Substitute Refinance - Posted by Sean
Posted by Sean on May 09, 1999 at 18:12:23:
Much details on this technique can be found on the cash flow forum, but here’s a simple primer.
Imagine that you have just purchased a house using seller financing. You placed 10% down and you are owe 90,000 at 8% on a 30-year mortgage (“Mortgage1”). You would like to refinance, but banks refuse to loan more than 80 percent.
You happen to find a mortgage of 90,000 for sale at 8.5% payable in 15 years (“Mortgage2”). The seller is asking $70,000 for it. Obviously this mortgage is of better quality than the one you’re paying on, so you approach the person you’re making payments to and ask him if he’d like to trade mortgages – the one you owe on with the one you have an opportunity to buy. Naturally he does.
You then get a mortgage loan from a conventional bank (“Mortgage3”) for $70,000, you use the money to buy Mortgage1. You trade Mortgage1 with the seller for Mortgage2. Since you no longer owe anything the seller reconveys Mortgage2 and you have just gained $20,000 in equity on your house.
So how does this relate to what we said before? Well, what if a person is trying to sell their house (they’re in foreclosure) but they don’t have enough equity to make it worth your while? Using the method outlined above with the bank, you can create enough equity in the house for it to be worth your while.
Or, since the loan is in foreclosure, you can offer to buy the loan from the bank. John Behle (our resident expert) says he has picked up loans from banks at 50 cents on the dollar. It’s an idea worth trying.