Posted by Stacy (AZ) on January 11, 1999 at 11:58:02:
Yes, you are correct. The seller agrees to “loan” you part of the equity in the property you are purchasing from him. Say you’ve negotiated the price of a house to $100K. You can get a new first mortgage for 70% ($70K) easily. However you don’t have the extra $30K for the seller. But, the seller only really needs $6K cash. He is willing to loan you the remaining $24K over a period of time. This loan will be secured by the property you are buying, so it’s a mortgage.
So, you have to pay the monthly payment on your new $70K first mortgage, plus your $24K second mortgage. The terms of the second mortgage can be anything you agree on…10 years 6% interest only payments with a balloon due in 2 years, for example. That way, you can refinance the entire amount after you have owned it for a while, improved it, whatever.