Financial wizardly - Page 2 - Fiberglass RV


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Old 05-12-2012, 06:55 PM   #15
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In the US in order to write off the interest the loan must be secured by your primary residence.
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Old 05-12-2012, 11:11 PM   #16
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So am not totally familiar with the term "Balloon" mortgages.
A.K.A. "Interest Only"
Monthly payments are the Interest only, no Principal gets paid down. Low payments for the life of the loan and one "Balloon" payment of all of the Principal due at the end of the loan. Usually the only way to pay the principal is to take out a new loan. Or win the lottery...
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Old 05-12-2012, 11:46 PM   #17
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A.K.A. "Interest Only"
...
Why would someone actually want that type of loan on their home? If you never really want to own it why not just rent?
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Old 05-13-2012, 12:18 AM   #18
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Why would someone actually want that type of loan on their home? If you never really want to own it why not just rent?
During the bubble the idea was that long before the loan came due the property would have gone up in value enough to make refinancing easy. Buy for 200k with the banks money then refinance with 50k in equity when the house reaches 250k in a couple of years.

While house shopping we were out bid on a house where the buyer had an 80% first mortgage, and 20% second mortgage, with the builder picking up a chunk of the closing costs. Of course they would pay more, none of it was their money. They started out with an upside down equity position.

We got a lot of advice to "buy more house" or go with one of these fancy mortgages. Which we ignored to buy the house we needed (like our 13 ft FG just what we need) putting down money so both payments and total interest is low. Good thing too because with all those other houses being dumped on the market our mortgage payment might as well be rent. Value is falling faster than we are paying it off.
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Old 05-13-2012, 10:14 AM   #19
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Thanks for explaining. It makes it easy to understand why so many people where willing to walk away from their homes in the US, causing the US housing prices to take such a big drop - while prices here in Canada continued to climb. Cant get a first mortgage on a home in Canada without having your own equity in it so people are not going to walk away to fast if prices take a dip.
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Old 05-13-2012, 05:24 PM   #20
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Why would someone actually want that type of loan on their home? If you never really want to own it ...
I had not heard the terms "Balloon Payment" or "Balloon Mortgage" in a long time. From my understanding, (and I could be wrong about this) they existed before "Sub-Prime" and "Adjustable Rate" mortgages were invented. Nobody ever wanted one; they usually settled for one because their lack of documented creditworthiness prevented them from obtaining a "regular" mortgage and they really wanted to "own" a house. These were only short term of 5 to 7 years and paying only the interest made the monthly payments affordable until you gained some equity from price appreciation. Think about it, you Buy a House and you take out a mortgage. The deed lists you as the owner and the financial institution as the lien holder; it's all in the semantics.
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Old 05-13-2012, 05:34 PM   #21
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Balloon mortgages were popular in the 1980's when the mortgage interest rate was 14% and home values doubled and tripled in a decade. People would speculate that their home would increase in value thus they were not interested in the rate nor planned on living there for long. Thus they paid a minimum investment and small payments hoping that the increase in value was sufficient to cover the entire mortgage that would come due, normally in 5 years. Construction loans were also balloon as were persons who moved every 3-5 years due to their employment.
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Old 05-14-2012, 09:00 AM   #22
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I think ballon mortgages are a commercial version of the older land contract. Which is making a comeback.

The high interest rates in the past (70's or early 80's as I recall) made selling a home difficult and drove down housing prices. Price of home is essentially a result of what income was required to afford mrtg. payments. Higher interest leaves less "monthly" for purchase price of house while still making payments high.

Sellers would draw up a contract where buyer agreed to monthly payments and purchase price to be paid in full three to five years in the future, that was the ballon payment.

The buyer would need to get a mortgage to payoff the ballon. But would have a few years of payment history, and the payment plus any increase in home value would provide equity.

Seller gained interest charged on land contract and had income to offset still having to pay the mortgage on the property allowing them to qualify for a mortgage on a different house. Plus had own mortgage payoff reduced by a few more years of payments.

At the end of the land contract both the buyer and seller and their banks would attend a closing where seller mortgage was paid off and a new one taken on by the buyer, land contract was fulfilled and title was transferred.

It worked ok for some, my sister and her husband sold their house that way when he took a job in another state. Interest rates were too high and the market was soft due to layoffs at the big three auto plants.

Commercial mortgage brokers created the ballon mortgage to meet the same need, rising housing prices made house down payment unaffordable and monthly payments high, but rising prices offered a good chance that five years down the road the owner would have equity to get new mortgage when ballon came due. Sweet deal for the broker because they get "normal" mortgage payement but it's 100% interest.
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