Avoid the Perils of Risky Financing
“Did you know that the most expensive thing you’ll likely ever buy is not your home: it’s the cost of financing required to purchase that home.”
— from Trump Strategies for Real Estate: Billionaire Lessons for the Small Investor by George Ross, (Wiley, 2004).
In this chapter, you’ll learn how to protect yourself from risky mortgage financing, including owner financing.
Notice, we did not say we will advise you against these forms of financing because there are times when you might want to consider them. The key is to reduce your exposure to the risks they present. Let’s learn how.
Balloon Mortgages
Balloon Wisdom
Consider a balloon mortgage if you want to minimize monthly payments on a property you will hold for
15, 30 years — definitely less than the amount of time be-fore your final payment is due.
Balloon mortgages start out with interest rates that are lower than the norm for fixed-rate mortgages. You make regular monthly payments that do not change for a predetermined period of time, usually 15 or 30 years. At the end of the period, a large percentage of the money you owe or all of the money you owe becomes immediately due.
Balloon loans were invented in times of high interest rates as a way to help first-time homebuyers get started without making onerous monthly mortgage payments. They are generally regarded as high-risk loans. Still, if you are buying a property that you definitely plan to sell before the balloon payment comes due — preferably a property you are certain will appreciate a great deal — a balloon mortgage might be worth considering.
Consider a balloon mortgage if you want to minimize monthly payments on a property you will hold for 15 to 30 years, less than the amount of time before your final payment is due. You might consider one of these mortgages if you expect to refinance the loan well before the balloon payment comes due. That scenario works best if you are reasonably certain that your property will appreciate rapidly. If its market value increases 50 percent over five or ten years, for example, you will then be in a good position to refinance your loan and get a more predictable fixed-rate loan.
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