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 are the components of a mo...1 Views
Finance Allah shmoop What are the components of a mortgage
payment All right so here's a weird thing about mortgages
When you borrow say four hundred grand buy a home
and say in a six percent fixed thirty year interest
you'll end up paying way more than the four hundred
grand just in interest Renting the money Think about it
Well you'll have a monthly pay payment of twenty four
hundred bucks and by the time you've made thirty times
twelve per year or three hundred sixty payments you'll have
paid some four hundred sixty three thousand dollars in interest
charges Seems like a lot of money to pay out
of your own pocket But since mortgage interest is usually
entirely tax deductible well the rial cost to most home
borrowers is actually meaningful E less than that six percent
interest maybe something closer to a three and a half
four percent something like that So while yes on a
total gross basis you will have paid out more than
the amount borrowed over the thirty year course in the
mortgage you'll also have been forgiven loads of taxes And
for what it's worth over most thirty year time periods
in history the market has gone up about eight to
ten percent a year on average Compound did something like
that So you feel the people mover floor moving fast
underfoot with inflation pushing things around as you go along
Well the money you borrow is the principal of the
loan and that number usually declines by a small amount
each month As you make a flat payment and it's
usually gradually paid off Check out what the principal of
four hundred grand looks like for the first twelve months
of payments right here Note that the flat monthly payment
is twenty four hundred dollars and see how the principal
payed as part of this payment loan thing there goes
from paydown of three hundred ninety eight dollars Teo Well
four hundred twenty a year later right Like you're paying
off principal little by little So you have less that's
attributed to interest And Mohr that's attributed to principal pay
down as you go along and note that this assumes
Ah flat monthly payment here Right You're paying the same
amount You're one you would You're thirty two thousand three
hundred ninety eight dollars and twenty cents on this particular
alone So after a year the amount owed an interest
is well just slightly last Here in this example it's
one thousand nine hundred seventy seven bucks down from in
a two grand and note what it looks like at
the end of each of the first five years That's
a big shift from almost entirely interest do now Principal
being ah meaningful part of it you got after ten
years right here and then at the halfway point in
fifteen years it's here So I noticed that the amount
owed at this point is roughly half the total Why
Because the lion share the pay down went to interest
in the first half of the life of the mortgage
AII those first fifteen years and well then in the
back half way more will be attributed to a principal
pay down than to interest Like check out what the
very last month's payment looks like It's just twelve dollars
of interest and two thousand three hundred eighty six dollars
of principle All of this is principal until well then
the balance is zero and we'll finally Then you will
have fully paid off your mortgage and own your home
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