. At least, let’s hope not. It wouldn’t be worth the cost to the bank for a percent or 2.
I may be reading this wrong, but I think jacobs4 is asking if the banks will have more incentive to call a loan due if the current rates are substantially above the rate of a note in a “subject to” deal.
Right now the banks might know that a property has been transferred, but as long as they are getting paid on time, there is little incentive to accelerate the loan.
Howdy Valgolas:
That was the same as I read the question. If rates get around 12 to 15% then lenders may in fact investigate to see if some of the loans have been taken over sub2 and then call them due. At that point too there will be even a whole lot more sub2 deals than ever before. This has happened before and may happen again if inflation goes rampid.
Howdy Ted!
I guess I was kind of seeing several issues in the question and the answers. I get confused easily, you know.
One is the bank calling the loan issue. At some spread in the rates, the banks will make the decision that calling the loans is profitable, like in the early eighties. We aren’t near this by any means, but if rates really shot up, this could happen - theoretically.
But by then, the lenders would have a lot of other problems on their hands, wouldn’t they?
They aren’t going to want to get even more properties back.
The other is the carrying cost issue. Part of this one is the question of whether a “subject to” deal makes sense at high interest rates. Also, do you want to take a property “subject to” if the loan is an adjustable rate, and the rates are rising?
These are good questions for “subject to” buyers to have thought out.
Thanks Tedjr and everyone else everyone for the insight. I asked the question mainly because I was worried if we took over a loan that was say, 5.5%, and current loan rates were 7%, if they would call it due. It sounds like that spread would not be worth their while.
We are estimating for a holding time of 5-7 months between acquisition and sale, so it sounds like we could be fairly sure they would not take action in that amount of time.