I am new to seller financing, I just put in an offer to purchase a house in Calif, it is too troublesome to get a loan from the banks, so we ask the seller (a relocation company that owns the property free and clear) to finance the sale. My broker and I worked out the following terms:
purchase price: $750,000
down payment: $ 50,000
seller finance: $700,000
Interest rate: 5.25%
term : 10 yr (interest only)
Balloon payment: $700K (at the end of the term)
No prepayment penalty
The more I thought about it, the more I am uneasy… since, it seems I will end up paying a lot more for the house?
Lets say, I pay interest payment for 5 years and at the end of the 5 years I refi the property with a conventional loan. I basically would lose the payments I paid to the seller and start from scratch with a $700K loan again with the new lender?
You are not ‘losing’ any payments. The payments you make to the seller are the interest only payments at 5.25% which you negotiated to close the loan. That is simply the cost of doing business and is at or below current market interest rates. Whether you pay this seller via owner financing or the commercial bank down the block you will still have to pay interest to someone.
For cash flow reason, I don’t wan to do P&I (principal and interest) payments.
It just seems to me if I paid $50K in interest payment to the seller, when I refi to a 30yr fixed, and the loan amount is $700K, I start from scratch again.
As I see it, your monthly payment is about $803 per month lower than an amortizing loan payment assuming the same interest rates. The tradeoff is that the total cost of your financing over the long term is more expensive with an interest only loan.
Beginning with the second month, the total of all your monthly principal and interest payments plus the balance of the loan to be repaid will be greater with the interest only loan than with the amortizing loan.
If the seller sees that he really gets more money in the long run with an interest only loan versus an amortizing loan, then the seller may be happy to accept your terms.
The drawback for you is that property values may still be dropping and you will be upside down with an interest only loan sooner than you would with an amortizing loan.
What you said confirmed what I was thinking… which is that with an interest only seller financing, I would end up paying more over the course of the loan, when I refi.