Aunt Fiona has decided it’s time to downsize and move into one of those trendy 55-and-over communities. We’d love to buy her house—it’s been in the family for generations—but there’s no way we could get approved for a home loan that big. Happily, Aunt Fiona wants to keep the house in the family too, so she’s agreed to something called a purchase-money mortgage, or PMM.
A “purchase-money mortgage” happens when the seller of a house offers mortgage financing to the buyer of the house. Yes, that’s right: we’re securing a mortgage from Aunt Fiona herself. On the plus side, this allows us to “qualify” for a loan we’d never have qualified for otherwise. It’s just like a bank loan, but instead of sending our payments to the bank, our down payment and monthly mortgage go straight to Aunt Fiona.
And it isn’t only relatives who can get in on the PPM action, FYI. Whenever a seller has a buyer who doesn’t quite meet the qualifications for the loan needed to complete the purchase, they can opt to go the PPM route, either for the whole purchase amount, or just enough to bridge the gap between the amount of the bank loan and the home’s sale price.
Is this still a legally binding, credit-score-impacting kind of arrangement? It is indeed, and this is where the potential drawbacks come into play. PPMs usually come with higher interest rates than standard home loans, since the borrowing terms are a lot less strict. This means that we’re likely to end up paying more in the long run for the family home than we would have if we’d bought it conventionally. Also, though PPMs usually come with super-flexible payment terms—i.e., we can make a full payment this month but make an interest-only payment next month, etc.—those super-flexible payment terms can make it really easy to make small payments when money is tight…and then realize later that we haven’t been paying down the principal amount of the loan nearly as much as we should have been.
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Finance: What is a Mortgage?345 Views
Finance allah shmoop shmoop What is a mortgage Well people
a mortgage is just dead it's alone but one with
special tax treatment For most people simply put Any interest
you pay on a mortgage to buy a home is
tax deductible Morty morton's inputs down a hundred thousand bucks
to buy a home that costs four hundred big ones
his mortgages three hundred grand at five percent interest per
year So that's fifteen thousand dollars a year he pays
to rent the money from the bank which he uses
to buy his dream home with the loop de loop
waterslide Morty earns one hundred grand a year and pays
tax on his last fifteen thousand of earnings soas faras
The irs is concerned since morty can deduct his fifteen
thousand dollars in interest against his earnings he does not
in fact earn taxable wages of one hundred grand annually
Instead he earns taxable wages of eighty five thousand dollars
a year Essentially with government is doing is sharing in
some of the cost of renting the money Taub i'm
ortiz home well why would the u s government be
so charitable Well because home ownership has been integral part
of the american dream since the u s of a
i po'ed in seventeen seventy six easy access to mortgages
and then home buying can be a hugely beneficial asset
In the vast majority of cases homes create family stability
a store of wealth and tax dollars for local schools
in the form of real estate taxes So don't feel
bad about splurging on that water slide there Morty Just 00:01:42.93 --> [endTime] remember you're doing it for the kids Hello
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